Plan ... In Case You Become Legally Incompetent

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Reprinted From: The News Journal
Written By: Nancy F. Blumberg, CPA-PFS, CFP
In planning for your future and for the future of your family, you should have provisions to handle your personal and financial affairs in the event of legal incompetency. For the business owner, these provisions will head off financial difficulties and eliminate family trauma.

Legal documents are necessary to provide for your chosen individual to handle your affairs. This should be done with a durable power of attorney or a revocable living trust. It these documents are not in place, a guardianship proceeding may result.

A guardianship is a legal relationship that generally should be avoided because it is costly, administratively burdensome and characterized by a lack of flexibility. It also will give rise to incompetency proceedings that may stigmatize the entire family.

A durable power of attorney is a written instrument that explicitly grants to an agent certain legal rights to act on your behalf in personal and financial matters.

The rights granted are usually broadly defined and will survive any later mental incompetency. These rights terminate on your death.

A durable power of attorney is easy to create. It can include the power to make medical decisions and funeral arrangements on your behalf. Along with a durable power, an individual may be advised to execute a living will. This states the individual's wish that his or her life not be prolonged by extraordinary or heroic measures in the event of terminal illness or injury.

A revocable living trust can be used to insure the continuous management of an individual's assets and personal affairs during life and after death. It is created by the grantor's execution of a trust agreement and provides that you transfer property to one or more trustees.

Typically, the grantor along with a family member or trusted individual are the named co- trustees. Initially, the grantor who acts as trustee has full control over the property placed in trust. As a result, you are currently taxed on all of the income from the revocable trust and all of the trust property is includable in your estate at death.

The trust instrument should include terms that allow the co- trustee to take over full management responsibility for the trust assets when the grantor is unwilling or unable to manage your affairs.

In fact, a crucial provision of the trust agreement is the procedure under which the grantor is removed from the management of the assets because he is incapacitated and the co-trustee assumes this responsibility.

A revocable living trust is preferable to a durable power of attorney in that the trust can give the trustee far more authority to act. It may have its greatest use, however, when it is drafted as a substitute for a will.

This approach offers a number of distinct advantages: the trust avoids the costs and delays of probate; fees involved in drafting the trust instrument are generally nominal in amount; and, unlike wills, a revocable trust avoids publicity.

If you or a family member are approaching a time in life when legal incapacity is more than a remote possibility, it is important to act promptly to avoid the possibility of guardianship proceedings.

Once legal incompetency has occurred, a durable power of attorney or revocable living trust cannot be used.