What is incapacity planning? How can a Living Trust, Power of Attorney, and Health Care Directive protect you and your loved ones if you become incapacitated? How to avoid a conservatorship. How do you help your family manage your finances and health care if you are sick? Legal steps before incapacity. What should Trustees know about incapacity?
By James L. Cunningham Jr., Esq.
If you were to become incapacitated and unable to make decisions for yourself and your family, who would step in, and what legal tools would they need?
Families can be torn apart when there’s no plan for incapacity—or when the wrong plan creates confusion and conflict. With proper planning, your loved ones can avoid the expense of Probate Court, emotional turmoil, and family strife—and will be able to help you when you cannot manage your own affairs.
Far too many families overlook this issue when creating their Estate Plans. About 80% of Americans will face some form of incapacity before death, most often in their 70s, 80s, or 90s—but it can happen at any time. An Estate Plan is not just about efficiently passing on wealth to the next generation; it often has a vital role to play while you are alive.
Even in the case of a “simple” estate, I strongly suggest you consult a qualified Estate Lawyer for incapacity planning. CunninghamLegal has offices throughout California, and we offer in-person, phone, and Zoom appointments. Call (866) 988-3956 or book an appointment online.
Along with reading this summary blog, you may want to watch the webinar on this page for more discussion and details.
How and Why Should You Plan for Incapacity?
Fundamentally, incapacity planning involves giving someone authority to act on your behalf in the event you cannot. Key documents prepared before you are incapacitated allow your loved ones to use your assets for your benefit and eliminate the need to establish a conservatorship in probate court.
Do not think, “This will never happen to me.” Indeed, Estate Planning attorneys sometimes refer to planning for incapacity as “planning for the inevitable.”
Lack of Planning Leads to an All-Too-Common Disaster
Take Jane, a widow in her late 70s.
Jane had always been a highly responsible woman. Little by little, however, she started forgetting what certain words meant, missed paying bills, and began misplacing important paperwork. Her daughter, Emily, who lived nearby, noticed that Jane’s cognitive and memory lapses were worsening. One day, Emily realized that Jane had truly become unable to handle her own affairs. Alzheimer’s was suspected, and Emily stepped in to help.
But when Emily tried to pay the mortgage and utility bills, Emily hit a roadblock—Emily had no authority to access any of her mother Jane’s accounts. Indeed, Jane had no Estate Plan in place giving anyone that authority, and Emily was advised by a doctor and a lawyer that Jane was no longer competent to sign over a Durable Power of Attorney or create a Living Trust.
Without the proper legal authority in place, Emily couldn’t act on her mother’s behalf. Instead, Emily began the difficult court proceedings to create a conservatorship—a major step that angered her siblings. Indeed, Emily’s brother claimed that Jane had once said he should take over if anything happened to her. Confusion reigned and family relations suffered irreparable damage—along with deep expenses to the estate—all because Jane never took the time to do the critical planning while she still could.
What Is the Definition of Incapacity?
You will find an extensive discussion of determining incapacity in the accompanying webinar on this page. We summarize the issues here.
“Incapacity” arises when a person has a mental impairment serious enough that it makes the person “substantially unable” to provide for their food, clothing or shelter or to avoid menace or undue influence. Essentially, the inability to “do for yourself.” The California Probate Code requires a “judicial determination” that someone is unable to take care of themselves but only after “notice” and an “opportunity to be heard” is given to the “proposed conservatee” or the one who is incapacitated. This is the reason for a Probate Court proceeding. Incapacity can be temporary or permanent, and it is quite different than merely having a “disability.”
Some signs of incapacity include:
- Being unable to understand or communicate with others
- Being unable to recognize people or things that were once familiar
- Being unable to understand the consequences of actions
- Having delusional thoughts or hallucinations
- Being unable to control moods and acting inappropriately
It’s important to note that a medical diagnosis, such as dementia or Alzheimer’s disease, does not automatically mean a person is incapacitated.
Incapacity can be a difficult determination, particularly during the “twilight” period when people still have limited capacity, and the determination must be handled with great discretion and sensitivity.
A person with a mental or physical disorder may still be capable of entering into contracts, getting married, making medical decisions, executing wills and trusts, and performing other legal actions. But when they can’t, someone must step in. Defining who that someone is, along with the scope of their authority, is crucial.
