Personal Finance

What Is Incapacity

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 17 minute read

People can’t stop time. It is impossible for any of us to know with absolute clarity what lies ahead. Ignoring the frightening possibility that you could lose your ability to think clearly and make decisions in the future does little to alleviate the discomfort of this thought. 

You can’t and shouldn’t avoid making a plan to protect yourself in the event of incapacity if you’re an adult in your right mind. If the terrible were to happen to you, your loved ones would be harmed less by an incapacity plan than by not having one at all.

Capable adults engage in a process known as incapacity planning in order to determine their future preferences and make preparations accordingly. Incapacity planning, in contrast to retirement or estate planning, deals with probability rather than actuality. 

Specifically, it deals with the outcomes you desire in the event that you lose the capacity to make decisions, articulate those decisions, or otherwise engage in the decision-making process.

There are three main areas of life that require planning in the event of incapacity: finances, personal matters, and health. The best plans provide another person the legal authority to act in your place and guarantee that your intentions will be carried out in the event of your death.

Most people don’t bother to have a strategy for when they become incapacitated. You should know that strategies like this are crucial and that you should make one as soon as possible, for whatever reason you don’t already have one. All the crucial information is listed below.

Fact 1: A Complete Incapacity Plan Has Many Components

Having even a fundamental disability plan in place might provide you peace of mind. You and your loved ones can avoid a host of legal, financial, and personal issues by having a solid plan in place. 

Everyone over the age of adulthood should always have a backup plan. An incapacity strategy involves more than one piece of paper. Instead, a comprehensive strategy makes use of numerous instruments, each of which is designed to address a specific challenge. 

The specifics of an incapacity plan will be determined by the individual’s situation and preferences, but it’s common for it to contain at least some of the following:

  • Creating a Last Will and Testament. A living will is a legal document that specifies what medical treatment the person involved wants or refuses in the event that they become incapacitated or unconscious. Unlike other forms of advanced medical directives, a living will is only effective if you are still physically capable of making and communicating your decisions in the event of a medical emergency. You can’t direct the distribution of your estate posthumously through a living will, but you can do so with a last will and testament.
  • An order to “Do Not Resuscitate” has been given. A Do Not Resuscitate order (DNR) can be a part of a living will or it can stand on its own. In the event that your heart stops beating or your breathing ceases, the resuscitative measures described in this text will not be carried out unless and until you provide your express consent. The majority of persons who decide to draft a DNR have a terminal and incurable condition or are at high risk for serious problems should they undergo resuscitative measures.
  • Authority to Make Medical Decisions on Behalf of Another. A health care power of attorney, also known as a health care surrogate or health care proxy, or by similar nomenclature, is a document that appoints someone to have the legal right to make medical choices on your behalf if you are unable to do so for whatever reason. Protecting your health care wishes in the event of incapacity requires both a health care power of attorney and a thorough living will. You can set them to go into action immediately or only if your mental faculties deteriorate.
  • The HIPAA Authorization Form. A HIPAA release is a form that authorizes your doctor or healthcare provider to discuss your medical history with your family, friends, or other individuals of your choosing. A HIPAA release is different from a health care power of attorney since it does not designate an agent to make decisions on your behalf regarding your health care. In the event that you become incapacitated and are unable to communicate, the release will allow you to ensure that your loved ones will not be kept in the dark regarding your medical condition and treatment.
  • Financial Power of Attorney That Will Not Expire Over Time. In the event that you become incapacitated and are unable to handle your financial matters, a durable power of attorney for money will allow you to choose a trusted someone to do so on your behalf. Financial powers of attorney, like health care powers of attorney, can go into effect immediately or upon the occurrence of a future event, such as your incapacity. In the event of your incapacity or hospitalization, a durable power of attorney can be used to authorize the use of your financial resources, such as the payment of bills.
  • Trust for the Maintenance of Existing Beneficiaries That May Be Revoked. When making preparations for the future, many people turn to a revocable living trust. Its primary function is to facilitate the transfer of assets to beneficiaries after your death without subjecting those assets to probate. You can also use your revocable living trust for incapacity planning. Trustee selection occurs throughout the trust creation process and determines who will be responsible for managing the trust’s assets. In most cases, you will act as the trustee of your own trust; but, if you become unable to manage the trust yourself, you will have the option of naming a successor trustee. As a result, the trust’s assets will be well taken care of if you ever become incapacitated.

