Incapacity:
Plan For It Now

Incapacity means the inability to make sound decisions regarding one’s financial affairs and personal care. It can befall anyone who enters a coma or suffers from a mentally debilitating illness, but it largely affects seniors coping with Alzheimer’s. When not planned for in advance, incapacity can create severe consequences for seniors and their loved ones. For example, if a person who has lost capacity never appointed anyone to make legal decisions for them, family members may have trouble paying that person’s bills, or doctors may be forced to choose between family members who disagree about the best medical treatment for a patient. The best way to deal with incapacity is to plan for it while one is still of sound mind.

If I Should Lose The Ability To Handle My Affairs?

• Think about the choices you would like control over

The first step in planning for incapacity is to think about the issues that may arise. How do I want my assets managed? Would I ever want to be put on life-sustaining medical equipment? Whom do I trust to make decisions for me?

• Learn your options

This fact sheet will briefly explain the different ways seniors and their loved ones can set up a legal framework to ensure the senior’s wishes are followed.

• See an attorney

Once you know what kind of planning you want, you should see an attorney who specializes in elder law. If you cannot get a personal recommendation from someone you know and trust, contact CANHR. CANHR has a Lawyer Referral Service (LRS) that can refer you to an estate planning attorney in your county. If you are helping your loved one plan for incapacity, or your loved one is in need of long-term care, you should see an attorney who is knowledgeable in the field of long-term care.

Note: See CANHR’s Fact Sheet: ?Lawyer Referral Service.?

What Are My Options?

If a person is still mentally competent, they can use a Durable Power of Attorney (DPA) and/or a Living Trust to plan for the future management of their financial affairs. An Advance Health Care Directive enables a competent person to indicate what kind of medical treatment they prefer and who can speak for them. If a person is no longer mentally competent, however, and they did not plan for incapacity earlier in life, these devices are no longer available. At this point, a caregiver may need to petition for a Conservatorship in order to be able to handle that person’s financial affairs and personal care.

Durable Power of Attorney (DPA)

A Power of Attorney is a legal document that allows you (the principal) to give authority to another person (the agent) to make legal decisions and financial transactions on your behalf. The agent does not have to be an attorney; they can be any trusted adult, or even a nonprofit agency.

A Durable Power of Attorney (DPA) indicates in the document that the agent will retain legal authority even if the principal becomes mentally incompetent. A Springing DPA becomes effective only upon a designated time, such as when a physician certifies that the principal has lost capacity.

Advantages and Disadvantages of a DPA

A DPA is a relatively easy, inexpensive way to give someone the ability to manage your financial affairs. Unlike a joint bank account, a DPA does not give the agent legal access to the principal’s assets for the agent’s own use, and DPAs terminate upon the principal’s death. Thus, your assets will remain with the your estate. A DPA can also help a caregiver plan for government benefits such as Medi-Cal by allowing the agent to transfer the principal’s property.

The main disadvantage of the DPA is that it is subject to abuse, because the court does not actively supervise the agent. This is why it is extremely important to choose an agent you trust to capably handle your affairs.

How to Execute a DPA

To execute a valid DPA, the principal must be mentally competent. Once an adult has lost mental capacity, they can no longer give someone legal authority to be their agent. Most states require only the presence of qualified witnesses or a notary to execute a DPA, but it is advisable to have it done by an attorney.

Durable Power of Attorney for Health Care (DPAHC)/ Advance Health Care Directive (AHCD)

A DPAHC (known in California as an Advance Health Care Directive) allows you to appoint a health care agent to make health care decisions for you (the principal). Your agent only makes decisions for you if you have lost capacity, unless you state otherwise in the document.

You can give an agent limited or broad powers in a DPAHC, from the right to access medical records to the power to make anatomical gifts. You may also specify healthcare instructions you want to be followed. To execute a DPAHC, you must sign forms that can be found at hospitals and senior legal service or senior information and referral programs. Californians can order an AHCD kit for $5.00 from CMA at (800) 882-1262. An attorney need not be present to execute a DPAHC, but most states require adult witnesses and/or a notary public.

Note: If you executed a DPAHC before 1992, it has expired. If you have executed a DPAHC before 2000, when the California Health Care Decisions Law consolidated previous directives into the AHCD, you should check to see that the forms have not expired and still reflect your wishes.

Revocable Living Trusts

A Living Trust is device that allows a person (the settlor) to transfer ownership of their assets to another entity (the trust). The settlor will assign a trustee to manage the trust for the benefit of the beneficiary. A Living Trust is created during the settlor’s lifetime (unlike a Testamentary Trust, which is created upon the settlor’s death). You should consult a qualified attorney to set up a Living Trust.

