With people living longer due to advances in medicine and changes in lifestyle, odds are that most of us will become disabled for some time before we die and may need long-term care. Unfortunately, too few plan for an event that is more likely to be a probability than a possibility—and the consequences of not planning can be disastrous for all involved.
When someone owns assets in his/her name and becomes unable to manage financial affairs due to mental or physical incapacity, only a court appointee can sign for the disabled person. This is true even if the person has a will, because a will can only go into effect after death. With some assets, especially real estate, all owners must sign to sell or refinance. So, for example, if a married couple owns their assets jointly, one of them becomes disabled and an asset needs to be sold or refinanced, the well spouse will have to go through the probate court in order for that to happen.
This is called a “living probate” because it is similar to the probate process at death but the person is still alive. It can be costly, time consuming and cumbersome with annual accountings, bonds, reports, ongoing determinations of incapacity/incompetency, and fees for attorneys, accountants, doctors and guardians. All costs are paid from the disabled person’s assets, and all assets and proceedings become part of the public probate record. A living probate usually lasts until the person recovers or dies which, depending on his/her age when the disability begins, can be years.
A fully funded revocable living trust avoids a living probate. When a living trust is established, the titles of assets are changed from the individual’s name to the name of the trustee. This is called “funding” the trust. If the trust has been fully funded (all titles changed) and the person becomes unable to conduct business, there is no reason for a living probate because the disabled person does not own any assets in his/her name. The successor trustee, hand-picked when the trust is created, can automatically step in without court interference and manage the disabled person’s financial affairs—selling or refinancing assets to help pay for his/her care and the care of loved ones, or keeping the owner’s business going—for as long as needed.
Other necessary documents include:
* Durable Limited Power of Attorney, which allows the successor trustee to transfer to the trust assets that may have been overlooked, and to manage assets (like IRAs) that cannot be put into a living trust;
* Durable Power of Attorney for Heath Care, which gives another person legal authority to make health care decisions (including life and death decisions) if you are unable to make them for yourself.
* HIPPA Affidavits, which give written consent for doctors to discuss your medical situation with others, including family members, loved ones and your successor trustee(s).
Planning for disability may also include disability income insurance (to help replace lost income), and long term care insurance (to help cover the costs of care that are not covered by medical insurance). Business owners may want to consider business or professional overhead insurance that will pay monthly operating expenses until they recover or the business can be sold or transferred, and buy-sell agreements in the event a co-owner becomes permanently disabled.
Disability before death is not always expected and it does not always happen, but it must be planned for.