It’s not always simple to figure out on your own what resources you need to incorporate into your plan and what they should say. It is recommended that you get the advice of an attorney with experience in estate planning to ensure that your plan is drafted correctly. Legal counsel can help you map out your future and ensure that the plans you make will work in practice.

Fact 2: A plan can save you money, but not making one can cost you more.

Making an incapacity strategy can range in price depending on things including the complexity of the plan, the amount of research involved, and the type of resources you decide to develop. 

Though the prices might range from $500 to $2,000 or more, most people include incapacity planning tools in their estate plans. Avoiding legal fees at the planning stage is possible if you do it yourself.

However, the expense of your disability plan extends beyond the initial setup fees. The opportunity cost of not having a strategy must also be included when calculating the full price tag. The best way to do this is to compare the outcomes of two hypothetical cases.

Example 1: You have an incapacity plan and are in a car accident.

However, many people in their 20s and 30s who are otherwise in good health and capable of handling their responsibilities well don’t see the use in making an incapacity plan. Although the likelihood of losing mental faculties is modest for the vast majority of people, it is yet a fact that the unbelievable frequently occurs. 

Consider, for instance, the potential for harm posed by automobile accidents. Crash-related injuries and fatalities rank fourth among all causes of death in the United States, according to the Centers for Disease Control and Prevention (CDC). 

About 35,000 people lose their lives and about 2.5 million are injured each year in vehicle-related incidents, as reported by the Department of Transportation.

Any accident that sends you to the hospital or incapacitates you for any period of time can have a major impact on your life, regardless of how severe the incident itself was. While there is a financial outlay involved in making an incapacity plan, the alternative often has even greater repercussions.

So, imagine you and your significant other aren’t married, but you’ve been together for a long time. You have a simple incapacity plan that was drafted by your local estate planner. 

As part of the strategy, you and your partner both executed legal documents designating the other as your health care proxy and financial power of attorney, and you drafted a living will outlining your wishes in the event that you become permanently and irreversibly incapacitated while in a medical facility.

It took a few visits with the attorney and the signing of some paperwork (at a cost of roughly $1,500) to complete the plan. After you and your spouse have completed the necessary paperwork, you should both maintain copies in a safe location and give one to your lawyer.

About a year later, you’re in a terrible vehicle accident that takes your life. You will need to spend several days in a medically-induced coma in a hospital. Your partner is your legally appointed agent under your incapacity plan, therefore they will be contacted by your healthcare provider anytime there are questions or concerns about your care. 

Likewise, when your partner presents a financial power of attorney to a bank, the bank will have no problem authorizing your partner to handle your finances and access your accounts. Additionally, your loved ones are aware of your wishes since you have expressed them. 

Since you authorized your doctors to share private information with them, there is no contention over who has the final say in medical matters and both parties can actively participate in making treatment decisions. 

While your spouse’s choice is ultimately what matters, you and your loved ones are free to explore the various possibilities and weigh in on the final decision if you so choose.

You pick up where you left off managing your own life once you’ve recovered and regained capacity. All of your assets are safe, and your connections with loved ones and in the community are secure.

Example 2: You are involved in an automobile accident without a disability plan.

Suppose, now, that you don’t have a plan and are involved in an accident, rather than having a plan and being engaged in an accident. 

Because of your coma, other people will have to make decisions and handle your business on your behalf, but you haven’t provided them with any legally binding instructions or preferences to follow. This is what might develop.

Legal Fees

While having an incapacity plan will not prevent injuries or reduce medical costs, it will save you from having to pay out of pocket for expensive legal representation if you become incapacitated. 

When you are hospitalized and unable to communicate or make decisions for yourself, your healthcare providers will need to consult with a family member or other representative.

If you’re married, your doctor will talk to your spouse; if you’re single, they’ll talk to your parents or siblings; and if your kids are old enough, they’ll get their input, too. 

However, a legal representative or guardian may be needed by your health care professionals in order to make major decisions on your behalf if you are deemed incapacitated. That means a member of your family or close circle of friends will have to file paperwork asking a judge to appoint a legal guardian or attorney for you.

To do so, they will need to get legal counsel, file the appropriate paperwork with the court, and wait, maybe for months, for a ruling that grants them authority over their personal and financial decisions. 

It’s not uncommon to spend $5,000 or more on a lawyer for this matter. In the meanwhile, your loved ones will have to come up with the cash themselves, as they lack the legal right to utilize your money to cover the legal bill. Legal bills can increase significantly if your family needs to seek guardianship or conservatorship quickly.

