Why You Need to Worry About Incapacity Planning
Death is the elephant in the room when we talk about estate planning. Sometimes we talk around it using phrases like “pass away” and “pass on” instead of directly naming it, but the not-so-subtle subtext of an estate plan is death’s inevitability.
If death is the elephant in the room in estate planning discussions—the obvious issue nobody names out loud—then incapacity is what is obscured behind the elephant, sometimes so obscured that you do not even know it is there.
Incapacity can happen at any age and can have many causes. An estate plan that addresses only what happens to your assets (such as your money, property, life insurance policies, and retirement accounts) after death—and does not address who can make decisions about your personal affairs if you become temporarily or permanently incapacitated—is fundamentally flawed.
What It Means to Be Incapacitated
Incapacity means that you lack the ability to handle your affairs due to illness, injury, cognitive decline, or some other cause. You are, to take the literal meaning of the word, in a state of being incapable. Legally, incapacity means something similar to incompetency. In the context of estate planning, incapacity refers to an impairment that renders you unable to make or communicate important decisions or to manage your affairs, including financial and healthcare matters.
Although often conflated with disability, incapacity and disability are not the same. A disabled person can be incapacitated, but disability does not necessarily involve incapacity. Someone who is in a serious car crash, for example, may have injuries that affect their mobility but not their cognition and communication. They may not be able to get around without assistance, but they can still make important decisions about their financial, property, legal, and healthcare affairs.
Incapacity and Your Estate Plan
When you become incapacitated, somebody else must step in and handle your affairs for you. Your bills and taxes still need to be paid, your investments must be managed, and healthcare must be provided, especially if you have suffered a medical emergency that renders you incapacitated and requires immediate treatment.
To take a proactive approach to incapacity planning, your estate plan must name and appoint your trusted decision-makers to act on your behalf when you are incapacitated, using documents such as financial powers of attorney, health care proxies, and a living trust. Without an estate plan that names financial and medical decision-makers for you in the event of your permanent or temporary incapacity, these choices could be left up to the court.
States have laws that provide guidelines for determining incapacity that necessitates the court appointment of a guardian or conservator (the term used may vary by state) for the incapacitated person. These legal definitions typically include medical, functional, and cognitive components. However, you are not bound by state law standards when specifying in your estate plan how to determine when you are incapacitated—and when decision-making authority should be transferred to another person. Typically, loved ones, physicians, or a combination of the two can make the determination, but you could choose to specify in your estate plan that a disability panel or—in rare cases—court oversight should be involved if you prefer. You may wish to remain in charge of your affairs as long as possible, or have concerns about others making decisions for you, and prefer a conservative standard. If you are highly confident in your chosen decision-makers (e.g., it is your spouse of 40 years), you may be comfortable with a less rigorous process. The goal of an estate plan should be to strike the right balance between convenience, objectivity, and timeliness.
In addition, you can create provisions in your estate plan to compensate those you name to act on your behalf while you are incapacitated. The people you name to make decisions for you may not expect to be paid. But reimbursing them for expenses they pay while managing your affairs, such as legal fees and accounting costs, and compensating them for time spent not working, can help ensure that all of the necessary legwork (and paperwork) is performed during your incapacity.
Plan for Incapacity to Avoid Estate Planning Gaps
Like death, incapacity looms large, especially as you get older. Acknowledging the very real risk of incapacity is the first step in addressing it. The next step is meeting with an attorney and taking action to build incapacity contingencies into your estate plan.