He who fails to plan is planning to fail. -Winston Churchill
I like my clients. I like meeting with my clients. Over the years I have built lasting relationships with many of them, not only professionally, but also personally. I become emotionally attached to them and their families, which is why a client meeting that I had this past week was extremely difficult for me. Often in my financial services practice I must ask the “uncomfortable” questions.
I have known John for many years. He has always had an extremely active lifestyle. In fact, at age 70 John ran the Falmouth Road Race for the first time and at 74 he finished his first half marathon. Until recently, John would not even entertain a discussion pertaining to his aging and possible incapacity, trust me I tried to bring it up many times in our meetings. However, now at 84, with his health failing, John was open to me asking the “uncomfortable” questions needed for proper planning.
John’s wife passed away a few years ago so he visits me with his son, Frank. Frank is a good son who only wants what is his best for his Dad, which made my most recent meeting with John and Frank much easier than it could have otherwise been. I began our discussion by asking John, what will happen if he becomes mentally or physically unable to take care of himself or his day-to-day affairs? I explained that making sound decisions about his health or finances may become challenging. I asked what will happen if he loses the ability to pay bills, write checks, make deposits, sell assets, or otherwise conduct his affairs? I warned John that unless he is prepared, incapacity could devastate his family, exhaust his savings, and undermine his financial, tax, and estate planning strategies that we have worked so hard to create over the years together. I advised John that planning ahead could ensure that his health-care wishes will be carried out, and that his finances will continue to be competently managed.
Incapacity can strike anyone at any time. Advancing age can bring senility, Alzheimer’s disease, or other ailments, and a serious illness or accident can happen suddenly at any age. Even with today’s medical miracles, it is possible to become incapable of handling either medical or financial affairs.
I told John that if he were to become incapacitated without the proper plans and documentation in place, a relative or friend could be required to petition the court to appoint a guardian, and petitioning the court for guardianship is a public procedure that can be emotionally draining, time consuming, and expensive. More importantly, I explained to John that without instructions from him, a guardian may not understand how he would want his matters handled.
Without legal documents that express your wishes, medical care providers must prolong your life using artificial means, if necessary. With today’s modern technology, physicians can sustain you for days and weeks (if not months or even years).
I explained to John how to avoid such an unfortunate circumstance from becoming a reality for him and his family through proper planning. In Massachusetts, there are two ways to do this: a health-care proxy (sometimes called a durable power of attorney for healthcare), and a Do Not Resuscitate order (DNR). Understanding the distinctions between the two is critical.
A validly executed health care proxy allows your representative to make medical decisions for you in the event that you are unable to communicate with your physicians. I reached out to Geoff Nickerson, an attorney at Oppenheim & Nickerson LLP in Falmouth who notes that proper planning goes beyond the preparation of the documents. “We emphasize to our clients that they must communicate with their health care agents effectively to express their wishes. Often, we suggest that if a parent names one child as agent, that parent should communicate his or her wishes to all of the children so that the others understand why the agent might make a given decision for their mother or father.” Great point Geoff. A DNR is simply a doctor’s order that tells all other medical personnel to not perform CPR in the event of cardiac arrest.
Next we discussed how to protect John’s property in the event he cannot. We talked about ways to defend against the danger of his property being wasted, abused or lost, which often happens in cases of incapacity. I explained three possible solutions that would protect John’s property and his wishes. We could establish a revocable living trust, we could prepare a durable power of attorney (DPOA) giving an agent the authority to control John’s property, or we could place the property in joint ownership. In fact, I told him that in many cases we could have a combination of all three.
Under a Revocable Living Trust, John would transfer ownership of his property to the trust. We would name John as trustee so he retains complete control over his affairs, but we would also name a successor trustee in the event John becomes incapacitated, in this case his son Frank. A successor trustee is the person named to run a trust only in the event the initial trustee cannot. If we create such a trust and John becomes incapacitated, Frank can step in seamlessly and take over management of the property that has been transferred to the trust.
A DPOA, on the other hand, allows John to authorize someone else, in this case Frank, to act on his behalf. There are two types of DPOA: an immediate DPOA, which is effective immediately, and a springing DPOA, which is not effective until the grantor has become incapacitated. Unlike a Revocable Living Trust that can continue after death, both types of DPOA end at your death.
Finally, I explained to John the implications of placing his property in joint ownership. A joint ownership arrangement would allow someone else to have immediate access to John’s property and to use it to meet his needs. Joint ownership is simple and inexpensive to implement. However, I pointed out that there are some disadvantages to the joint ownership arrangement that should not be overlooked. For example, John’s co-owner will have immediate access to his property regardless of incapacity; John will lack the ability to direct the co-owner to on how to use the property; gift tax consequences could be triggered if someone other than John’s spouse is named as co-owner (and John’s spouse is deceased, so someone else would be named as co-owner); and, if John dies before the joint owner, John’s property interests will pass to the other owner without regard to John’s intentions. Nickerson points out another risk to joint ownership. “Property held jointly is subject to attachment by creditors of the joint owners. If your proposed joint owner is in a high-risk profession, joint ownership might not be in your best interest.”
Winston Churchill was right, we must plan or we will experience failure. I advised John to think about his options and then we will schedule a meeting with an attorney who can prepare the necessary documents. Doing so will give John the peace of mind he deserves and the protection his family needs. It is always a difficult time in our lives when we finally must admit that we will not be on this earth forever. Although John’s realization was not easy, he seemed relieved that he finally has made the decision to make the necessary preparations.
Be vigilant; stay alert because you deserve more!
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He who fails to plan is planning to fail. -Winston Churchill