Incapacity is the lack of physical or mental abilities that results in a person’s inability to manage his or her own personal care, property or finances. The likelihood that you will live your entire life without facing some sort of disability is slim. By the time you reach the age of 65, your chances of becoming incapacitated rise to over 50 percent. If you live to be over 80 years of age, this statistic reaches nearly 75 percent. Although age is often a disability factor, even those under retirement age have a 20 percent chance of becoming incapacitated.
Most of us take for granted having the mental function or integrity to make a particular medical decision, to be a party to a contractual agreement, to execute an effective deed to real property, or to execute a will having certain terms. It is not until this function is lost that you and your family may regret not planning for this event. Once an individual’s competency is deemed insufficient to make medical and legal decisions on their own, then ultimately a third party capable of making these decisions on their behalf must be created judicially. This person may not be an individual you or your loved one would ever want making such decisions on your behalf! A durable power of attorney, like other estate planning strategies such as the creation of a living trust, allows an individual to plan for their own incapacity.
The durable power of attorney is similar to a simple power of attorney, in which one party “the agent” acts on behalf of another “the principal,” with the agent owing a fiduciary duty to the principal at all times. However, under typical agency law, the simple power of attorney will terminate once the principal becomes incapacitated, while the durable power of attorney will remain in full force and effect. Due to this novel feature, the durable power of attorney can be utilized for estate planning purposes, typically with individuals of modest means who may not be able to invest in the traditional creation of a living trust.
Invariably your estate planning attorney will emphasize the importance of creating a living trust as the trust itself has many unique “tools” that a durable power of attorney lacks. See some of these important distinctions below:
|ESTATE PLANNING DISTINCTIONS||LIVING TRUST||DURABLE POWER OF ATTORNEY|
|Probate Avoidance||A living trust allows the Settlor, or creator of the trust, to avoid probate upon death.||A durable power ceases immediately when the principal dies and the probate process applies to his or her property.|
|Powers After Death of Settlor/Principal||The trustee of a revocable living trust can take action upon the settlor’s death, like selling property, paying debts, or contracting professional services.||The agent can make no transfers after the principal’s death and all power ceases.|
|Succession Plan||If a trustee dies, a successor trustee is appointed by the court or is established in the trust instrument itself.||If an agent dies, the power simply terminates.|
|Ownership/Title||The living trust can hold title to the trust assets and generally has all the powers that an owner has.||The agent does not own the property of the principal.|
|Third Parties||The living trust is commonly recognized by third parties such as banks and financial institutions.||The durable power is less recognized and at times unfamiliar to third parties who may be reluctant to deal with agents.|
A durable power of attorney may be the option for you or your loved one, especially if your estate is of modest size, money for estate planning is a factor, and there is knowledge that you or your loved one may soon become incapacitated.
Please feel free to contact Essential Legal Services with any questions or concerns or if you need assistance with your estate planning at this time. There is no time like the present!