Estate Planning Is More than Just a Will

| March 4, 2017 | 0 Comments

Not too long ago, I wrote about the most basic estate-planning tool: your will. If you have children, or really anyone whom you wish to benefit at your death, your will is the most essential foundation for putting your affairs in order after you’re gone. However, “after you’re gone” isn’t the only scenario your estate planning should cover. For instance, who would manage your affairs if you are still living, but unable to fend for yourself?

The legal term for this situation is Incapacity: when a person is not able to handle his or her own financial or personal affairs. In California, if your assets are owned by a Trust then that will be your primary tool for handling those assets. A Trust should have provisions that allow a successor trustee to take over in case of incapacity. But some assets fall outside of a trust, or you may not even have a trust, so an additional tool is needed: a power of attorney (POA). The POA allows someone else to act on your behalf and is most critical in situations when you are unable to manage your own affairs, such as extended illness, recovery from an accident, etc. A POA can be limited, or it can give your agent broad discretion over your finances, so choose this person very carefully.

A POA may be “immediate” (takes effect on the day you execute it) or it may be designed to “spring” into action on some triggering event, such as your incapacity. A “durable” POA remains in effect even after incapacity, where as a non-durable POA does not. A springing power of attorney should require some proof of your condition in order to be valid, and you should understand what that proof is before you sign the document. Whether springing or immediate, a POA grants your agent the same rights and powers over your assets and liabilities as you have, so you should choose this person with care.

The importance of a power of attorney is most obvious in the case when you become incapacitated. You would be unable to act for yourself, but other documents like a will are not activated either; you would be in financial limbo. This can last for a few days or several years.

Of course, your loved ones could always go to court and have a conservator appointed to manage your affairs, but wouldn’t you rather make that decision beforehand? You can avoid the financial limbo by having a POA in place before you become incapacitated, allowing your affairs to be managed for you until you are ready to resume management yourself.

Consider the following example. Who would pay the bills for you if you are in a coma in the hospital? If you maintain separate checking accounts, can your spouse access your account to use those funds to meet your obligations? If you are not married, who will pay your bills and take care of your affairs while you cannot? Is there someone who would care for your pet? If you and your spouse are hospitalized, who would take care of your finances and children?

A POA should be designed with flexibility to cover a wide range of situations, because other issues crop up during long-term incapacity. This can include settling a business, managing real estate and IRA or pension distributions.

A power of attorney needs to contain specific language for certain assets, such as retirement accounts, so generic forms (such as those from the internet) may not accomplish what you need them to do. Many brokerage firms do not accept powers of attorney with general, non-specific language relating to ‘management of your assets’. Even some custom documents get rejected, so make sure yours is acceptable to your financial institutions.

Other common problems include outdated documents. For example, if your relationship to your agent changes (e.g.: divorce), you need to update your documents. It’s also important to ensure that the people you have entrusted with this kind of responsibility are still the right ones for the job.

Like all estate planning documents, you should review these documents regularly and consult with an attorney who specializes in estate planning.

This column is prepared by Rick Brooks, CFA®, CFP®. Rick is director/chief investment officer with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

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