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Smart Estate Planning

Take action now in case of future incapacity

People are living longer these days, but increased longevity may have its drawbacks. Chances are, a parent, a sibling or other older loved one may reach a point where he/she no longer can manage his own affairs. You and/or your spouse also may become incompetent some day.

If incapacity strikes, assets may be at risk. Family members might have to petition a court to appoint a fiduciary to act on behalf of the incompetent individual. Such proceedings can be expensive, time consuming, exposed to public scrutiny and, most important, may result in the appointment of someone who would not have been your choice.

Strategy: To avoid such a scenario, work with a qualified attorney to put an incapacity plan in place while you are competent. Urge your parents and siblings to implement their own plans, too.

What might go into an incapacity plan? Some key elements...

JOINT OWNERSHIP
Perhaps the simplest and least expensive tactic for dealing with potential incapacity is to put some assets in joint ownership, with right of survivorship.
Example: Marie names her niece Linda as joint owner of her bank account. If Marie becomes incapacitated, Linda can pay bills from that account, handle deposits, etc.

Trap I: At the death of one co-owner, the survivor automatically inherits the balance of the account. That's true no matter what it says in the will of the person who dies.

In our example, Linda would inherit the bank account while all other nieces, nephews and other possible beneficiaries would be excluded. The same would be true if Marie named Linda co-owner of brokerage accounts or real estate.

Trap II: For wealthy families, joint ownership may interfere with an estate plan designed to reduce or defer estate taxes.

Another problem with joint ownership is the lack of protection against poor judgment. If Aunt Marie decides to empty the joint bank account to invest in a questionable scheme, there is nothing Linda can do to prevent it.

Still other problems may arise. For example, niece Linda might spend Marie's money improperly. Also, if Linda is co-owner of the account, her creditors may have access, as they would to any of her assets. This includes the IRS.

Strategy: Arrange for automatic deposit of investment income and Social Security checks as well as automatic payment of utility and other bills. This will reduce the need for joint ownership of a bank account because investment income will be deposited and bills will be paid even if one co-owner becomes incapacitated. Automatic deposit and payment can be arranged right away. It's safe and convenient. Bills won't go unpaid because they're paid immediately from a bank account.

If some joint ownership is still desired, it usually is best to limit it to a bank account with modest deposits. Name a person you trust as joint owner.

POWERS OF ATTORNEY
A power of attorney is a document authorizing someone (an "agent" or "attorney-in-fact") to act on behalf of someone else (the "principal"). Be sure to include one in your incapacity plan.

A power of attorney shouldn't interfere with your estate plan the way joint ownership might.

Example: If you name your son John as attorney-in-fact, John can sign contracts on your behalf, buy and sell investments, and so on.

For this purpose, be sure to execute a "durable" power. Otherwise, a power of attorney will not be recognized if a court finds that you have become incompetent. A durable power will remain in force.

You will want to name someone you trust as your agent. Even so, you may be reluctant to have a power of attorney in someone else's hands while you are still competent.

Solution: Many states recognize "springing durable powers of attorney." These take effect only under specified circumstances.

Example: Your springing power might take effect only after two doctors, including your personal physician, have determined that you have become incapacitated.

No matter what type of power you choose, review it every few years. Your circumstances may change, leading you to want to change provisions or name another agent. Also, some financial institutions are leery of "outdated" powers of attorney. Important: Check with your bank, broker and mutual fund company to see if they will accept your power or if they'll insist that their own forms be used.

Don't confuse the legal/financial powers of attorney described above with health care powers of attorney. The latter, also known as "health care proxies," allow someone else to make medical decisions for you if you can't.

Such a health care power also belongs in your incapacity plan.

The agent you name in your health care power does not have to be the same person named in your durable power of attorney. If someone in your family is especially knowledgeable about medical issues or is more attuned to your personal wishes, he might be given the health care proxy. Your durable power of attorney should be entrusted to someone likely to make sound financial decisions.

REVOCABLE TRUSTS
Another component of your incapacity plan might be a revocable trust. These are sometimes known as "living trusts." These trusts can be used to avoid probate and provide for management of trust assets in case of incapacity.

Work with an estate-planning attorney to create a revocable trust and then consider whether to transfer none, most, some or all of your assets into this trust during your lifetime.

You can be both the trustee and beneficiary of the trust. You make the decisions about trust assets, and you collect any cash paid out by the trust. You will be responsible for the income tax on any earnings of trust assets.

Life goes on, pretty much as before, although the trust-not you-holds title to the assets in it.

Escape clause: If you become unhappy with your trust for any reason, you can scrap it and retake personal ownership of the assets. That's why these trusts are "revocable."

Where incapacity protection comes in: When you create your revocable trust, you can name a cotrustee or successor trustee, perhaps your spouse or child. If you become incompetent (as determined under the terms of the trust document), the individual you have named as co- or successor trustee will take over the management of trust assets.

The entire process can occur seamlessly, without court involvement and the risk that assets won't be managed for a period of time.

Advantage: Your replacement trustee will have a fiduciary responsibility to preserve the trust assets and use them to provide for you, the trust beneficiary.

What's more, your estate plan needn't be disrupted. A revocable trust can fit in with your overall estate plan-along with your will, beneficiary designations, etc.

Negate probate: At your death, trust assets avoid probate, which can be time consuming and expensive. The trust assets can be directed in the manner you desired, as expressed in the trust document.

Trap: All of these advantages apply only to assets actually held in the trust. A surprising number of people create revocable trusts and then fail to transfer assets to them during their lives or at death.

Strategy: If you create a revocable trust, be sure to consider re-titling at least some of your assets so that they're owned by the trust. As with the rest of your plan, it's wise to work with a knowledgeable attorney to ensure that the transfers accomplish your objectives.

In addition, don't assume that creating a revocable trust alone will provide tax advantages. You still need to consult with your professional advisers to reduce income, estate and other taxes.