Estate Planning and Disability
THE COUNSELOR
Volume 2 • Issue 8 • August 2012
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning and business planning issues. This month's issue will discuss planning for disability. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
Planning for the possibility of disability is probably the most overlooked part of estate planning. While many people give serious consideration to estate planning for their death, few seriously consider planning for their disability. Disability planning is a vital part of estate planning because it benefits the person directly, and because, until a person is well past retirement age, the probability of becoming disabled in the next year exceeds the probability of dying in that same period.
Disability Planning Defined
Disability planning is planning for when you are mentally incapacitated to the degree that you are no longer competent to make business or personal care decisions or so physically disabled that you cannot communicate directions for the management of your affairs.
A person is considered incompetent when a medical determination has been made that the individual does not have the mental ability to make business or personal care decisions.
A person is incapacitated when a court has declared the person legally incompetent to make business or personal care decisions. When a person is determined to be incapacitated, the court will take away the person’s right to make personal care and business decisions and may empower someone else to do so under the court’s supervision.
Disability can happen to anyone, at any age, and at any time. Many think of disability as being something that only happens to old people, like when they develop dementia. However, as noted earlier, a person’s probability of dying in the next year is much lower than his or her probability of becoming disabled in the next year unless the person is well past retirement age. With people living longer due to advances in medicine, their lifetime probability of becoming disabled is increasing. Today, the odds are better than 50:50 that any given person in the U.S. will have some period of incapacity.
What Happens if We Don’t Plan: Life Probate
Most people think of probate as a legal process for changing titles on assets from the name of a deceased person to the name of the deceased person’s beneficiaries or heirs. But there is another probate court process, a “living probate.”
Living probate is what happens when someone is alleged to be incompetent to manage their own affairs. Someone literally sues them in a probate court, asking the judge to take away their right to make their own care and/or business decisions and to give that right to someone else. It can be an expensive process in which the alleged incompetent person pays the lawyers on both sides as well as a court visitor. If the person is found to be incompetent to manage their business affairs and there are business affairs to be managed, the court will appoint a conservator to do so. The court may require that the conservator post a bond against theft or mismanagement and provide a detailed accounting to the court on a periodic basis for the court to audit. Sometimes the responsibility for the physical care of a disabled person and the responsibility for the management of assets that are titled in the disabled person’s name are given to two different people: a guardian of the person (for physical care) and a conservator of the person’s assets (for financial care).
If there are no assets titled in the incapacitated person’s name, such as when the person’s assets have been placed in a trust, the court has no need to appoint a conservator of the incapacitated person’s assets. This is just like there is no need for post-death probate if there are no assets titled in a deceased person’s name that are not controlled by beneficiary designation.
Because the courts jealously guard everyone’s rights to manage their own personal affairs and property, living probate provides a form of protection that is anything but free. Living probate, especially when there are assets to be managed, is costly, time consuming and cumbersome with annual accountings, bonds, reports, ongoing determinations of incapacity/incompetency, and fees for attorneys, accountants, doctors and guardians. All those costs are paid from the disabled person’s assets, and all living probate proceedings are a public record. Once a guardianship/conservatorship is established, it will go on until the incapacitated person dies or the court determines that he or she is no longer incapacitated.
Another possible problem is that a court cannot allow an incapacitated person’s resources to be used to provide care for anyone who is not the incapacitated person’s legal responsibility. That means that adult children, parents, grandchildren and others for whom the disabled person was providing support will be on their own.
A Fully Funded Revocable Living Trust Avoids Living Probate
When a living trust is fully funded, all titles of assets are changed from the individual’s name to the name of the trustee and new assets acquired are taken in the name of the trust. Then, if the person becomes disabled, there is no reason for a living probate for asset management because he does not own any assets in his own name that need managing. A new trustee can simply succeed to the management of assets. Further, the person can provide in the trust how disability is to be determined.
While some may think so, a durable power of attorney is not a substitute for a fully funded revocable living trust for several reasons. For example:
A durable power of attorney will endure the disability, but not the death, of the asset owner (principal). A living trust, on the other hand, is not affected by the trust maker’s death.
