Not Just Death and Taxes: 5 Legal Documents Essential for Incapacity Planning

Proper estate planning is more than your legacy after death, avoiding probate, and saving on taxes. Comprehensive estate planning includes a plan to manage your affairs if you become incapacitated during your life and can no longer make your own decisions and a thorough discussion of not just death and taxes: 5 legal documents essential for incapacity planning can help you be prepared. 

What happens without an incapacity plan?

Without a comprehensive incapacity plan in place, your family will have to go to court to get a judge to appoint a guardian and/or conservator to take manage your assets and health care decisions. This guardian or conservator will make all personal and medical decisions on your behalf as part of a court-supervised guardianship or conservatorship, which can be expensive and time consuming until you either regain capacity or die. There are two dimensions to decision making that need to be considered: financial decisions and healthcare decisions.

• Finances during incapacity

If you are incapacitated, you are legally disqualified from making financial, investment, or tax decisions. Of course, bills still need to be paid, tax returns still need to be filed, and investments still need to be managed.

• Healthcare during incapacity

If you become legally incapacitated, you will also not be able to make healthcare decisions on your own behalf. Because of patient privacy laws, your loved ones may be denied access to medical information during a crisis and end up in court fighting over what medical treatment you should, or should not, receive (like Terri Schiavo’s husband and parents did, for 15 years).

You must have these five essential legal documents in place before becoming incapacitated so your family is legally permitted to make decisions for you: 

1. Financial power of attorney: This legal document gives your agent the authority to pay bills, make financial decisions, manage investments, file tax returns, mortgage and sell real estate, and address other financial matters according to the powers granted to the agent in the document.  

Financial Powers of Attorney come in two forms: “durable” and “springing.” A durable power of attorney goes into effect immediately.  In contrast, a springing power of attorney only becomes effective after you have been declared mentally incapacitated. There are advantages and disadvantages to each type, and we can help you decide which is best for your situation. 

2. Revocable living trust: This legal document has three parties to it: the person who creates the trust (you might see this written as “trustmaker,” “grantor,” or “settlor” — they all mean the same thing); the person who legally owns and manages the assets transferred into the trust (the “trustee”); and the person who benefits from the assets transferred into the trust (the “beneficiary”). In the typical situation, you will be the trustmaker, the trustee, and the beneficiary of your own revocable living trust while you are alive and have capacity. If you ever become incapacitated, however, your designated successor trustee will step in to manage the trust assets for your benefit. Since the trust controls how your property is used, you can specify how your assets are to be used if you become incapacitated (for example, you can authorize the trustee to continue to make gifts or pay tuition for your grandchildren). 

3. Medical power of attorney: This legal document, also called a medical or health care proxy, gives your agent the authority to make healthcare decisions if you become incapacitated. 

4. Living will: This legal document shares your wishes regarding end of life care if you become incapacitated. Although a living will isn’t necessarily enforceable in all states, it can provide meaningful information about your desires even if it isn’t strictly enforceable. 

5. HIPAA authorization: This legal document gives your doctor authority to disclose medical information to your selected agent or agents. This is important because health privacy laws may make it very difficult for your agents or family to learn about your condition without this release.

Is your incapacity plan up to date? 

Once the documents for your incapacity plan in place, you cannot simply stick them in a drawer and forget about them. Instead, your incapacity documents must be reviewed and updated periodically, especially when certain life events occur such as moving to a new state or going through a divorce. If you keep your incapacity plan up to date and make the documents available to your loved ones and trusted helpers, it should work the way you intended so you can rest easy the issue of not just death and taxes: 5 legal documents essential for incapacity planning has been properly established.