You are doing ok now. You are paying your bills, still able to balance your checkbook and do your own banking. But it is getting to be a real chore. It just seems harder to do now. If that is what you are thinking, you are probably right. As you age, your physiological systems slow down. Although you may not like it and you may be in denial, your mind is part of those physiological systems that slow down. It has been studied. It has been found that on average after age 60, your financial ability declines about 3% each year.
You still may be handling your finances now, but have you ever thought about what would happen to your real estate, bank accounts, investments and other property (your “stuff”) if you could not take care of them because of your mental disability due to an accident, illness or injury? How would your property be maintained, bills paid, income collected or property sold? Wouldn’t it be nice to have a personal assistant?
There are generally only two classes of people who can make decisions for you when you cannot: those whom you appoint and those whom the probate court appoints. If you have done no planning, no one would have the legal authority to act on your behalf during your mental disability without court involvement.
In order to handle your stuff, your loved ones would have go to probate court to have a conservator appointed to handle your finances and other property. There is typically a court hearing at which the probate court judge first makes a determination if you are legally incapacitated and cannot handle your own affairs. If you are legally incapacitated, the judge then appoints a conservator to handle your property and finances.
The judge also decides what your conservator can do. The court may include in the appointment order, that any non-recurring monthly expenditures above a certain amount such as $200 or an annual limit of $1,000, require court approval. Between the time spent preparing and filing documents, serving court papers and attending the hearing, it could take over a month to get your expenses approved by the court, and at a substantial legal fee cost when an attorney is used. This is not the result that most people want. Most people would rather have their family or other loved ones they choose making these decisions, instead of the judge, who may not know them.
There are several planning opportunities you can put in place now when you are alive and well that can be used to take care of your stuff when you are not so well, and avoid probate court. Probably the most common tool used for financial matters is a general durable power of attorney. This is a legal document in which you appoint one or more agents to act on your behalf with regard to your property and finances.
Your general durable power of attorney can be effective either immediately when signed or when you become mentally disabled. You could also do what I have done, it is immediately effective for my wife Emily, but for anyone else to act, I have to be disabled. Most of our clients, including myself and my wife Emily, use a disability panel of at least three people who know them to make the determination that they cannot effectively manage their property and financial affairs, either unanimously or by majority rule.
In your general durable power of attorney, you direct that your agents can do what is necessary, all without court supervision. Your agents can collect your income, pay your bills, deal with governmental agencies and do just about everything you could do to manage your stuff.
Most durable powers of attorney are general durable powers of attorney, in that they cover all of your stuff; anything you can do, your agent can do. However, you can have a limited durable power of attorney which would apply only to certain assets or for a specific period of time.
To minimize the amount of resistance that your general durable power of attorney comes across, it should include an extensive list of powers. Because of this, our powers of attorney which were three pages long in 1999 are now about 25 pages long.
In addition to your appointed financial agent, you should choose at least two backup agents in the event the prior agent is unable or unwilling to act. All too often, we see powers of attorney which only name one or two financial agents, none of whom are able to act. If you became mentally disabled in this circumstance, you would end up in probate court to appoint a conservator to handle your property and financial affairs. Your financial agent should be someone you can trust and has the ability to handle finances. Do not necessarily name the kids in birth order if any of them does not have money management skills as one of the gifts that God has given them.
If you went into the nursing home, would you like your assets to go to your spouse and other loved ones or to the nursing home? If you would like your assets going to your spouse or other loved ones, you must have the proper gifting language in your financial power of attorney. Michigan law changed in 2012 with regard to gifting powers in a financial power of attorney and requires very specific language.
In our office, when a client with an existing estate plan comes in, we rarely ever find that the proper gifting language is included in their financial power of attorney. Ask the attorney drafting your financial power of attorney if they are familiar with the 2012 changes in the financial power of attorney statute and if they have recent experience filing Medicaid applications in the event of nursing home admission. If the answer to either of these is no, then find another attorney who will be able to properly advise you and include the proper gifting language in your financial power of attorney.
Another change in 2012 now requires your financial agents to sign a one page statutory “Acknowledgment” form that basically states, among other things, that they will follow your instructions, act in your best interest and will not loot your assets. It is similar the “Acceptance” signed by your patient advocates in your health care power of attorney since 1989. We recommend that your financial agents sign the Acknowledgment now so they do not have to worry about it later when needed. Review your financial power of attorney and make sure your financial agents have signed an Acknowledgment. We regularly review attorney-drafted financial powers of attorney which have been signed after 2012, but do not have agent Acknowledgements or do not have them signed by their financial agents.
As of June 27, 2016, you now have to include special language in your financial power of attorney if you want to allow your financial agents to have access to your online accounts and other digital assets either now or after your mental disability.
Financial powers of attorney are only good during your lifetime. They expire with you. There are other alternatives that you could use to avoid a probate court to take care of your stuff both during your lifetime and after your death. Two of these alternatives are a properly drafted and implemented revocable living trust and a family limited liability company.
One of the best alternatives is a fully-funded revocable living trust. Having a trust is not enough, it must be fully-funded. Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust.
The proper funding of your trust is critical in making your estate plan work and having the results you plan. Failure to properly fund your trusts may cause unintended results. These may include probate during your lifetime or after death; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other expenses. What is the point of having a trust if you do not put anything in it.
If you are no longer effectively managing your property or financial affairs, your named disability panel can remove you as trustee. Your named successor trustee can then step in and manage your trust assets for you.
Another alternative oftentimes used in conjunction with a trust, is a family limited liability company (“LLC”). With a family LLC, you typically would elect to be a manager-managed LLC and transfer your business and/or other investment assets into the LLC. As with a trust, if you are no longer effectively managing your property or financial affairs, your named disability panel can remove you as the LLC manager. Your named successor manager can then step in and manage your LLC assets for you.
You do not need to have someone outside your family making decisions regarding your property if you are unable. Make sure your wishes are followed. Do proper planning today.
By: Matthew M. Wallace, CPA, JD
Published edited July 24, 2016 in The Times Herald newspaper, Port Huron, Michigan as: Who will manage your “stuff” when you can’t?