The Ten Biggest Problems with Your Estate Plan and How To Fix Them

The Ten Biggest Problems with Your Estate Plan and How To Fix Them

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Problem #4 - What Happens in Your Incapacity

Most people will be affected by incapacity during their life, either their own incapacity or the incapacity of a friend or family member. Incapacity comes in two primary varieties: 1) temporary or 2) permanent. However, the fundamental issues that you and your loved ones will deal with will be the same regardless.

Problem:

If you are deemed incompetent, someone else will need to make financial and medical decisions for you. If you have not designated someone to do that for you in a legal document, then you will be subjected to a judicial process to have someone installed to make those decisions on your behalf. This is called a guardianship. In the Commonwealth, there are two types of guardianships for incapacitated adults: 1) guardian of the person and 2) conservator of the assets. The Court may appoint the same person to fulfill both functions, or these positions may be allocated to different people, depending on the situation. Let’s explore this concept with a case that I worked on a number of years ago. (I have changed some of the identifying facts to protect the client.)

Betty was a 27-year-old woman who was an up-and-coming lobbyist out of a K Street firm in DC. Like most young people, she did not pay much thought to the possibility of her own incapacity. During the week, she lived in her apartment in Tysons Corner and traveled home on the weekends to visit her parents in Richmond. On one such Friday evening, she was involved in a car accident in northern Virginia and became the mental equivalent of an 8-year-old. Her parents quickly discovered that they had no legal authority to make medical or financial decisions for Betty. They hired me to assist them in petitioning the Court to become Betty’s guardians of the person and conservators of the assets. The process took eight months to complete and involved two appearances in Court and the appointment of a Guardian Ad Litem (a temporary guardian who is also an attorney in that jurisdiction) to make certain no one was taking advantage of Betty. Each time we appeared in Court, our hearings were scheduled right between drug court dockets, so we had a gallery of folks listening to our proceedings that Betty’s parents were not happy to have as witnesses to the process. Finally, after this long process, the judge appointed Betty’s parents as her guardians and conservators. Now Betty’s parents pay me annually, for the rest of her life, to file an annual report with the Court detailing what they have done with their daughter’s assets that prior year. The total cost of this process for Betty’s parents was approximately $5,000. Contested guardianships can easily cost north of $10,000 in legal expenses.

Solution:

So, what is the solution that Betty should have proactively employed to avoid this quagmire? At a minimum, while Betty had the capacity to understand and sign legal documents, she should have hired a competent attorney to build her four very important documents:

1) a General Durable Power of Attorney (for financial management decisions/actions);

2) a HIPAA Release (medical information release);

3) a Health Care Power of Attorney (for medical decisions); and

4) a Living Will (for end-of-life instructions).

However, please understand that General Durable Powers of Attorney are not as stable as people would like to believe they are. Often, other people and/or financial institutions will refuse to accept the authority of a General Durable Power of Attorney. Why, you ask? Well, first there is nothing in the law that requires a third party to accept the authority of a General Durable Power of Attorney. Second, these documents have been abused rampantly in our society; as such, most financial institutions are weary to accept their authority as they do not wish to be on the hook for taking direction from the Agent. And finally, many financial institutions have begun adopting policies and procedures that apply an arbitrary cut-off point to what they see as the effective lifespan of the documents.

Let me explain that last one in greater depth. It is common for General Durable Powers of Attorney to have a termination clause that says something like, “This General Durable Power of Attorney revokes all of my prior General Durable Powers of Attorney, if any.” So, let’s say I draft such a document today and appoint my business partner Dan as my Agent. Then three years later, I draft a new General Durable Power of Attorney, and I appoint my other business partner Spencer as my Agent. Spencer’s document legally revokes Dan’s document as it contains the termination clause. However, Dan’s document still exists in the paper realm. There is no red “VOID” that magically appears across the paper of Dan’s document the moment I sign Spencer’s document. Financial institutions are concerned about these types of situations. They build policies and procedures to protect themselves as they are betting on the probability that the older a General Durable Power of Attorney is, the more likely that there is a newer one out there in the Universe, somewhere, revoking the older document in front of them. As such, we at JGB have seen a common trend among financial institutions to refuse General Durable Powers of Attorney that are more than five years old. We counsel our clients that it is in their best interest to update their General Durable Powers of Attorney at least once every five years, if not on a more frequent basis.

In many cases, the more stable incapacity planning solution is to use a properly funded revocable living trust as your estate planning document so you aren’t relying on the inherent instability of a General Durable Power of Attorney. The successor Trustee you name in your revocable living trust is not subjected to the same three problems identified above for Agents under General Durable Powers of Attorney. A revocable living trust allows your chosen successor to be installed as the Trustee upon your incapacity event (which is determined privately via the terms of the trust) and immediately assume powers and responsibilities for the use and management of your assets in your best interest. As such, the revocable living trust plan has proved to be a highly-effective tool for incapacity planning and management for JGB clients.

Do not hesitate to contact your JGB attorney to discuss planning for incapacity as a specific part of your estate plan. Be certain that regardless of the planning documents you choose to employ, you are taking proactive measures to prevent a “Betty” situation in your own life. As my business partner Dan is fond of saying, “Any day in Court is a bad day.”

Our next installment will focus on Problem #5: Taxes.

DID YOU KNOW?

*Did you know communicating responsively to our clients is important to us? If you send us something and don't hear from us, please give us a call to confirm we received it.

*Did you know that the attorneys at Johnson, Gasink and Baxter, LLP have built their practice by working with great clients like you? We are offering small estate planning classes for clients and their friends. Class attendees will learn about funding and common issues with estate planning. The next classes is:

  • June 11th at 2:00 in our Virginia Beach office

Don't let something happen to your friends and loved ones without proper estate planning in place! Please contact Brooke Heilesen at 1 877 790 4555 to reserve a spot in a class.

*For Financial Advisors: Watch for information on upcoming continuing education classes being offered this summer.

About the Author:

In January of 2004, Jeremy moved from Boston to the gentler climate of Virginia. He lives in the Richmond, Virginia area and has two beautiful daughters and a strapping young son. Having grown up on Cape Cod, Massachusetts, Jeremy enjoys spending his free time outdoors by the water where he can often be found SCUBA diving, saltwater fishing and shooting Skeet/Trap.

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