September 28, 2012   Disability & Illness, Estate Planning

Planning For Incapacity and Long-Term Care

long term care planning With people living longer due to advances in medicine and lifestyle changes, chances are that most of us will become disabled for some time before we die and will need some long-term care. And while we tend to think of incapacity or disability as something that happens when we are older, the reality is that even those who are young and healthy can suddenly become disabled from an accident, an illness or a random act of violence. Unfortunately, too few plan for what is more likely to be a probability than a possibility.
What Happens If You Don’t Plan: Living Probate
Most people are familiar with the probate process at death. It is the legal process for changing titles on assets from the name of a deceased person to the name of the heirs, and is required because a deceased person cannot sign the paperwork to transfer the titles. But there is another probate process, a “living probate,” that is for the physical care of a disabled person and the management of assets that are titled in that person’s name. (Usually these responsibilities are separated and given to two different people.)
If you own assets in your name and become unable to manage your financial affairs due to mental or physical incapacity, only someone appointed by the court can sign for you. This is true even if you have a will, because a will can only go into effect after you die. With some assets, especially real estate, all owners must sign to sell or refinance. So, even if you are married and own all of your assets together, your spouse will have to go to court if assets need to be sold or a line of credit is needed to help pay for your care.
The court becomes involved to protect your interests, but this protection is not free. It can be costly, time consuming and cumbersome with annual accountings, bonds, reports, ongoing determinations of incapacity/incompetency, and fees for attorneys, accountants, doctors and guardians. All costs are paid from your assets, and all assets and proceedings become part of the public probate record. A living probate usually lasts until you recover or die which, depending on your age when the disability begins, can be years.
The court will not allow your assets to be used to provide care for anyone who is not your legal responsibility, so adult children, parents, grandchildren and others for whom you currently provide care will no longer have that support.
Additionally, the court will appoint someone to oversee your care and report to the court. This may be your spouse or a family member, but it may also be someone who is a stranger to you.
A Fully Funded Revocable Living Trust Avoids Living Probate
One of the advantages of a revocable living trust is that it can avoid a living probate. When you set up a revocable living trust, if you change the name on the titles of your assets from your name to the name of your trustee (which is usually you), you are “funding” your trust. If you have fully funded your trust (changed all the titles) and you become unable to conduct business, there is no reason for a living probate because you do not own any assets in your own name. Your successor trustee, someone hand-picked by you, can automatically step in without court interference and manage your financial affairs—including selling or refinancing assets to help pay for your care—for as long as needed.
A fully funded living trust is much more effective than a durable power of attorney. For example:
  • A power of attorney may not be accepted by banks and other financial institutions, especially if it’s old, is deemed too limited or too broad, or is not on their own form. By contrast, ownership of trust assets by the trustee must be honored.
  • The person to whom you give this power (your agent) could become disabled or die. If you have not named a successor, a living probate may be the only solution. With a trust, even if all the successors you name are unavailable to serve, a trustee can be appointed under the terms of the trust.
  • If you own a business, a power of attorney must contain very specific instructions for running the business. But if it is owned by your living trust, the successor trustee will have no problem stepping and running the business, or hiring someone if he/she is not qualified or licensed to do so.
  • A durable power of attorney ends at your death, but your trust can continue after you die to provide for the care of your loved ones.
A living trust lets you set the criteria to define your disability, including certification by two physicians or a panel of people that you pre-select. You can also name the people who are to be taken care of in the event of your disability, and prioritize the names in the event funds become limited. The court may still need to officially appoint a guardian for your care, but you can make your preference known.
Additional Documents for Disability Planning
Durable Limited Power of Attorney: The agent’s powers are limited to transferring titles of assets you may have forgotten to your living trust and managing assets (like IRAs) that cannot be put into a living trust.
Durable Power of Attorney for Heath Care: This document lets you legally name someone to make health care decisions (including life and death decisions) 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, especially if members of your family disagree.
HIPPA Affidavits: These documents give written consent for doctors to discuss your medical situation with others. These are vitally important, because they allow not only family members to discuss your situation and prognosis with the doctors, but they can also allow your successor trustee(s) to be kept fully informed.
Other Recommendations
  • 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.
  • Life and disability insurance on the healthy spouse. If the healthy spouse dies or also becomes disabled, additional funds may be needed to take care of the surviving disabled spouse or both disabled spouses.
  • For business owners, business or professional overhead insurance that will pay monthly operating expenses until the owner recovers or the business can be sold or transferred, and buy-sell agreements in the event a co-owner becomes permanently disabled.
Disability before death is not always expected and it does not always happen, but it must be planned for. An experienced estate planning professional will be able to help you personalize your plan and put it in place before it is too late. 
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