Financial Expenses

Unexpected causes of financial strain during a period of incapacity exist beyond the obvious ones of medical care, lost wages, and vehicle repair.

Now imagine you have a number of credit card bills that are due. If you and your partner are not joint account holders, she will not be able to access your bank account to pay your bills even if she knows they are due. 

You may incur fees or penalties if you pay your bills late or don’t pay them at all. It might also lower your credit score, making it harder to obtain credit and increasing your interest rates.

In a similar vein, if you don’t pay your rent, car payment, mortgage, cell phone bill, or any other obligation, you could face anything from eviction to foreclosure if you don’t pay your landlord.

Even if you have set aside money in an emergency fund for just such an occasion, you will be unable to use those funds. Thus, your emergency fund is meaningless unless you have made preparations to grant another person access to your accounts in the event you become unable to do so.

Personal Relationships

You should think about the potential harm to personal relationships in addition to the legal expenditures and financial costs of incapacitation. Your loved ones will want the best for you if you become incapacitated. They will be eager to comply with your ideals. 

What does that mean, though? If you are unable to communicate, how do they determine your preferences? What criteria do they use to determine who gets to vote? When they disagree, what then?

Suppose you and your significant other had a pre-accident conversation about your final desires. You informed your significant other that, in the event of your illness, you would want him to make all of the decisions. 

But you didn’t put your decisions in writing. Your boyfriend believes he should be the one to speak for you while you are in a coma and make important decisions.

The law does not recognize a nonmarital partner’s authority to make decisions on behalf of an incapacitated spouse or partner. Instead, it’s more likely that your parents or siblings will inherit the property.

Even then, your next of kin will need to petition the court to appoint a guardian or conservator before they will be able to make decisions on your behalf. Plus, this doesn’t account for the expense of a future court battle if someone challenges the representative’s decisions.

As a result, you may discover, upon making a full recovery, that not only are your financial matters in a far worse state than they could have been but that your personal ties with family and loved ones may also be irreversibly harmed.

Example 3: You are involved in a car accident and your incapacity plan wasn’t established correctly.

Individuals who pick the cheapest incapacity planning solution may wind up spending more money in the long run. When you don’t have a plan or your strategy is flawed in some way, you still face the same challenges as when you do.

Do-it-yourself planning, in which an individual develops a strategy without the aid of an expert, is another common cause of subpar results. This can help you save money in the short term, but it may also make you feel unsafe.

If you believe you are well protected, you may be less likely to seek out expert assistance or guidance even if your plan is incomplete or poorly crafted. When resources are depleted, it’s too late to make adjustments, therefore doing nothing would be futile.

Fact 3: You can make decisions despite your incapacity on your own or have someone else make decisions for you.

In the event of incapacitation, you may either; Either have taken precautions to ensure your safety throughout your incapacitation, or you have not. If you haven’t, someone else will have to deal with the problems caused by your incapacity because you can’t. 

Who, though? With no strategy in place, it’s unclear who will make the call for you. If you need a guardian or conservator appointed, that person will have to petition the court for the right to act on your behalf and then wait for a ruling. It’s time-consuming and expensive to deal with all of this once an inability to work has occurred.

However, if you have an incapacity plan in place, you have already communicated your wishes and chosen a representative. If you have a plan in place before you lose mental capacity, your representatives can start looking out for your best interests as soon as you lose the ability to do so yourself. 

Your reps will also have the benefit of the direction and decisions you’ve made during the planning process.

Fact 4: Disability Plans Don’t Give Others Permission to Harm You

The worry that others may take advantage of them in their inability is a major deterrent to making an incapacity plan. That makes sense. Indeed, if you can’t protect yourself, it seems risky to put your safety in the hands of another. 

Untrustworthy officials can misuse their authority and work against your best interests if given the chance. Fortunately, there are a number of ways in which having an incapacity plan in place might safeguard you from being used in this way.

To begin, you have the freedom to designate which of your decisions will be made for you by others when you make an incapacity plan. For example, if you feel uncomfortable investing too much trust in one individual, you might spread that authority out throughout a larger group. 

You may also appoint co-representatives who share decision-making responsibilities and may act on your behalf with unanimous consent. For another, you get to select reliable individuals to represent you. 

Instead of relying on a friend or family member to look out for your best interests, you can employ a professional that does this for a living, such as a lawyer, banker, or trust business. 

Appointing a professional will be more expensive than choosing someone from your own circle of friends or relatives, but it’s better than taking a risk with someone you might not be able to fully rely on.