Who Determines Incapacity?
A properly created Estate Plan should define what incapacity means as well as provide a mechanism to avoid a court proceeding. If these plans are not properly written, documented, and in place—or if those plans go awry—the ultimate decisionmaker (or “decider”) of whether a person has capacity is a Probate Court judge. Having a judge decide means something has gone wrong and this judge must consider all relevant evidence to determine if you have a deficit in one or more mental functions.
What Is a Disability Panel?
Traditional Trusts often require a court order or a physician’s declaration to remove an incapacitated Trustee. A more modern approach is to use a “Disability Panel.” This can allow family members or other trusted individuals to determine when a Trustee lacks capacity and should step down. This keeps the process private and family-oriented, making it less adversarial and more respectful of the incapacitated person’s dignity. Be sure to include detailed instructions in your trust about how incapacity is determined. Whether it’s a Disability Panel or a letter from a doctor, your living trust should have language that addresses incapacity of a trustee – otherwise it’s a ticket to Probate Court.
What Does It Mean to Plan for Incapacity?
Incapacity planning involves creating legal frameworks and documents that empower one or more trusted individuals to manage your financial, medical, and personal affairs if you become unable to do so yourself. Without these plans, families often face lengthy and costly court proceedings, such as conservatorships, to gain authority over a loved one’s affairs.
A conservatorship is a big deal, and generally difficult to obtain, so the goal is to avoid conservatorship through proper planning. You can learn more about conservatorships below and in the accompanying webinar.
What Documents Do You Need to Plan for Incapacity?
At CunninghamLegal, we advise most clients to have all of the following documents and structures in place as part of a meaningful Estate Plan. You can read more about Estate Planning Basics in this article and throughout our website.
1. Living Trust
A revocable Living Trust is a foundation of incapacity planning in California, as well as Estate Planning in general in this state. Think of it as a bucket that holds your assets—a bucket that can be passed to others without involvement of the Probate Court. As the original, Grantor Trustee (or co-Trustee along with a spouse), you manage the bucket. But if you become incapacitated, your Successor Trustee—someone you’ve pre-designated—steps in to manage the bucket for your benefit.
Many people make the mistake of thinking a Living Trust is only important after you die, but it can be just as important during an incapacity. It is also important to know that a typical Living Trust is “revocable,” meaning you can change it whenever you wish.
Creating a Living Trust is only the first step, however. A common pitfall in Estate Planning is failing to fund the trust. Continuing with the bucket analogy above, if you don’t properly place your assets into the bucket, the Trustee has no authority over them. Many families discover too late that an “empty” trust offers no protection.
Funding involves retitling assets like real estate, bank accounts, and investments in the name of the trust. Without proper funding, families may face complicated, lengthy, and costly probate court proceedings, even if a trust exists.
Assets that typically go into a trust include real estate, bank accounts, mutual funds, and brokerage accounts. Assets that typically remain outside the Trust include IRAs, 401(k)s, life insurance, and annuities. It’s complicated, and I strongly suggest engaging a qualified Estate Lawyer to help you get it right. Contact CunninghamLegal to learn more.
2. Durable Power of Attorney
A Durable Power of Attorney (DPOA) allows you to appoint someone, your “Agent” or “Attorney-in-Fact,” to handle financial matters for the assets outside of your trust, such as IRAs, life insurance, or managing accounts titled solely in your name. The word “durable” means the power remains effective even if you become incapacitated, but the Durable Power of Attorney you give to another ends with your death.
Make sure your DPOA is broad enough to cover all potential financial needs but not so broad that it grants unnecessary authority. The document should explicitly authorize your Agent to take actions like funding your trust or managing retirement accounts.
Work closely with a qualified Estate Planning Lawyer on your DPOA. We invite you to contact CunninghamLegal to set up an appointment.
3. Advance Healthcare Directive and POLST
An Advance Healthcare Directive (sometimes called a Living Will) empowers a trusted person to make medical decisions for you when you’re unable to do so. This person is usually called your “Healthcare Agent.” The directive includes instructions about end-of-life care, organ donation, and other critical healthcare decisions.
