Incapacity Planning

Jim Hendrix was right when he said: “Life is pleasant. Death is peaceful.  It’s the transition that’s troublesome.” As baby boomers are moving into retirement at the rate of 10,000 per day many are for the first time thinking about their own mortality and the need to make arrangements for themselves if they cannot handle their own affairs prior to their death.

The first order of business in planning for incapacity is making sure you have an estate plan. For most individuals and couple with real property, a simple estate plan will include wills, a revocable trust, durable power of attorneys (“DPOA”)  and health care directives.

The revocable trust will include real property and any other substantial assets. However, a revocable trust will not eliminate the need for a power of attorney. A power of attorney is a written instrument in which one person (the “principal”) designates another person (the “agent”) to act on the principal’s behalf.  Like a revocable trust, a power of attorney allows a principal to entrust the management of his financial affairs to another. If the power of attorney is made “durable,” it remains in effect even when the principal later loses capacity. To be a durable power of attorney, it must include the magic words of “This power of attorney shall not be affected by subsequent incapacity of the principal” or similar language.

The advantages of a DPOA are that it is the simplest and least expensive to prepare. There is also no transfer of title to assets required, court supervision is unnecessary and administrative requirements are minimal.

A DPOA can also be very flexible. The powers granted to the agent can be very broad or as narrow as the principal wishes. Sometimes a DPOA is used if a principal is going to be out of the country or is having surgery.

The disadvantageous of a DPOA is that some third parties are still unwilling to do business with an agent despite statutory provision protecting the third parties. The most common problems arise in the sale of real estate or securities. On the other hand, third parties usually have little objection to dealing with a trustee acting under a revocable trust. Another problem of the DPOA is that they are only effective during the principal’s life. If there is a trust in addition to DPOA, the trustee can immediately exercise all necessary powers to settle the affairs of the trust after the death of the principal.

In conclusion, it is my hope for myself and for you that our transition from life to death is not too troublesome. To the extent that we plan for the transition, I know it will be easier. If you do not have an estate plan which includes a durable power of attorney, I recommend that you put it on your list of things to do in the coming year. If you don’t make a plan for yourself, someone else will and it may not be what you would have wanted. I see people for a FREE 30 minute consultation at my offices locate in Walnut Creek and Brentwood.

This article provides only general legal information, and not specific legal advice. Information contained is not a substitute for a personal consultation with an attorney.  LAW OFFICE OF JOAN M. GRIMES, PHONE (925) 939-1680 1600 S. Main Street, Suite 100, Walnut Creek, CA 94513  © 2015 Joan Grimes

Do Your Children Owe You Money?

Many times an Estate Planning Client comes into the office saying that their children, grandchildren or another person (maybe the gardener) owes them money.  Sometimes it is only a few hundred dollars, but other times it is hundreds of thousands of dollars.  The loan could have been for a car, down payment on a house or business.  Under the best of circumstances, there is an actual promissory note, but most of the time; it is just a verbal agreement.

If the loan is not large and you will not need the money in the future, we recommend that you try to cancel the obligation before your death and making any necessary distributions to other beneficiaries to equalize treatment.

If it is not possible or desirable to forgive the debt prior to your death, the debt and disposition of the debt should be specifically addressed in the will or trust. There are 2 specific issues that you need to be aware of with regards to addressing a debt in a will or trust.  First, your financial situation may be very different at your time of death than it is today.  If you forgive a home loan secured by a Deed of Trust to son in your will, but your son dies before you, what will happen with the loan?  Is it your intent that the beneficiaries go after the owner of the property to pay back the loan? Second, what are your intentions if there are not sufficient assets to equalize payments to other beneficiaries based on the loan made to one beneficiary?

Loans to children or other people can be a tricky issue in estate planning.  If it is your intention that any loans be canceled upon your death, you should specifically list the borrower, the amount and date of the loan.  In addition, you should indicate whether any estate or inheritance taxes attributable to this forgiveness of debt shall be paid by the individual or is a charge against the estate. Another alternative is to provide that the debt is an offset against that person’s share of the estate.  However, if the debt is large and there are not sufficient assets to equalize a distribution to other beneficiaries or make any other distributions called for under the terms of the will or trust, the question of the balance still due to the estate on the loan should be addressed.

In conclusion, it is a great thing that parents are able and willing to help their children, grandchildren or other people.  However, failure to address assistance given in a will or trust has caused numerous problems among beneficiaries.  It all goes back to “he or she is getting more….”  In order to avoid this problem, I strongly urge you to review your will or trust and see how any loans or advances are handled.

If you have questions about your will or trust, I would be happy to review it with you at no charge. I see people every day for a FREE 30 minute consultation in Walnut Creek and Brentwood.

This article provides only general legal information, and not specific legal advice.  Information contained is not a substitute for a personal consultation with an attorney.  LAW OFFICE OF JOAN M. GRIMES, PHONE (925) 939-1680191 SAND CREEK ROAD, SUITE 220, BRENTWOOD, CA94513     © 2014 Joan Grimes