Sign A Healthcare Proxy, Living Will And Power Of Attorney
Advancements in medical science and care may enable us to live fuller, longer lives. The flip side is that more of us are likely to suffer from a diminished mental state–a harsh reality that’s difficult to accept. Here’s a scary statistic: One in eight baby boomers will get Alzheimer’s after they turn 65. Sure, you hope you won’t be one of them. But the risk of a slow decline and incapacity, meaning that you don’t know what assets you have, what you want to do with them and who your family members are, lurks for us all.
Maybe you figure you’ll have time to plan after the onset of symptoms. But you could instead suffer a stroke, or get hit by a bus and immediately need someone else to make medical decisions for you. The bottom line is that regardless of your current age or health, it’s crucial to anticipate that at some point you might become physically or mentally unable to manage your finances or make medical choices. (For the story of how a 61-year-old’s sudden stroke wrecked havoc with his online financial life, click here.)
Yet once you do become incapacitated, it is generally too late legally to make changes in your estate planning documents. And unless you have made other, binding arrangements, your family may need to ask a court to appoint a conservator (also called a guardian) to oversee your finances. This can be an expensive and an embarrassing ordeal, and for many families involves unpleasant, even acrimonious, exchanges.
So it is much better to address this subject while you are healthy and hearty. You can set things up to preserve your independence for as long as possible, knowing that certain systems that you have designed will take effect should you need them. Here are issues to consider.
Who Will Make Health Care Decisions?
Someone needs to be able to make medical decisions if you no longer can. To appoint this person, you will need a health care proxy – known in some states as a health care agent or health care power of attorney. Legally, the health care proxy also automatically gives the agent access to your medical records. (Some states have surrogate decision-making laws that give specific family members the right to make certain medical decisions for others.) Sign four copies of both this document and your living will. Keep one and give one each to your health care agent, your primary physician and a trusted advisor.
What Are Your Final Wishes?
If you have preferences about end-of-life care, you should create a living will (also called an advance directive) – a written statement that expresses your wishes. Although it is difficult to address every contingency, living wills typically cover pain relief and whether you would want treatments such as surgery, a ventilator, a feeding tube or resuscitation that might prolong your life but without necessarily ensuring your return to a functional state.
Who Will Take Over Your Finances?
If you become incapacitated, someone needs to be able to take over your finances – from paying bills to authorizing stock trades, and everything in between. There are two separate documents to consider: a durable power of attorney and a living trust or revocable trust.
Durable power of attorney. This document authorizes a trusted family member, friend or advisor to act as your agent in a variety of financial and legal matters. The power of attorney may be effective from the moment you sign it or you can specify that it be activated by a specific event–for instance, if you become incompetent. The problem with this approach, known as a springing power, is that someone must decide when you have reached that state. Traditionally, this has required a medical opinion.
Many people are wary of signing these documents, since they give unbridled power to an agent. If you’re nervous about this, don’t give the signed document to your designated agent—instead, leave it with your lawyer with instructions on when to turn it over. In that case, remember to tell your agent that the document exists and whom to contact.
Either way, make sure you name a second person who can become the agent if, for any reason, the first person cannot do the job. Some lawyers use pre-printed forms for the power of attorney and will include it as part of the estate-planning package at no additional cost.
Note that many banks and brokers require that you fill out a specific power of attorney form for that institution. If so, do the paperwork but also sign a power of attorney that your lawyer drafts to cover your other assets. A broadly worded power of attorney could give your agent the authority to implement a variety of estate planning strategies, such as: changing the ownership of a Section 529 state college savings plan, making gifts, adding assets to a trust and amending retirement plan beneficiary designation forms.
Living trust (revocable trust). Some people will want to use this special type of trust in conjunction with the durable power of attorney. Here’s how it works. You set up a trust, designed for your own benefit, with the idea that a person or financial institution that you designate (the trustee) will ultimately manage the funds and distribute the money for your care. Until then, you can be a co-trustee or the sole trustee.
The trust can describe in detail how the assets are to be managed, how principal and income are to be distributed and who receives the property when you die. (A common misconception is that revocable trusts avoid estate taxes, which is not true.) It can also spell out exactly how to identify incapacity and who should determine it. When you are acting as trustee, it should include a procedure to bring in a successor trustee should you become incapacitated.
Depending on your circumstances, these trusts can be unfunded (meaning there are no assets in the trust), partially funded or fully funded at the time they are set up. For example, you can keep some cash to manage yourself and transfer other assets into the trust. Or, you can leave the trust unfunded until someone certifies that you have become incapacitated. At that point, the designated agent could fund the trust for you.