There are standard AHCD forms, but it’s better to have a customized directive that suits your unique situation and your specific wishes as part of your comprehensive Estate Plan. Hospitals and health care plans may also want a Physician Orders for Life-Sustaining Treatment (POLST), a specific set of instructions for health professionals like emergency personnel. Some people post their POLST right on their door or sickbed so an EMT who rushes in knows what level of action is desired. In essence, the AHCD provides the legal basis for a POLST.
I think everyone over the age of 18 should have an Advance Healthcare Directive in place. And I certainly urge everyone to discuss these issues openly, so there’s no confusion about the desires of a patient in a critical situation.
4. HIPAA Authorization
This document is important to allow your designated Healthcare Agent access to your medical records without violating privacy laws. Without it, doctors and hospitals may refuse to share critical information.
Make Sure Your Estate Plan Is Signed and Accessible
Make sure all these important documents are complete and signed and kept in a safe place, ideally with copies in a secure off-site location—and that your key family members know where to find them! It is not uncommon for someone to come to our office with Trust documents that are incomplete, still in draft form, or unsigned.
What Is a Successor Trustee?
One of the most important decisions you will make in your Estate Planning is the selection of a Successor Trustee or Trustees. Remember that you (or you and your spouse) are the original Trustee(s) of your Living Trust, also known as the Grantor Trustees. The Successor Trustee takes over to manage assets when the original Trustees can no longer do so.
Please keep in mind when selecting Successor Trustees that it is a serious responsibility, as Trustees must be honest, reliable, and proactive. They are also personally liable for mistakes and omissions, including unpaid taxes or improper distributions. I strongly urge you to read my article on selecting a Successor Trustee and discuss your decision with a qualified Estate Lawyer as part of the planning process. Contact CunninghamLegal to set up an appointment.
It’s also important to educate your Successor Trustee on their responsibilities and make sure they agree to take them on. Here’s a helpful webinar on working with your Successor Trustee in advance.
Navigating the Financial and Health Care Systems
When a person becomes incapacitated, there are two primary areas that must be managed and where crucial decisions must be made: medical and caregiving matters on the one hand, and financial matters on the other.
In other words, who is making medical and caregiving decisions for the incapacitated person, and who is taking care of the person’s financial assets and paying bills? Often these responsibilities are assigned to a single Successor Trustee, but in some cases, the responsibilities may be divided.
Successor Trustees, Agents under a Durable Power of Attorney for Property (DPA), and Health Care Agents must often deal with complex systems and large bureaucracies, from accessing financial accounts to navigating long-term care insurance. Gaining account access under the DPA and exercising the powers under Advance Healthcare Directives can be challenging.
- Account Access: The issues may be complicated when it comes to account access. For example, many children discover they cannot manage an account in the parent’s name. The Durable Power of Attorney can help give access to the parent’s account. However, there is an “order of liquidation” that essentially calls for the accounts in the parent’s name to be spent first, then the account in the parent’s name with a “Payable on Death” (POD) or “Transfer on Death” (TOD) designation, and only after those accounts have been exhausted should the Trustee draw down on the accounts in the Living Trust. This can trip up well-meaning people who simply don’t know what they don’t know. Without proper planning, including a fully funded revocable living trust, those who are entrusted to manage the affairs of an incapacitated person might find that they unwittingly are breaking many unknown rules
- Out-of-Date or Inaccessible Healthcare Directives: It is essential to check that healthcare documents are up-to-date and accessible. Avoid storing all copies in a safe deposit boxe where they may be inaccessible to family members. And again, make sure people know where they are!
Avoiding Common Pitfalls
Estate Planning is a complicated area of the law. Seeking the help of a savvy Estate Planning Lawyer is the best way to navigate the legal requirements and avoid potential pitfalls. Below are some of the most common errors, but I urge you to read my article on “Trust & Will Disasters” and consider reading my book, “Savvy Estate Planning: What You Need to Know Before Talking to the Right Lawyer” which is organized around the common mistakes I see. And I invite you to set up an appointment with CunninghamLegal.
1. Relying on DIY Documents
While it’s tempting to download free legal forms online, these documents often lack the specificity and flexibility needed for real-world situations. I’ve seen families end up in court because a DIY trust didn’t include proper incapacity provisions.