A holder of trust assets cannot decline to accept the authority of the trustee (or successor trustee). A durable power of attorney, on the other hand, works only if whoever is holding the assets decides to accept it. That can be a real problem. Perhaps whoever is holding the assets will think the power of attorney is not broad enough to be acceptable. Or perhaps that it is too complex to understand without a legal opinion that the asset holder is unwilling to seek. Powers of attorney also may not be accepted if more than a certain number of days or months have elapsed since they were executed. This is a particular problem when the power is given to a spouse. Many institutions will not accept a power of attorney unless it is on their own form. With a living trust, the trustee is the owner of the trust assets; institutions and securities transfer agents must honor the trustee’s ownership.
Durable powers of attorney will not endure the disability or death of the agent to whom the power is given. If the principal is disabled, a living probate will likely be needed if no successor agent is available and willing to serve. By contrast, a trust will not fail for lack of a trustee. A well-drafted living trust will contain trustee succession provisions, and even if all named successors are unavailable to serve, a professional trustee can be appointed.
A living probate will cause all powers of attorney to terminate; the court will simply take over and put a conservator in charge. As explained earlier, a fully funded living trust will eliminate the need for a conservator of the estate because there is no estate.
If the power of attorney fails to work for any reason at the principal’s disability, a living probate may be the only solution for taking care of the principal. The conservator of the estate will be someone appointed by the court. If the incapacitated person has not made his or her wishes known by a certain kind of formal document, the court may choose someone who is a professional conservator but a total stranger to the family. With a living trust, the client handpicks the successor trustees for his/her trust.
Federal agencies, such as the IRS and the Social Security Administration will generally not honor powers of attorney; agents cannot cash Social Security checks or sign tax returns. With a living trust, Social Security checks can be set up ahead of time for direct deposit to a living trust account and a trustee will be empowered to deal with the IRS.
A power of attorney must contain very specific instructions for running a sole proprietorship or other business entity. If the sole proprietorship or business entity is owned by the living trust, the successor trustee will have no problem stepping in and running the business. The successor trustee can also hire other persons to run the business if the successor trustee does not want to run the business or does not have the proper license to do so. An agent does not have the power to delegate.
The revocable living trust should include instructions regarding the persons who are to be taken care of in the event of the trust maker’s disability. For example, it could be the trust maker only; or the trust maker and spouse; or trust maker, spouse and legal dependents. The trust maker may also want to include others who are not legal dependents, like parents and adult children who are actually receiving support at the time of the trust maker’s disability. Also, priority must be established for those the trust maker would like to care for, in case there are not enough funds to provide for everyone.
Additional Documents for Disability Planning
Durable Power of Attorney
A durable power of attorney can be useful in conjunction with a trust. Often one will be accepted to transfer titled assets to the principal’s revocable living trust, and they are effective in managing assets (like IRAs) that cannot be put into the living trust before a disability event.
Living Will/Advance Health Care Directive/Durable Power of Attorney for Health Care
Depending on the state where you live, these documents are referred to by different names. They may take the form of one document or multiple documents. These documents allow you to legally give someone the authority to make health care decisions (including life and death decisions) for you if you can no longer make them for yourself. Without a designated health care agent, you could be kept alive by artificial means for an indefinite period of time.
HIPPA Authorizations
HIPPA authorizations give written consent for doctors to discuss a person’s medical situation with others the person has designated and to disclose medical information to them. These documents are vitally important for disability planning because they can allow not only family members to discuss a disabled person’s situation and prognosis with the doctors, but they can also allow the trustee and members of the advisory team to be kept fully informed.
Insurance and Disability Planning
A vital part of disability planning is a review of your insurance needs. There is no one size fits all plan, but solutions can include:
Disability income insurance to help replace lost income.
Long-term care insurance to help cover the costs of care that are not covered by medical insurance, including Medicare.
Life insurance. Waiver of premium provisions have a real cost but, in the event of disability may convert the policy into a paid-up policy. With term policies, check for guaranteed purchase options and conversion of term to permanent life upon disability.
Business or professional overhead expense insurance. This insurance will provide cash to pay monthly business operating expenses (rent, payroll, etc.) so that personal assets will not have to be used to keep a business going. A typical benefit period would be 18 months, enough time to see if the disabled owner will recover or to make arrangements for the sale or transfer of the business.
Buy out insurance for buy-sell agreements upon disability. The benefit options include a lump sum payment or a stream of income payments over a period of years.
Conclusion
Disability before death is usually not expected, but it should be properly planned for. Disability planning should be on the same level as planning for death. If you have not yet considered what will happen to you and your family in the event of your disability please consider calling us today for a free initial consultation to discuss a comprehensive estate plan that will include planning for your disability.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.