Planning for incapacity

While many people believe that estate planning is entirely about distributing assets at death, an equally important aspect is preparing for potential incapacity during life. Here are some steps that may help you or a family member plan for potential capacity issues:

1. Review and maintain your estate plan

Having all of your essential documents in place before any impairment, whether sudden or gradual, can help ensure your intentions are carried out according to your plan and not by default. Below is a description of the important planning documents that are generally useful to address any potential cognitive impairment in the future.

Revocable trust

A revocable trust can provide for management of your assets during your life in addition to the disposition of your assets at death. While you likely would be the initial trustee of the revocable trust, the successor trustees you name can manage any assets held in the trust if you become unable to do so. The trust can include provisions for when and how your incapacity is determined, who will serve as trustee if you are unable to do so, and when trust income and principal should be distributed.

People often believe that having a durable power of attorney (described below) is sufficient for managing their financial affairs in the event of incapacity. While a durable power of attorney is a valuable tool, it has some limitations. Financial institutions and third parties sometimes hesitate to accept durable powers of attorney, which can complicate the agent’s ability to access your assets. The use of a revocable trust, however, allows your successor trustee to seamlessly manage the assets held in the trust if you become incapacitated without the need for additional verification or court intervention.

While a revocable trust is used in conjunction with a will, your will is not operative during your life and therefore does not impact your incapacity planning. However, it is important to have your will in place before any incapacity because only you can execute your will.

Durable power of attorney

A durable power of attorney appoints a trusted individual to act as an agent on your behalf with respect to assets titled in your individual name. The power of attorney may be effective from the moment you sign it, or it may be activated by a specific event such as your incapacity. Your agent under a durable power of attorney may be given the power to handle matters that fall outside the scope of your revocable trust, such as transferring assets to your revocable trust or naming beneficiaries for retirement accounts. Sometimes, durable powers of attorney spell out scenarios under which advisors or lawyers can and should contact family members if cognition concerns are noted.

Healthcare power of attorney

A healthcare power of attorney (also called a healthcare proxy or healthcare directive) appoints someone you trust to make medical decisions for you when you no longer can. This document and other healthcare documents (described below) may be separate standalone documents or combined into a single document depending on your state law and the attorney who drafts the documents.

HIPAA release

Based on the Health Insurance Portability and Accountability Act of 1996 (HIPAA), this document allows your healthcare agent and potentially other fiduciaries the right to access your medical records.

Living will

A living will expresses specific wishes about certain aspects of end-of-life care, rather than simply leaving those decisions to the person named in your healthcare power of attorney. Although it is difficult to address every contingency, living wills typically cover pain relief and whether you would want a ventilator, feeding tube or resuscitation.

2. Keep important information where trusted individuals can find it

It is prudent to keep your estate planning documents, financial information and medical information updated and accessible to the individuals who would care for you if you lose capacity. Many people keep files — whether hard copies or electronic — that include contact information for key advisors, copies of relevant documents, medications and health updates, and lists of accounts and properties. It is common to include passwords for online accounts as well, however you should ensure that information is in a safe place to prevent security issues.

3. Be aware of red flags

Family members, advisors and healthcare professionals need to be aware of changes in a person’s ability to understand and manage financial matters. Red flags may be cognitive, emotional or behavioral. It may not be easy to determine if subtle changes in behavior are serious issues but being alert to the possibility is important. Some examples of red flags include:

• A sudden desire to change beneficiaries of a will or trust
• A sudden change in spending habits
• A sudden change in risk appetite

Advisors and family members should be open and honest about relationships among family members. Sometimes the conversations can be difficult, but it is better to have them earlier, rather than later, so everyone is prepared when red flags pop up. Risks of failing financial capacity include poor financial decisions, unintentional self-impoverishment, exploitation by others and vulnerability to undue influence.

Planning for incapacity allows you to communicate your wishes so that your loved ones can care for you seamlessly. Professional guidance ensures that your documents are properly prepared to reflect your intentions and comply with current laws, providing clarity and peace of mind to you and your loved ones. Taking these steps can help safeguard your plans and minimize the risk of future complications.

For more information on planning for incapacity or for CIBC’s electronic organizer, please contact your CIBC Private Wealth advisor.

Lucy Bickford is a senior wealth strategist at CIBC Private Wealth in Chicago with over 10 years of industry experience.