I am now in my tenth year of writing the weekly column Planning Matters for the Times Herald. If you include the Savvy magazine columns, I’ve had over 500 columns published. I am always looking for estate planning, elder law, business planning and real estate topics to discuss. If you have any ideas for a column or something for which you would like explained more fully, please email me at email@example.com.
This week’s topic comes from fellow hunters at deer camp in northern Michigan, which is where I am now as I write this. It used to be that I would have to get my column done before I went to deer camp. But now with wider cell phone coverage areas and wifi hotspots, I can write my column almost anywhere. I even get a cell signal in my hunting blind.
In our office, we use a little different definition of estate planning than most estate planners. Firstly, I want to control my property when I am alive and well. I have not met a client yet who did not want to be in control if they could. In today’s column, we are going to discuss when it is appropriate to relinquish that control and how to do it and what to do.
This leads us to the second part of the definition of estate planning, I want to provide for me and my loved ones in the event of my mental disability. When we are talking about disability in the estate planning context, we are talking about mental disability. If I am physically disabled, I can still make decisions about me and my stuff, but if I am mentally disabled, I cannot. This is one of the most overlooked parts of estate planning. We regularly see plans that only focus on the after-death distribution of stuff, rather than making sure your instructions are going to be followed while you are still living, but unable to make your own decisions. This is the focus of today’s column.
But before we get to that, we will finish our definition of estate planning. After I and my loved ones are provided for during my lifetime, I can worry about my stuff; when I am gone, I want to give what I have, to whom I want, when I want the way I want, all at the lowest overall cost to me and those I love. Most people focus on the upfront cost of setting up an estate plan, without realizing there are costs all along the way. There are costs to update or failing to update your plan, costs upon disability and costs after death. And for most people, the big bucks are paid by their loved ones after they are gone through the probate court estate administration process.
The key document for disability planning is your financial power of attorney. With a financial power of attorney, your designated agent has the authority to handle your finances and property, deal with your creditors and pay your bills. In most instances, with a properly drafted financial power of attorney, you can avoid a court appointed conservatorship , along with its associated costs and complexity. But when do you want your designated agent to start acting?
You may want your agent to begin acting immediately upon the signing of your financial power of attorney. It may be because you are physically disabled and it is difficult for you or you are unable to complete those tasks. Or maybe bill paying and balancing the checkbook has become a real chore and it would be nice to have a personal assistant to help out. If one of the kids is willing to help you with your finances, is trustworthy and has money management skills, why not go for it? Also, if you have a personal assistant, there is less likelihood you will be financially scammed.
If you are currently handling your financial affairs and do not want anyone helping out at this time, you can have the financial power of attorney spring into action at a future date, such as when you are mentally disabled. This is called a springing power of attorney. The determination of your mentally disability for financial matters is usually made by one or more persons you designate in your financial power of attorney who state that you can no longer effectively manage your property and financial affairs.
If your estate planner just took a power of attorney form out of a form book and slapped your name on it, you may have a provision that states that it requires one or two doctors to determine that you are mentally disabled. This is a common form document provision, but it requires your loved ones to take you to the doctor(s) or have the doctor(s) come to the house, maybe over your objections, and then have the doctor(s) prepare and sign documents of disability.
Most of our clients want to keep matters private within the family and choose a disability panel made up of at least three family members who know them well and make the determination either by majority rule or by unanimous declaration that you could not effectively manage your property or financial affairs. The disability panel determination allows your financial agent to act on your behalf.
You could have your financial power of attorney effective both immediately and upon your mental disability. In my financial power of attorney, my wife Emily is able to act for me immediately when I signed it, but for anyone else to act, I have to be mentally disabled, as determined by the majority rule of my disability panel, which consists of my wife Emily and my kids Luke and Elizabeth.
However, a disability panel determination in your financial power of attorney does not stop you from acting, even if you are mentally disabled. If you want to stay out of probate court with a court appointed conservator, about the best way to stop you from acting when you are mentally disabled is to have 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. All it takes is three documents prepared by the estate planner. First your disability panel members would sign a disability certificate indicating that you can no longer effectively manage your property and financial affairs. Then your successor trustees would sign an acceptance of trust and a trust certificate. Once these three documents are completed, your named successor trustees can then step in and manage your trust assets for you. They can then remove your name from all of the trust accounts and protect them from your inappropriate actions.
In most instances, the disability certificates for the trust are also used for the financial power of attorney. No additional documents are needed to be able to handle assets that are not titled in the name of your trust during your lifetime, such as retirement accounts.
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 whom you do not know making decisions regarding your mental disability, or managing your property and financial affairs when you are unable. You can decide when you give up control.
By Matthew M. Wallace, CPA, JD
Published edited November 19, 2017 in The Times Herald newspaper Port Huron, Michigan as: When should I give up control?