Incapacity Planning II: Two Essential Documents for Managing Your Finances

There are two essential legal documents for managing your finances that must be in place prior to becoming incapacitated. Once you are incapacitated, you cannot initiate, sign or approve them:

1. Financial Power of Attorney. This legal document gives your selected agent the authority to pay bills, make financial decisions, manage investments, file tax returns, mortgage and sell real estate, and address other financial matters that are specified in the document. Financial Powers of Attorney come in two forms: “Durable” and “Springing.” A Durable Power of Attorney goes into effect as soon as it is signed, and remains in effect after you become mentally incapacitated. A Springing Power of Attorney only goes into effect after you have been determined to be mentally incapacitated.

2. Revocable Living Trust. This legal document involves three parties:
– The person who creates the trust (the “Trustmaker” or “Grantor” or “Settlor”—they all mean the same thing);
– The person who manages the assets transferred into the trust (the “Trustee”); and
– The person who benefits from the assets in the trust (the “Beneficiary”).

In a typical Revocable Living Trust, you will be the Trustmaker, the Trustee and the Beneficiary of your own trust. However, if you become incapacitated, then your Successor Trustee will step in and manage the trust assets for your benefit.

To be part of an effective incapacity plan, your Revocable Living Trust should contain provisions that specify how to determine your mental status through a private process (i.e., a disability panel, the opinion of two physicians, an attending physician or some other method) instead of a public court process. In addition, the trust agreement should contain specific instructions about how to you want to be cared for if you are declared mentally incapacitated.

Without these two important documents, any interested party may petition the Court to put a Conservator in place to manage your financial affairs. The Court-appointed Conservator can, at your expense, oversee your finances if you are not competent to oversee them yourself.