While old age or disability may seem far away for some, debilitating illnesses and accidents can happen anytime. Do you have a plan if you become incapacitated and can no longer do things for yourself, such as managing your finances and your home, or performing activities of daily living (ADLs), such as eating, dressing and bathing?
The best place to start is to get essential paperwork in order and have a person in mind who can look after you. BOK Financial® Personal Trust Market Manager, Michelle Mieras, shared some tips on what can be an overwhelming topic.
Create an estate plan with a revocable living trust
Nobody likes to think of what will happen when they pass, but an estate plan isn't always just for when you're gone. Should you become incapacitated, a revocable trust allows a trustee of your choosing to step in to manage your financial affairs and continue to pay your living expenses, caregiving, housing and medical bills. You may include specific instructions to the trustee in your trust agreement to ensure your wishes are carried out. For example, if others depend on you financially, you may direct your trustee to continue providing financial support to those individuals on terms you define.
Be aware that a revocable trust can be helpful in the event of incapacity as long as the trust has been funded (or can be funded after incapacity) with monetary assets that allow the trustee to pay for financial needs. The type of accounts you have may not make a funded, revocable living trust a practical option, Mieras cautions.
“Certain assets can't be titled in the name of a revocable trust such as an IRA or 401(k) account. In those cases, other options for incapacity, such as a financial power of attorney, should be considered.”- Michelle Mieras, personal trust market manager
Have a power of attorney
If you work with a lawyer to create your estate plan, the plan will most likely include a power of attorney (POA) for financial decisions and an advance directive (or sometimes referred to as a living will or medical POA) for medical decisions.
A POA authorizes one or more person(s) to act on another's behalf. The powers granted may be broad and general, or may be limited to a particular action, but typically cover medical, financial or property decisions, either temporarily or permanently. The POA powers may either become effective upon incapacity, or they may become effective immediately (and are not affected by subsequent incapacity). The person(s) granted power of attorney becomes known as the "attorney-in-fact" or "agent." The person granting the power of attorney is the "principal." State laws vary as to the requirements to create a valid POA and can govern the type of powers granted, so it's best to consult a lawyer to draft the paperwork, Mieras suggests.
A financial POA usually gives the attorney-in-fact access to and management over accounts owned by the principal that are not held in trust, allowing them to apply the funds for the benefit of the principal even when incapacitated. A POA may also grant the attorney-in-fact the power to fund (or transfer assets to) a revocable living trust so that the trustee can use the funds as provided in the trust agreement. Again, much of the powers and authority of a POA are governed by state law and the choice of legal language used in the POA document.
“A plan that only includes a revocable trust and not a financial power of attorney would likely require court involvement to address funds not held in the trust in the event of incapacity. Most people should have both.”- Michelle Mieras, personal trust market manager
The named trustee and the named attorney-in-fact under a financial POA can often be the same person, which streamlines financial asset decisions to address and pay for any needs of the incapacitated person.
Choose the right person
Before choosing your trustee and/or attorney-in-fact, make sure the person is up for the task. You'll want someone available, responsible and trustworthy enough to look out for your best interests. Mieras said you need to make sure they know the scope of the duties required to fill the role (which can be time-consuming)—and have the ability to manage your affairs simultaneously with their own. A person who struggles to manage their own finances is likely not the best person for this role. Consider that the best person to manage your finances may not be the same person who would do a great job managing your medical care, and they need not be the same person.
If you don't have a POA or revocable living trust in place when you become incapacitated, or if there is a dispute over who you appoint, court intervention may become necessary to appoint a conservator (also called a guardian in some states) to handle your finances. This will cost time and money, and may not result in the appointment of a person you prefer to have handling your finances.
Professional fiduciary option
If you find there isn't a family member or trusted friend who can step into the role as your trustee or attorney-in-fact, or if you are worried about creating rifts between any family or friends serving in that role, Mieras recommends putting a "professional fiduciary" in place to prevent a contested situation.
A fiduciary, by definition, is someone who is required to act in your best interest. "You can find one by searching for 'professional fiduciary' or 'public administrator' or asking for recommendations from elder care service providers, estate attorneys or CPAs. We also offer it at BOK Financial," said Mieras.
To get started, she recommends interviewing potential fiduciaries with questions such as:
- What is your process as a fiduciary?
- How is your internal organization set up?
- What is the oversight?
- How do I know my funds will not be misused?
- How do you obtain information regarding my finances?
Consider the cost
Be aware that you will be paying for a fiduciary's services at an hourly rate or a small percentage of the value of the assets. This is often just a fraction of the expenses of a court proceeding for a conservatorship or guardianship, which can run into thousands of dollars.
"Usually, if you end up going down a conservatorship/guardianship route, it's a lot more expensive," said Mieras, adding if you have a trustee or attorney-in-fact, you might consider specifying payment for their time into your agreement.
Creating a plan for your finances in the event of incapacity is best to do while you still have the capacity to make decisions for yourself. Consult with a financial advisor or estate planning attorney to help decide the best options for your situation in regard to trustee, conservatorship and/or fiduciary services.
Part 1: Do you need a will or a trust?