Last but not least, any representative who agrees to serve as yours will be legally obligated to do so. Your representatives must look out for your interests and not abuse their position of trust for their own profit. They risk legal repercussions and public scrutiny if they disobey this mandate.

Fact 5: Attorneys Have Nothing to Do With Powers of Attorney

Creating a power of attorney is a common part of making an incapacity plan. A power of attorney is a legal document that permits an adult to give another person the legal authority to act on their behalf in a variety of situations. 

Although the title “power of attorney” may cause some to think otherwise, it is not necessary to engage a lawyer or involve one in any way in the creation of a power of attorney.

If you’re a legal adult and you want to make a power of attorney, you’ll be referred to as the principal. The term “agent” or “attorney-in-fact” is used to describe the individual or entity you choose to act on your behalf. 

An attorney-in-fact is simply a formal name for your appointed representative. It does not make your representative into or demand that they be a lawyer in any way.

You should only appoint a mature person who is both willing and able to act as your attorney-in-fact. But since powers of attorney are formal documents, it’s smart to have an attorney draft them for you. A lawyer is not necessary for matters involving powers of attorney and attorneys-in-fact.

Fact 6: As You Age, Incapacity Plans Can and Should Change

It’s likely that your incapacity plan will evolve from the time you complete college until the time you get married, have children, or discover that you have a chronic condition. Incapacity plans, like other forms of financial and estate planning, need to develop and evolve with you.

  • In the process of relocating to a different state. If you are preparing to relocate to a new state, you should at least evaluate your incapacity plan to make sure it complies with the rules of your new home state. A recommended first step after relocating is to schedule a consultation with a local estate planning attorney to discuss what should be updated.
  • The shift in the Composition of the Couple. Make sure your incapacity plan takes into account any changes in your personal situation, such as a marriage, divorce, or serious non-marital relationship. Suppose, for argument’s sake, your divorce and start dating someone else. Your ex-spouse is still covered under your current plan because you two were married before. Altering your plan is necessary if you want to choose someone other than a family member or your new partner as your representative.
  • Expecting a Baby. It’s true that becoming a parent alters your life in ways you might not anticipate. You need to plan for your child’s future, including the chance that you won’t be around to be a caretaker, provider, or parent. Plan for what you want to happen if you become unable to care for or raise your child as part of your incapacity plan. It is important to plan ahead to make sure your child is cared for and educated the way you want, that a temporary guardian is named and appointed, and that your child has access to the cash needed to cover childcare costs.
  • Opening for Business. The needs of a firm are distinct, and as the leader, you’ll feel the effects of a loss of capability quite acutely. Tools for incapacity planning should be developed by business owners to safeguard not only their own but the company’s financial and operational interests. You should be prepared to hand off your responsibilities to someone else who can handle them competently.
  • Experiencing some sort of health problem or injury. If you suffer a major injury or find out you have a serious disease, you should review your incapacity plan to make sure it still meets your current needs. If you or a loved one has been diagnosed with Alzheimer’s disease or dementia, for instance, it is crucial that you choose a health care surrogate in your powers of attorney that you have full faith will be able to handle your care as your mental faculties decline. Having a terminal illness can also affect your decisions regarding the medical care you choose to accept or decline.
  • Loss of youthful vitality due to the passage of time. Things in your life, both medical and otherwise, can shift suddenly as you age. There are many age-related changes that are unimportant, but if it has been a while since you reviewed your incapacity plan, you should do so. Also, because laws might change, it’s a good idea to check in with your estate planning attorney once a year to see if there’s anything new you should be aware of. Contacting your lawyer is a smart idea just in case they don’t automatically notify you of any changes to the law. Every three to six months, you should review all of your currently effective documents, such as financial powers of attorney, to make sure that there are no lingering issues regarding their validity and currency among third parties.
  • Anytime You Decide to Alter Your Priorities. Make sure your incapacity strategy is tailored to your own requirements, preferences, and goals. For example, if you would rather designate a brother than a spouse as your health care proxy, you should make provisions for this. Similarly, if your goals or priorities shift, you’ll need to revise your strategy.

Bottom Line

Planning for incapacity isn’t exactly fun. Thinking about dying or being sick isn’t enjoyable at all. Even so, it is obligatory on your part. Being a responsible adult includes taking steps to prepare for infirmity. 

You should make a strategy right away if you don’t already have one. Taking the time to put together a plan will allow you to reflect on the things that are most dear to you and your life, as well as the ways in which you can best provide for your own safety and that of your loved ones.

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