A University of Alabama Law School Clinical Program funded in part by West Alabama Regional Commission

Disability: Maintaining Control by Planning Ahead

Life expectancy at birth increased from 47 in 1900 to 76 by the end of the twentieth century and that trend is continuing. The fastest-growing segment of the population is the over-85 group. In the early years of the 20th century, most deaths were sudden or occurred after a short illness. Now most deaths occur after a long period of chronic illness or debilitating health problems.

While most of us can look forward to more years of good health, it is essential to plan for a period of some degree of disability. Refusing to think about the possibility of disability until it occurs can cause inconvenience, heartache and financial inconvenience or even financial disaster.

Making decisions in advance is prudent for oneself and a caring act for loved ones. It may be that the plans made now will not be needed, but it is better to have a plan ready and not need it than to need it and not have it. Do not delay thinking about possible disability “until you need to”. When you reach the point of needing help you may not be able to make appropriate plans

Financial Decisions

If you do not make arrangements for the handling of your business while you are competent and you later become incapacitated, court proceedings may be necessary to appoint someone to manage your affairs. Having a Conservator appointed can be intrusive and embarrassing. It can also be expensive, entailing court costs, attorney fees and costs of a bond. These expenses come from your estate. A Conservator must go to the court to ask for permission to spend money for you, and each court proceeding means additional expenses. If – only if - you have someone in whose integrity and good judgment you trust, this painful process can usually be avoided by executing a Durable Power of Attorney or a Living Trust , but you must do this while you are competent.

Durable Powers of Attorney

The simplest and least expensive way to plan for management of your business affairs is to execute a DURABLE POWER OF ATTORNEY, appointing an agent or “attorney-in-fact” to act for you if you are unable to manage for yourself. To be "durable," that is, to remain valid even if the Principal (person who executed it) becomes incapacitated, the document must include these words, or words to the same effect:

For powers that are to be effective immediately: "This power of attorney shall not be affected by the subsequent disability, incompetence or incapacity of the principal."

If the document is a "springing power" (springs into effectiveness when and if the principal is incapacitated): "This power shall become effective upon the incapacity, incompetence or disability of the principal."

Caution
Durable Powers of Attorney are wonderful documents when used appropriately, but their simplicity also makes them easy to misuse. It is critical to choose an agent (called an "attorney-in-fact") who is impeccably honest, has good judgement, and will be sensitive to your preferences. These are not qualities about which you can make a quick judgement, Your agent should be someone you have known well for a long time and who manages his/her own business well. Your agent should consider your needs and wishes first in managing your assests, if that time comes.

Sole vs. Joint Agents

Many businesses prefer and even insist on having one person they can look to for decisions if the principal cannot act. For that reason it may be best to appoint only one person as the Agent or Attorney-in-Fact, with an alternate appointed in case the first named person is unable to act. If the principal has only one person that (s)he trusts completely then it is better to appoint that person as sole agent rather than appoint an alternate who may find the opportunity too tempting, or who may be honest but poor at handling business.

It is possible to appoint joint agents if there are two trustworthy, competent candidates who can work together. It is wise to include some mechanism for prompt resolution of any disagreements if they arise. This is the situation in which third parties do not want to be caught. (Never appoint more than two agents.)

Special considerations

It is also wise to include in springing powers some trigger that will determine when incapacity occurs. This could be a letter from your treating physician, letters from both your doctor and attorney, or from someone else that you trust.

It is best not to appoint someone whose financial circumstances are less solid than your own. Remember that appointing someone to act for you is not “an honor”, but a responsibility. If you have several family members who might think they should be appointed, it may be best for you or your attorney to contact all of them at the time the appointment is made. You can explain that for reasons having nothing to do with affection or esteem, the person you appointed is the one you feel will best be able to carry out this responsibility and that you hope and expect all of the family will cooperate. If there is some sound reason for objecting to the appointment, other family members will have an opportunity to voice their concerns then, while you are able to consider and address them.

Do not allow yourself to get bogged down in whether you might hurt someone's feelings. Appointing an agent is a business decision, not an expression of affection. Do not appoint the oldest child, or the one with a college degree, or the only male, for those reasons only. Appoint the person who manages his/her own business well and whom you can reasonably expect to do the same for you, and do it willingly.

What should be in the DPOA?

A DPOA should be more than a form; it should meet the particular needs of the person executing it. Three or four pages may suffice for someone whose business matters are simple; ten pages might be inadequate for someone whose financial affairs are more complicated. Even simple DPOAs should include a provision to make bank deposits and write checks; pay, negotiate or compromise debts; collect amounts owed; manage personal and real property; enter any bank deposit box, and other basic management tasks. If an agent is to be able to sell real property that must be specified in the document. Also, an agent under a power of attorney cannot benefit him/herself unless the authority to do so is spelled out. If a principal owns stocks or bonds, there should be a provision about managing them.

A complete list of all the provisions that should be included in a good durable power of attorney document is beyond the scope of this article. It is enough to say that one or two general paragraphs are not sufficient, and you should seek knowledgeable legal advice to draft a document that is right for your circumstances. If you have an old Durable Power of Attorney, even if it is a good one you might want to update it to include the new "HIPAA" medical privacy regulations.

A form purchased at an office supply store or borrowed from a friend may meet your needs, but given the modest cost of having a document tailored for you, it is foolish to risk problems that you might not recognize in a “one-size-fits-all” document (Area Agency on Aging Lawyers prepare them at no charge).

