We know that life is uncertain, and an accident or illness could occur that makes us temporarily or permanently incapable of managing our own financial affairs. If that happens, someone will have to step in and take care of financial matters for us. Or we may recognize that our future may include a reduction in our capacity or interest in continuing to handle our financial dealings. In either case, we can plan in advance for an appropriate legal transfer of authority over some or all of our financial and property interests.
Our society has developed several legal tools that allow a transfer of financial decision-making authority to take place. There are voluntary tools that we can create in advance of potential incapacity. The voluntary tools help ensure that our finances will be handled in the manner of our choosing, by a person or institution of our choosing. It is necessary to resort to involuntary tools if effective advance planning is not in place.
This article will briefly describe frequently used legal tools for substitute financial management.
THE FINANCIAL POWER OF ATTORNEY
The Financial Power of Attorney can be a simple, effective, and low cost means of allowing someone else to manage financial and property issues for you. Using a Financial Power of Attorney, a person delegates decision making authority to a trusted family member or other agent. The power can be immediately effective, or it can be dormant until needed. Virtually every competent adult should consider signing a Financial Power of Attorney to allow their financial affairs to be managed effectively and in accordance with their wishes in the event of their incapacity.
A Financial Power of Attorney is a powerful tool that should only be given to an agent who can be trusted completely. There are many issues you need to consider before you sign a Financial Power of Attorney. Questions to ask yourself include: (1) Should the document give your agent the power to act whenever the agent decides it is necessary, or only when someone other than your agent (e.g., your doctor) determines that you are incapacitated? (2) How broad are the powers you want to give to your agent? For example, do you want your agent to have the power to give away your assets? (3) Do you want to name more than one person to serve together as co-agents for you. (4) Who should you name as a back up to take over if your original agent cannot serve?
JOINT OWNERSHIP OF PROPERTY
Joint ownership is a widely used form of property management. Couples often share ownership of bank and investment accounts and real estate in this manner. Often these assets are held “with right of survivorship,” which means that upon the death of one of the owners, the asset becomes owned solely by the survivor. Joint ownership as a property management tool has many limitations and may not allow your joint owner to effectively manage your finances. There can also be tax complications with joint ownership arrangements, and they can upset your estate plan. Most experts suggest that you should not rely on joint ownership as your only management tool.
THE LIVING TRUST
A living trust is a trust you create to take effect during your lifetime. If it can be changed or canceled by you at any time, it is called a revocable trust. If you cannot change or cancel the trust, it is called an irrevocable trust. Revocable living trusts are asset management and probate avoidance devices. They have no tax or asset protection advantages. Irrevocable trusts are usually created to obtain tax savings, to protect assets from creditors, or to qualify for Medicaid or other public benefits.
REPRESENTATIVE PAYEES AND GUARDIANS
Representative payee authority functions something like a mini guardianship, limited to the sole purpose of managing a person’s Social Security income check. It is also available for Civil Service, Railroad Retirement, and Veterans Administration checks. A representative payee can be established for an incapacitated beneficiary without going to court. Someone must apply to the Social Security Administration or other agency to be named as representative payee. Annual financial accounting is required.
Guardianship (called “conservatorship” in some states) is usually the legal tool of last resort for decision-making and management of the financial and personal affairs of an incapacitated person. It may be required if effective voluntary tools are not in place. Guardianship involves a court proceeding whereby an individual is adjudged to be incapacitated and someone is appointed by a Judge to act as guardian for that individual. The guardian may be authorized, acting under court supervision, to act for the incapacitated person in making property management or personal and health care decisions, or both. Guardianships are inflexible and relatively expensive, can be conflict ridden, and may be embarrassing. People generally want to avoid resort to this tool.
For most people, it is wise to plan ahead by creating one of the less costly and more flexible voluntary tools that will be needed in the event of your financial incapacity. In this way you can best protect both yourself and those who rely on you.
In the event of your sudden incapacity your family may face crushing burdens. By planning ahead, you can protect your family by resolving some of the problems they will encounter and giving them the authority to do what needs to be done. If you own a business, you need a plan that will protect your employees, customers and business partners.
Try not to procrastinate. This is like insurance. You have to have it in place before you need it.
Your elder law and estate planning attorney at Marshall, Parker and Weber will help you consider your options and put the best planning tools in place.