Advantages of a Living Trust

The Revocable Living Trust can serve as a management device in the event of incapacity: The same person can be the settlor, the trustee, and the beneficiary of a trust, so you can set up a trust with your own assets and retain complete control over them. You must be competent to establish a living trust, but you can name an alternate trustee to manage your assets in case you lose capacity.

The Revocable Living Trust can serve as a substitute for a Will: A Trust document provides for the distribution of the settlor’s assets upon the settlor’s death. Unlike with a Will, the trustee will distribute the assets directly to the beneficiaries, without court supervision or probate. This process is generally faster and cheaper than a Will.

Disadvantages of Living Trusts

A Living Trust will help avoid the costs of probate, but it is more expensive to have drafted than a Will. In order for a Living Trust to function effectively, the settlor must ensure that the trust is fully funded, which can require effort by the settlor. Although Trustees have the duty to use trust assets only for the beneficiary’s benefit, the Court does not supervise the management or distribution of funds. One important thing to remember is that putting your funds in a Living Trust will not shield them from recovery by the state if you received Medi-Cal benefits.

Living Trusts and other Management Devices

Even if you get a Living Trust, you should still get a DPA and a DPAHC, since a trustee does not have the power to make some financial decisions, or any medical decisions, on your behalf. You can also obtain a ?pour-over Will,? which arranges for any assets that were not transferred into the trust during your life to be ?poured over? into the trust upon your death.

Conservatorships

If a person is no longer mentally competent and has not appointed someone to handle their financial affairs and/or personal care, the Court can appoint an individual or professional (the conservator) to act on that person’s (the conservatee) behalf. In California, this proceeding is called a probate conservatorship (other states may call it a guardianship).

A conservator of the person is responsible for the personal care of the conservatee.

A conservator of the estate is responsible for the financial affairs of the conservatee. The conservator must seek court supervision for major transactions, such as the purchase or sale of real property.

How a Conservatorship Is Established

A conservatorship proceeding is initiated when a friend, relative, or public official petitions the court for the appointment of a conservator. Once a petition is filed, a court investigator interviews the proposed conservatee and reports to the court whether the appointment of a conservator is justified. The conservatee will then attend a hearing, where the judge determines whether or not the conservatorship is required.

Advantages of a Conservatorship

A conservatorship offers more protection against abuse of the conservatee than other devices because the court supervises the conservator. The conservator must first file with the court an inventory listing all the conservatee’s property, and later, accountings that reflect all transactions involving the conservatee’s assets. A conservatorship can be helpful as a structured mechanism for managing an incapacitated person’s affairs when no other mechanism is in place, especially when that person is reluctant to accept assistance.

Disadvantages of a Conservatorship

The court is heavily involved in the conservatorship process, and this can result in substantial costs in attorney’s fees, filing fees, and investigator’s fees. The proceeding is public, so the conservatee’s assets become a matter of public record. Finally, the conservator must continually return to court for approval of certain transactions, which require hearings and additional fees and can create delays in completing the transactions.

Conservatorships and Nursing Homes

A conservatorship can be used to plan for Medi-Cal benefits for a person who is incapacitated and may need to enter a nursing home. For example, a conservator may petition the court for approval of appropriate Medi-Cal planning transactions, such as transferring a home or other assets.

Conservatorships and Mental Institutions

Under a Probate Conservatorship, the conservator may not place the conservatee into a locked mental institution against his or her will. However, under an LPS (Lanterman-Petris-Short Act) conservatorship, a person who has been found to be ?gravely disabled? can be involuntarily committed to a mental institution. An LPS conservatorship must be initiated by the county government; it cannot be petitioned for by a spouse or relative.

Other Alternatives to Conservatorships

In addition to DPAs, Living Trusts, and AHCDs, other mechanisms may substitute for getting a conservatorship:

• Joint Tenancy Property

Joint tenancy allows another person access to your funds. This can be risky, since your joint tenant can withdraw all the joint tenancy funds. There may also be adverse tax consequences with this option.

• Management of Community Property by a Spouse

A spouse who is competent may manage the Community Property of an incompetent spouse. Some transactions may require court approval.

• Establishment of a Representative Payee

Spouses or trusted friends may be appointed as representative payees for Social Security and Supplemental Security Income (SSI) beneficiaries who have lost capacity.

For more information on planning for incapacity, contact CANHR’s Lawyer Referral Service (LRS). The LRS can answer questions and make referrals to qualified attorneys for legal advice.

Prepared by Bethany Jones, UCLA legal intern, Summer 2005.

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