For most people, the primary focus of an estate plan is the distribution of estate assets through lifetime gifting and/or after death. While that should remain a primary focus of your estate plan, you should also have an incapacity plan in place to ensure that you and your assets are protected in the event you suffer a period of incapacity. To get you started, we will explain how a living trust can help with incapacity planning.
I’m Still Young – I Don’t Need to Worry about Incapacity
This is a common, yet mistaken, belief. While it is true that age related dementia caused by conditions such as Alzheimer’s certainly can cause incapacity, you could also suffer a period of incapacity at any age. A tragic car accident, a debilitating illness, or even a work related injury could all result in your incapacity. Consider the following facts and figures related to incapacity in the United States:
- Just over 1 in 4 of today’s 20-year-olds will become disabled before they retire.
- Over 37 million Americans are classified as disabled; about 12% of the total population. More than 50% of those disabled Americans are in their working years, from 18-64
- An otherwise healthy 35-year-old female has a 24% chance of becoming disabled for 3 months or longer during her working career.
- An otherwise healthy 35-year-old male has a 21% chance of becoming disabled for 3 months or longer during his working career.
- The average length of disability for that 35-year-old female or male is 82 months.
If Incapacity Does Strike…
…what would happen to you and to your estate? Who would make crucial health care decisions for you? Who would decide where you could live? Who would take over control of your assets and investments? Who would pay your bills? If you own a business, who would take over the day to day management of the business?
If you are married, your spouse he/she may have the legal authority to step in an take over; however, even if that is the case, it is not unusual for other family members to resent that solution. A parent, sibling, or adult child might feel strongly enough to initiate a legal challenge. That, in turn, could lead to a costly and protracted legal battle that could cause a rift in the family for many years to come.
Using a Living Trust as an Incapacity Planning Tool
Although every incapacity plan should be individually tailored to the needs of the plan’s creator, a revocable living trust is a very popular incapacity planning tool. It works as follows: As the Settlor of the trust, you create the trust and name yourself as the Trustee. You then name the person you would want to take over control of your assets in the event of your incapacity as the successor Trustee. All major assets are then transferred into the trust. As the Trustee, you continue to have access to, and control over, the trust assets just as you did before creating the trust. If, however, you become incapacitated, your successor Trustee is elevated to Trustee automatically. As the Trustee of the trust, your chosen successor now has control of the trust assets without the need to involve a court. Because it is a revocable trust, you also have the ability to move assets in and out of the trust as needed and to replace the successor Trustee with someone else if the need arises. Finally, as the Settlor, you are able to use the trust terms to define “incapacity” as you wish and/or to set up procedures to be followed to determine under what conditions the successor Trustee should take over as Trustee. For example, you could require two physicians to sign off on a declaration of incapacity.
Contact Us
Please download our FREE estate planning checklist. If you have additional questions or concerns about how a living trust can help you plan for the possibility of your own incapacity, contact us by calling (916)-437-3500 or by filling out our online contact form.
Timothy P. Murphy
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