2. Failing to Update Documents
Life changes, and so should your estate plan. Marriages, divorces, deaths, and even moves to a new state can render parts of your plan obsolete. Review your documents every few years with a qualified Estate Planning attorney. Here’s a webinar on updating your Estate Plan.
3. Not Funding the Trust
As explained above, a trust is only as good as the assets it holds. If your house, bank accounts, or investments aren’t titled in the name of your trust, those assets won’t be protected in the event of incapacity. Read more about funding a trust here.
4. Neglecting Long-Term Care Planning
The average cost of a nursing home in California exceeds $12,000 per month. I’ve seen it as high as $40,000 per month! Without proper planning, these expenses can quickly drain an estate. Long-term care insurance or hybrid policies that combine life insurance with long-term care benefits are worth considering.
If insurance isn’t an option, explore local resources like Meals on Wheels, Adult Day Care programs, and in-home care services. Many families rely on a combination of professional care and unpaid assistance from relatives. Here’s a webinar on long-term care insurance you may find useful.
Long-term care is a big subject I cannot fully pursue here, but the bottom line is to discuss these issues openly with your family in advance and have a plan in place that will not create too much of a burden on family members or your estate. You may also wish to review the webinar on this page, beginning at time mark 41:34, for more discussion of the topic.
What Is a Conservatorship in California?
If you become incapacitated without a plan, your family may need to go to court to establish a conservatorship. A conservatorship is a court-supervised process where a judge appoints a conservator to manage the finances or personal care of an individual who cannot do so themselves.
While necessary in some cases, conservatorships have significant drawbacks:
- Loss of Control: The court, not the individual, chooses the conservator. There can be disputes between family members over who should be named conservator. But with proper advance planning, a conservatorship proceeding is almost always unnecessary.
- Time and Cost: Legal fees and time delays can be burdensome.
- Privacy Concerns: Court proceedings are public, exposing personal details to scrutiny.
As Estate Planning lawyers, we hear many unfortunate stories of family members struggling to manage conservatorships for aging relatives. The emotional toll of this process can be overwhelming; conservatorships should be avoided if at all possible.
There are two basic types of conservators:
- Conservator of the Person: Manages personal and medical decisions.
- Conservator of the Estate: Handles financial matters.
Courts generally appoint family members as conservators, but the process often creates conflict among loved ones. I once worked with a family where siblings fought bitterly over who should manage their mother’s care, delaying critical decisions and wasting thousands of dollars in legal fees.
You will find a fuller discussion of conservatorship in the accompanying webinar on this page, beginning at time mark 14:28. But the bottom line is this: Properly planning for incapacity allows family members to avoid the painful and costly conservatorship process.
The Emotional Side of Incapacity
Incapacity isn’t just a legal and financial challenge; it’s an emotional one. Families often grapple with guilt, grief, and difficult decisions all at the same time, creating a perfect storm of stress and anxiety.
When my own father-in-law began showing signs of Alzheimer’s, it was a wake-up call for our family. Watching a loved one decline is incredibly difficult, and the stress can strain even the closest relationships.
Planning ahead by taking the steps described in this article, as well as having honest discussions in advance, can alleviate some of this burden, allowing families to focus on caregiving rather than crisis management.
When families hold joint meetings to review the Estate Plan, it reduces conflict and confusion later. Discussing roles, responsibilities, and expectations helps avoid disputes and helps create a smoother transition.
How to Cope as a Caregiver
Anyone who has been a caregiver will tell you how challenging it can be. Burnout is common and can affect even the most patient caregivers at some point. If you find yourself in the role of a caregiver, I urge you: don’t neglect your own needs and your own health.
Luckily, there are plenty of resources available. Make a plan, and remember:
- Communicate: Have honest conversations with family members about roles and responsibilities when caring for an incapacitated loved one.
- Seek Support: Join caregiver support groups or consult with professionals who specialize in elder care.
- Take Breaks: Caregiver burnout is real. Don’t hesitate to seek respite care when needed.
Should I Seek Legal Advice when a Loved One Is Incapacitated?
If someone becomes incapacitated and you are the trustee or the agent under a Durable Power of Attorney, I believe you absolutely need legal advice. You do not want to wing it.
