Planning for Incapacity

When you think of your will or your living trust, you might only consider how it will be used to divide your estate upon your death. While that is almost always the motivating factor for people to create an estate plan, it is increasingly common for components of your estate plan to be used before your death.

Most estate plans includes powers of attorney in addition to the standard will and trust. Those powers of attorney will be critical to your family if you are ever unable to make financial or medical decisions for yourself. For example, I have a client whose mother became mentally ill and unable to care for herself. The onset of the illness was swift and dramatic. No planning had been completed for my client's mother. My client's father, who had been depending on assets held in his wife's name alone to help pay for his long term care, was suddenly in a very difficult spot. The only option was acquiring a court-approved guardianship and court-approved distributions from the mother to help take care of him. Guardianships are expensive and are rarely necessary if planning is done correctly and in advance.

Not only do powers of attorney help alleviate problems by appointing agents to make relevant and necessary decisions when the principal is unable, but trusts can effect the same result. If such a provision is desired, a carefully-drafted trust will allow for the chosen trustee(s) to take over the trust assets if the grantor is incapacitated. If and when the grantor returns to full capacity, he or she will reacquire full control of the trust assets.

When considering or reconsidering your estate planning, don't overlook the forest of post and pre-death planning for the trees of distribution to your heirs.

Spend Away!

I had a client in the office the other day who was here to sign his estate plan documents. As per routine, we reviewed the documents I prepared and made a few edits. When we arrived at the portion of his trust that set aside a specific amount for each child, he had an internal debate as to how much he should leave each. Rather then give specific amounts, I advised him to set aside a percentage of the residue (the leftover cash) instead. This lead to a discussion of how conservative he should be with his spending so that he can leave as much behind as possible.

In my opinion, and this is what I told him, spend away! In my experience, I've noticed that, the eldest generation feels an obligation to leave behind as much as possible for the generations after them. I could only speculate as to the reasons why, but I think its important to emphasize to my clients that the money they earned is theirs. They should feel no pressure to leave a more generous amount to their heirs to the detriment of their own lifestyle. After working a lifetime to build their wealth, if they have the means then go ahead and get that balcony room on an Alaskan cruise rather than an interior room on a 3-day boat to Ensenada.

This article in Financial Times points out another reason to feel free to spend down the estate: the fear of leaving mounds of cash to spendthrifts who will only fritter it away. Of course, if that is a concern, then I'd advise use of a discretionary spendthift trust to prevent heirs from wasting trust assets and require some self-sufficiency.

The point, however, remains: if you've toiled away to earn it, don't feel guilty enjoying it, too.