It is a good idea to check with your bank or other financial institution to be sure the power of attorney form you execute is satisfactory with the bank. Some institutions insist on their own forms. You will also want to clarify that, even if you execute a springing power, you intend the document to remain valid until and unless you revoke it and notify the bank. Occasionally banks will insist that a power of attorney is “no good” because it was executed several years ago. Problems with banks refusing to accept "springing powers" from years past are good reasons to avoid springing powers, since this defeats the purpose for executing a Power of Attorney while one is competent. The idea is to avoid problems during a long period of incapacity. It is best to address those issues with your bank ahead of time. If the answers you get are not satisfactory you may want to look at other institutions.

Living Trusts

Living Trusts are being actively marketed as substitutes for wills, and mass marketers are not always knowledgeable about state rules or careful about individual needs. In fact, over-aggressive marketing and outright scams have become such a problem that the attorneys general in many states are actively working to stop this activity. It is not unusual for living trust peddlers to go into the homes of vulnerable seniors and apply high pressure tactics to "do it today". They may greatly exaggerate the costs and complications of wills and probate, and use other alarming misinformation to make a sale. Seniors and families should be alert to these kinds of abuse.

On the other hand, well-drafted living trusts can be highly effective when appropriate. In some states, where probate costs are high and the procedures intrusive, a well-drafted Living Trust may be a good choice. In Alabama, where probate is inexpensive and not intrusive, avoiding probate alone is not a good reason for selecting a living trust. These instruments can be useful in other ways, however, and one of those is providing for disability in those cases in which a Durable Power of Attorney may not be adequate.

Another sounds reason for including a Living Trust in an estate plan is ownership of real property in other states. Placing that property in a suitable revocable trust can avoid having to probate the estate in more than one jurisdiction.

Usually the Trustor or Grantor (person setting up a Living Trust) appoints him/herself as the Trustee as well as the Beneficiary, but there can be reasons to do otherwise. For instance, a parent who is competent but unable to resist entreaties from family or others for donations might place most of his/her assets in trust and name someone else as Trustee. Or the Trustor may be aware that (s)he is becoming confused and, though competent, not as sharp in handling financial matters as in the past. The Grantor who transfers his/her assets into trust in someone else's control can then say to those wanting money that it is not within his/her control, the family member/ charity/ business/ con artist must ask the Trustee (who presumably is made of tougher stuff).

Although Powers of Attorney are flexible, Living Trusts can be even more so. The Trustor or Grantor, who is also the Beneficiary, usually appoints him/herself as the Trustee, and manages his or her own affairs so long as (s)he is able. The Trust provides that if (s)he becomes incapacitated an Alternate Trustee will take over. Property is actually transferred to the Trust and belongs to it. Income taxation is the same as if it is still owned by the Grantor, but the Trust actually owns it. This can make some transactions more complicated and others less so. Living Trusts are revocable and therefore executing such a trust does not save on Estate Taxes by removing assets from the taxable estate, although a trust it may be part of a total estate plan that will minimize estate and future income taxes.

Two major concerns that arise in selecting an Agent under a Power of Attorney also arise with Living Trusts:

Is there a person of impeccable honesty who also has good business judgment and experience (and perhaps the ability to handle issues with other family members who resent or are hurt by the appointment)? and
When does the document take effect? Who decides when the Trustor/ Beneficiary/Trustee is "incapacitated?"

A major disadvantage of Living Trusts is the expense associated with drafting a suitable one, making wise decisions about what property to transfer into it, and drawing up documents to effect the transfers. It is foolhardy to pick up a form from a stationary or business supply store. A good Living Trust should be drawn up by an attorney familiar with these documents, who can be sure the document is valid in your state, tailored to your needs, and properly funded. If the Trust is signed but not funded - that is, no property is transferred into it - it is useless.

One usually does not put all one’s assets into a Living Trust, so a Durable Power of Attorney may be needed to manage assets not included. For most people in Alabama a well-drawn Durable Power of Attorney alone can accomplish the same management goals much more simply and inexpensively than a Living Trust.

Joint Accounts

Married couples often use joint bank and stock accounts. This can be a convenient way to transfer assets automatically at the death of one spouse, and to provide that one spouse can manage the couple’s money if the other becomes unable to do so. It is less desirable when other family members are concerned.

Having another person on an account allows that person to use and withdraw the funds just as if it were his/her own. Creditors could claim all proceeds of the account to pay either joint account-holder's debts. If the person added is a child, it exposes the account to being a marital asset of that child in a divorce action. Putting another person’s name on your account is, in effect, a gift to that person. While many children, nieces and nephews and even neighbors would never think of misusing a joint account, the option is there.

If the account is joint with survivorship (as most joint accounts are), at the death of one account-holder the entire account will pass automatically to the other. A will does not change that. Sometimes parents put one child’s name on an account but direct in their wills that the proceeds will be divided among all their children. But the one child whose name is on the account has a legal right to the entire account at the parent's death and the will cannot override that right. Also, if a joint account-holder is sued and a judgment is entered against him/her, the proceeds of the account could be used to pay the debt, even if the other account holder put in most or all of the money.

It is usually better to provide management access by means of a power of attorney.

THIS SUMMARY IS NOT INTENDED TO BE AND SHOULD NOT BE CONSIDERED AS LEGAL ADVICE IN A SPECIFIC SITUATION. YOU SHOULD CONTACT AN ATTORNEY OR OTHER APPROPRIATE PROFESSIONAL FOR ADVICE ABOUT YOUR PARTICULAR NEEDS AND HOW BEST TO MEET THEM.

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