People in the prime of life can find it enormously difficult to envision a time when they will struggle to think clearly or care for themselves physically. Yet the statistics are unmistakable: according to the US government, 70% of people turning age 65 can expect to use some form of long-term care during their lives. What’s more, various forms of incapacity can strike younger, healthy people without warning.
Take the example of a young, single friend of mine who is in wonderful physical condition. Out for a bike ride one day, he spun out and landed in the emergency room in critical condition. And in addition to ‘straightforward’ injuries like broken bones, his injuries included a brain bleed, which left him with a short-term cognitive impairment. Luckily, my friend’s injuries are healing well – including the cognitive ones – but the experience has been a harrowing one. In the immediate aftermath of the accident, it wasn’t clear who was in charge of his care, let alone his consulting business. Friends and family stepped up, but without clear guidance or coordination, those efforts sometimes overlapped or resulted in unnecessary conflict. The result was a mixed bag: some outcomes were not as bad as they might have been due to the extraordinary efforts of all involved, while some outcomes were, at best, sub-optimal.
Who Will Speak For You When You Cannot?
Some things we can know and decide ahead of time. Who gets that family heirloom, for example, is a decision you can make now, even if it won’t happen for 30 years to come. Many other decisions that arise when you are disabled – either physically or cognitively – can be neither foreseen nor decided upon in advance. There are simply too many possibilities to envision. In addition, the all-important context of each decision or action is unknown until it actually arises. To deal with these kinds of situations and decisions you need someone – or more likely, multiple people – to speak and act on your behalf in a manner that as closely as possible reflects your own best interests and wishes.
Choose Your Financial Surrogates Wisely
The growth of financial complexity, not only in our own lives but also of our various governmental bureaucracies, means that there is no simple, one-and-done, answer to naming financial surrogates, i.e., persons you want to be able to decide and act on your behalf when you can no longer do so. Here are several of the roles and designations you should consider naming or enabling:
Financial Power of Attorney. This is one of more widely used forms of delegation. It designates an agent to handle a number of kinds of financial transactions. It can be a ‘springing’ power or a ‘durable’ power. A springing power of attorney is called that because it ‘springs’ into action if you become incapacitated. A durable power of attorney becomes effective as soon as you sign the document, and continues to be effective if you are incapacitated.
Creating a Power of Attorney is a big deal because it gives someone a lot of power. It’s critical to think through what you’re trying to do with this kind of legal power, and also how it fits into other powers you may want to create (see below). It is usually very helpful to talk through your plans and wishes with an experienced estate planning attorney or advisor before finalizing your plans.
Your Business. In addition to a personal POA, you may want to consider a Power of Attorney for your business. This may also be part of a more general Succession Plan for the business, or it could be more narrowly conceived. Either way, it’s always a good idea to write down key financial facts for both your personal and business affairs: account numbers, key websites, login IDs and passwords, as well as descriptions of key processes and notes about key clients and deliverables.
Social Security Representative Payee. After my Dad had a stroke, I was surprised to learn that my general Power of Attorney from him had severe limitations. For example, the Social Security Administration required that I become his Representative Payee if I wanted to represent him to that organization. Representative Payees must be at least 18 years of age, and are typically ‘family or friends.’ If Social Security is your biggest single asset, this may be the only power you’ll need to name.
Similarly, the US Internal Revenue Service has its own financial surrogate system. Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization, both exist to enable third parties to represent a disabled or incapacitated individuals with that organization. Your designee who completes one of these forms will be entered into the “Central Authorization File” and will receive a “CAF” number. This permanently identifies your representative to the IRS and enables him/her to act in certain capacities on your behalf. You’ll find additional information in IRS Publication 216,
Long Term Care Insurance companies have created a “Lapse Designee” to deal with the fact that a leading cause of policy lapse is the cognitive decline of policyholders. In order to help ensure that your policy doesn’t lapse if you inadvertently forget to pay the premium as you age – just before you really need it – you can name someone who will receive notice from the insurance company and can act on your behalf to keep your policy in force.
Agent for Funeral Decisions is a financial surrogate that some states permit. If you have a will, you are likely not to need to name such an individual, since decisions regarding burial are typically included in that document. That said, many people fail to create a will, and it’s good to know that this option at least exists.
Bank Accounts. In an attempt to be practical or to avoid legal complications, many people create joint accounts with family members or enter into ‘pay-on-death’ or other automatic arrangements for individual bank accounts. Unfortunately, unless your financial ecosystem is of the ridiculously simple variety, these arrangements usually end up creating far more problems than they solve. If you think you’re going to die with more than $50,000 to your name, you’re almost certain to have a better outcome (for yourself as well as for your helpers) if you (1) maintain as few bank accounts as possible, and (2) clarify the purpose and use and power over each in a central document, such as a Power of Attorney or a trust.
Practically speaking, many financial institutions refuse to accept a general Power of Attorney drafted by a third party, insisting instead that you use their own POA form. Unfortunately – obviously – by the time one needs to use such a form, the granter of the power may be incapable of signing it. So, it’s a Catch 22. What can you do in this case? First, if you have only a few key accounts, you can set this up beforehand or negotiate the acceptance of your own power with the institution. In addition, you can resort to the granddaddy of all power, the power of a trustee (see below).
Trustee or Co-Trustee of a trust. Many people mistakenly believe that the purpose of a trust, especially of a revocable living trust, is to save on taxes. That is not the case. A revocable living trust, in particular, is a ‘see-through’ entity for tax purposes. What it does do better than anything else I know about, however, is (1) allow the creator (grantor) to give detailed instructions about how she wishes to have her affairs managed in the event of her incapacity, as well as to (2) make her resources available to carry out those wishes. In particular, in my experience, it solves the problem of financial institutions not wanting to accept third-party Powers of Attorney because, once identified as the trustee of a trust account, the surrogate is part of a recognized framework of control.
Many people avoid trusts because of their perceived cost as well as the effort it takes to create them. And though there is some truth in this assessment, in my experience a well-crafted trust is an extremely cost-effective way to go when compared with the costs and hassles and conflicts and family disharmony that is typical when a vehicle like this doesn’t exist in the first place.
You are in control of your life and your wealth. With some forethought and the wise use of financial surrogates, you can remain in control, whatever your future may bring.