Earlier this month, both Stacey Romberg and I attended a virtual dinner meeting of the Estate Planning Council of Seattle and heard a lively panel of estate planning professionals discuss some of the pitfalls in planning for incapacity and strategies for sidestepping those pitfalls. Those pitfalls can include cumbersome requirements for proving incapacity in a General Durable Power of Attorney, the failure to plan for the incapacity of an agent acting under a General Durable Power of Attorney, and the failure to provide for the appointment of a successor trustee under a Revocable Living Trust.
First, a refresher for anyone who does not live and breathe estate planning. A General Durable Power of Attorney is a document that nominates an agent, who is sometimes referred to as an attorney-in-fact, to make financial and legal decisions on behalf of the person signing the document (the principal). A General Durable Power of Attorney can either be effective immediately upon signing the document or it can be effective only upon the principal’s incapacity.
A General Durable Power of Attorney effective on incapacity is sometimes called a “springing” power of attorney, because the agent can only act on behalf of the principal if the principal is incapacitated, thus causing the powers granted to the agent to spring up like a cat pouncing on a spider. The downside of a springing power of attorney is that the agent must show that the principal lacks the capacity for the agent to have authority to act. Typically, the General Durable Power of Attorney document itself will provide the standard for demonstrating incapacity. If the standard for demonstrating incapacity is too cumbersome, such as requiring written statements from multiple psychiatrists, the agent may have a hard time producing the documentation showing that the principal lacks capacity.
Another pitfall in planning for incapacity occurs when estate planning documents fail to account for the agent becoming incapacitated. As Stacey wrote in this blog post, it is important to nominate at least one alternate to any fiduciary nominated in your estate planning documents. Among the many reasons to nominate alternate fiduciaries, one of the most important may be providing for an alternate fiduciary to serve if your nominated fiduciary becomes incapacitated. This can happen when one spouse, who has been acting on behalf of an incapacitated spouse as an agent under a General Durable Power of Attorney, develops dementia themselves and a third party is needed to step in and manage the affairs of both spouses.
Revocable Living Trusts may also contain unexpected pitfalls in providing for the management of a person’s affairs upon incapacity. A Revocable Living Trust is managed by a trustee. Typically, the trustee of a Revocable Living Trust during the lifetime of the person who sets up the trust (the Grantor) is that person – the Grantor. However, if the Grantor becomes incapacitated, the Revocable Living Trust should provide for the appointment of a successor trustee and set forth the requirements for the documentation the successor trustee will need to show to assume that role.
Have questions about planning for incapacity? We’d love to discuss!
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