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The elderly or other people who find financial matters overwhelming might prefer to put everything in the trust except for life insurance, retirement assets and a checking account that holds the grocery money. This bank account is needed, if for nothing else, to deposit Social Security checks (preferably by direct deposit), since they cannot be made payable to a trust.
It would be a mistake to rely exclusively on a revocable trust and not sign a power of attorney. For example, if you do not initially put all the assets in the trust, it is important that the agent with power of attorney be authorized to add assets to the trust at some later point. And while the trust works well for assets under its umbrella, it does not cover quasi-personal functions, like filing tax returns, applying for Social Security benefits, signing a nursing home contract and even picking up mail.
While everybody needs a power of attorney in case of incapacity, the same is not true of a living trust. During life, a living trust is most useful to people who have many different kinds of assets, since financial institutions tend to be more accepting of trustees that they are of agents coming to them holding durable powers of attorney. If your financial life is relatively simple — say you’ve consolidated your accounts —a power of attorney may be all you need.
But before you decide, factor in the role a living trust plays after you pass away. At that point, the living trust works as a will substitute. In some states, living trusts are also used to avoid or limit the cost of probate–the process through which a court determines that a will is legally valid and approves the distribution of assets covered by that will. Whether probate is costly or burdensome will depend on the state. Still, there are times when you might want to use a revocable trust to limit how much of your estate goes through probate or to avoid it altogether. For example, if you are concerned about publicity over your net worth or the identity of your beneficiaries, you might transfer assets through a trust–which, unlike a will, is not a public document. Someone leaving assets to a domestic partner might use a revocable trust, because it is harder for surviving blood relatives to challenge a trust than a will. (For the raft of planning issues that affect same-sex couples, click here.)
A living trust is also useful if you own real estate in a state that is not your primary residence. Real estate is governed by the probate rules of the state in which it is situated. Unless the property is in a living trust, an Illinois resident who has a home in Florida, for instance, would need to probate the property separately in Florida.
If your goal is to avoid probate totally, keep this in mind: using a living trust for this purpose only works for assets put into the trust. And inevitably something gets left out. So you should still have a will that can cover everything else, whether or not you listed it. And of course, this will must be probated.
Whom can you trust?
Choosing the right person—or people—to help you put all these mechanisms into action can be tricky. The individual with your health care proxy should be the same one designated in your living will. For this difficult job, you’ll want someone levelheaded, who communicates well with doctors and is prepared to put emotions aside and implement your final wishes.
There’s no need or particular advantage to having the same person in charge of financial matters too. When choosing an agent under a power of attorney or the trustee for your living trust, look for someone who is honest, well organized, good with paperwork and vigilant about meeting deadlines. A person’s own financial acumen is less important than knowing how to hire experts when his or her own knowledge falls short.
Most people think first of naming a family member, especially a spouse or child. But that approach backfired for Brooke Astor, the New York philanthropist, who lived to be 105. Astor had a strained relationship with her son, Anthony D. Marshall, yet she gave him her power of attorney and entrusted him with supervising her care in old age. As Astor became incapacitated with Alzheimer’s, friends complained that Marshall and his wife were diverting Astor’s money for their own uses. One of Marshall’s sons, Philip, filed a lawsuit in July 2006, basically accusing his father, who was 82, of elder abuse.
After several months of legal wrangling, the parties called a truce. The court appointed Annette de la Renta, a close friend of Astor’s, as her guardian and put JPMorgan Chase in charge of her money. Astor died in August 2007 with an estimated net worth of $131 million.
At the end of a six-month criminal trial in New York, in October 2009 a jury convicted Marshall of stealing tens of millions of dollars from his mother. Some of the most serious charges involved abusing the power of attorney. In the same trial, Francis X. Morrissey, Jr., one of Marshall’s lawyers and co-executor of Astor’s will, was convicted of conspiring with Marshall to take advantage of Astor’s diminished capacity and forging an amendment to the will. An appeal from the conviction is pending.
What can we learn from this sad tale? Whether you are choosing a trustee for your living trust or an agent to hand your power of attorney, select someone you trust absolutely. If you don’t have an obvious family member to choose, make a list of everyone you know and then whittle it down to trusted friends – preferably ones who are not your contemporaries. Other possibilities include an individual advisor (for instance, a lawyer or accountant) or a corporate fiduciary, like a bank or trust company. To guard against an Astor-style disaster, think about creating a system of checks and balances by naming joint agents for a power of attorney or co-trustees of a living trust.
