It’s no secret that dealing with parents or a loved one with diminished mental capacity can be a challenge. Mental capacity is an issue that can potentially affect anyone—at any time. It most often happens when an elderly adult begins to suffer from a form of dementia or Alzheimer’s disease.
If at some point you or a loved one becomes incapable of making decisions about health, welfare or finances, you want to make sure you’re prepared. You might notice things like changes in personality, depression, poor decision-making, erratic behavior, difficulty driving and even increased “generosity” to anyone who asks. These are the kinds of actions that also can affect banking, real estate transactions, investments and the ability to generally care for oneself each day.
What can you do to be prepared?
The Durable Power of Attorney is an essential part of the estate plan.
Here’s how a Durable Power of Attorney (POA) works:
- Appoint an agent. The “principal” signs a POA document while they have the capacity to appoint an “agent” who can act in the event of their incapacity. The durability of the document means it is effective even if the principal lacks capacity. The document is designed to give the principal the ability to appoint a trusted agent to make decisions in the event the principal loses the capacity to act on his or her own behalf.
- Set the terms. The POA document can be drafted in a couple of ways: one provides the power of attorney immediately and continues on into the principal’s disability; the other specifies that the power of attorney take effect only upon the principal becoming incapacitated. This means that although the POA is usually effective “immediately” so an agent doesn’t have to prove incapacity to use it, a principal can specify that it become effective upon disability (also known as the “springing power).
However, a springing power can be more difficult to use because disability is usually defined in the POA document and requires one or two doctors to submit a written certification that the principal is unable to manage their affairs. Also, many financial institutions have adopted internal rules about the certification of disability and tend to question the validity of a POA document. In recent years, the springing power has become frustrating to agents who are usually trying to use the document in an emergency. This is why we recommend a POA be immediately effective to avoid the hassles of a springing power. Also, an immediately effective POA can be useful in case the principal is out of town, allowing the agent to step in and take care of important business in the absence of the principal.
- Know the difference between joint ownership and POA. Surprisingly, banks and credit unions continue to give estate-planning advice to clients, telling them it’s easier if the agent (usually a child) is a joint owner of an account. However, joint ownership subjects the account to possible creditor issues of the joint owner, and it can cause issues upon the principal’s death because the joint owner becomes the actual owner of the funds.
It’s important to remember that the way an account is titled always “trumps” what another estate planning document, such as a Will or Trust, says. Joint ownership often causes consternation within a family when the child who is the joint owner ends up with an account that was intended for other beneficiaries as well.
On the other hand, if a person has a valid POA, the agent can access accounts to conduct all banking matters as if he or she was a joint owner, without being an owner. The document allows the agent access to bank accounts and financial investments as well as the ability to sell real estate, deal with retirement benefits, manage care contracts, and other business-related matters if the principal is unable to do so.
When a POA document does not work: Appointing Conservators and Guardians
There are a small percentage of situations in which the POA does not work. This happens when the agent and the principal are at odds regarding how to direct those relying on the document. The most common scenario happens when the agent sees the principal making bad decisions regarding a bank account—not paying bills, giving money away to family members or solicitors—and the agent tries to use the POA to prevent the principal from making these transactions.
Since the financial institution has to rely upon the owner/principal and follow the agent’s direction, it cannot be the arbiter of a deadlock. In such a case, a Conservatorship might be necessary.
A Conservator is a person appointed by the probate court after a hearing in which a probate judge determines the principal needs assistance managing his/her assets because the assets would be wasted or dissipated if he/she continues to manage assets.
A conservator has an elevated status over an agent under a durable POA and may take the place of the principal to manage all assets. A conservator also has to provide an annual accounting to the court and to interested parties.
A Guardian might also need to be appointed to manage the “person.” The Guardian steps into the shoes of the principal to make decisions that affect health care and management of the person—not their assets. Sometimes a Guardian has to make difficult decisions regarding where the person will reside, including placement into a care facility.
The court only appoints a Guardian after it determines a person is “legally incapacitated.” This finding is based on the testimony of a spouse or child dealing with a husband, wife, or parent with diminished capacity and the opinion of a doctor. Again, the Guardian has an elevated status over an agent under a durable POA. The Guardian is allowed to make all decisions that affect the person.
Often, a person is resistant to the appointment of a Guardian and Conservator, causing much stress within the family and to those seeking to protect an elderly parent. The statutory definition of a legally incapacitated individual for a guardian is:
A person, other than a minor, who is impaired by reason of mental illness, mental deficiency, physical illness or disability, chronic use of drugs, chronic intoxication, or other cause, to the extent that the person lacks sufficient understanding or capacity to make or communicate informed decisions.
It’s important to keep in mind, however, that a judge will not grant guardianship if a person is merely making bad choices or poor decisions about their lifestyle or assets.
There is a fine line between making bad choices and legal incapacity, and a child or elderly adult may need the careful advice of an attorney to help them through these tough legal issues.