Not only do you have to follow the terms of the trust or the Durable Power of Attorney, you also have to follow state laws which vary widely, and you will likely have to create new legal documents, such as a new Certification of Trust if there is a living trust in place, a document showing acceptance of your role, and more. In California where I practice, the laws are complicated and not necessarily logical. You also must follow “doctrine,” as well as statutes, case law, and state and federal tax law.
In other words, there are layers of legal requirements not contained in the trust documents or in the Durable Power of Attorney, and I strongly suggest you work with an established Trust & Estate Lawyer. In this regard, remember that Estate Planning Law is the domain of specialists. Please do not rely on an attorney who practices primarily in a different area of the law, such as a real estate attorney. Seek out a qualified and experienced Estate Planning Lawyer. I urge you to contact CunninghamLegal today.
What Is Trust Administration
If you become the Trustee after someone is incapacitated or passes away, the process is called “Trust Administration.” This may include a wide variety of duties but fundamentally means carrying out the terms of the trust as written, following all laws, and protecting and managing the assets of the trust for the beneficiary or beneficiaries. Even some professionals fail to grasp all the aspects of Trust Administration—including lawyers, CPAs, and financial advisors. Why? Because they tend to focus on their core competencies without looking at the broader picture.
Your best bet is to put together an “A-Team” to include these three professionals and put them in touch with one another.
Your Responsibility as a Trustee or Agent with a Durable Power of Attorney
It is important to recognize that as a Trustee or Agent under a Durable Power of Attorney, you are 100% personally liable for all acts and omissions. This is a heavy responsibility.
It is also important to understand that under California law, incapacity of the person who created a revocable living trust makes that revocable Living Trust IRREVOCABLE by operation of law, and the above rules about the “order of liquidation” apply. In other words, you can’t change the terms of the Trust, and you must handle assets in a proscribed manner.
Here’s a hypothetical. Suppose mom becomes incapacitated and goes into a nursing home that costs $12K a month. She starts out with $100K in a Living Trust, a POD (Payable on Death) account for her son of $100K, and another account with $100K in her name only. If you are both the Trustee and the Agent with the DPOA, which account should you draw from first? If you make a mistake, you may be sued by the beneficiaries of the Trust or the son with the POD account. Such situations do arise, but the problems often do not show up until well after mom has passed away.
Specific rules apply to these situations, and following them is crucial—yet another reason to have a qualified Estate Lawyer at your side. You can read more about risks for trustees in this blog.
Help Your Loved Ones by Taking Action Now
Planning for incapacity is an act of love and foresight. It protects your dignity, safeguards your assets, and eases the burden on your loved ones. Start by consulting an experienced Estate Planning Lawyer to assess your unique situation and craft a comprehensive plan.
If you’re ready to take the next step, schedule a consultation with CunninghamLegal. Our team offers personalized advice and family meetings to help you navigate the complexities of Estate Planning.
Action Steps to Take Today
- Gather Your Documents: If you have them, locate your Living Trust, Durable Power of Attorney, Advance Healthcare Directive, and other key papers.
- Review and Update: Check that your documents reflect your current situation and wishes and comply with state law. I strongly suggest a review with a qualified Estate Planning firm such as CunninghamLegal. These documents are written in legalese, and it is often difficult for a layperson to interpret the actual consequences of the language.
- Talk to Your Family: Let your family and especially your Successor Trustee know where your documents are stored and discuss your preferences.
- Consult a Professional: Work with an experienced Estate Planning lawyer to address gaps in your plan and make sure everything is up to date and complies with any changes in the law.
What Do We Do?
The lawyers and staff at CunninghamLegal help people plan for some of the most critical times in their lives; then we guide them when those times come. Make an appointment to meet with CunninghamLegal for Estate Planning, Tax Planning, Business Law, and much more.
We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Call (866) 988-3956 or book an appointment online.
Many clients tell us they find our legal webinars and YouTube channel incredibly helpful and informative. We cover a wide range of issues related to Estate Planning, as well as retirement, taxes, Trusts, probate, living in California, retiring in California, asset protection, and many other topics.
We look forward to working with you!
Best, Jim
James Cunningham Jr., Esq.
Founder, CunninghamLegal
We guide savvy, caring families in the protection and transfer of multi-generational wealth.
