Planning for incapacity

An old man having an unexpected health problemDo you handle most or all of the bill-paying in your household? Are you responsible for making most of the investment decisions? How prepared are you for the possibility that you might someday become physically or mentally incapacitated and unable to manage your financial affairs? Incapacity can happen to anyone at any time due to causes like a serious injury, dementia or other forms of illness. It is prudent to plan ahead for such a risk. And if you have a spouse or partner, the pair of you need to plan together. (For more on incapacity planning for couples, read Tough decisions about decision-making.)

What should you consider doing now to address the risk of incapacity?

Consolidate assets

Assets that are scattered among too many financial institutions or retirement accounts might be hard to locate and manage on your behalf should you become incapacitated. This could result in more work and headaches for the person(s) responsible for taking control of your financial affairs. Try to consolidate your assets as much as feasible.

Formalize your planning

In the event you become incapacitated, whoever becomes responsible for managing your finances will find the task easier if there's something in writing to guide the way. Of highest priority is a list of all financial products you own, with the contact information for each service provider.

Consider drafting a formal financial plan, preferably with the help of a professional advisor, that provides a snapshot of your current finances and outlines your goals as well as general recommendations on how to achieve them. Update your financial plan at least annually or more often if you experience a major life change, such as a marriage, birth or adoption of a child, or divorce.

Another useful document is an investment policy statement that spells out your goals and specific investment strategies for achieving these goals. It should include information about your risk tolerance and liquidity requirements and a recommended asset allocation for your portfolio.

Help prevent hassles with these legal documents

Every adult should have the following legal documents in place at all times:

  • A living will. With a living will, you specify in advance what types of medical treatment you do or do not wish to receive in the event you ever become incapacitated and unable to make such decisions on your own.
  • A healthcare power of attorney. You use a healthcare power of attorney to appoint a "power holder" to make medical decisions on your behalf in the event of incapacity. By having a healthcare power of attorney in addition to a living will, you enable the power holder to act in circumstances in which the living will does not specify your wishes.
  • A financial power of attorney. This allows you to appoint a trusted person to make financial decisions on your behalf in the event of incapacity.
  • A will. This defines how your assets will be distributed after you've passed away. If you have children who are minors, you can use a will to name a guardian so that the decision about who will care for the children is not left up to a court. A will also directs how debt, taxes and expenses are to be paid and names an executor to file any necessary tax returns and manage your estate until everything has been distributed.

Explore the idea of using a revocable trust

A revocable trust is a legal instrument you can use either together with or in place of a will. You transfer assets to the trust and specify in writing how the assets are to be distributed after your death. Legally speaking, the trust owns the assets, but you can use them yourself for any purposes. You can terminate or amend the trust at any time.

A revocable trust offers two main advantages over a will. First, a revocable trust is generally harder to contest after your death. And second, because a revocable trust does not become part of the public record, it keeps your personal and financial affairs private.

Keep documents organized

Keep all essential legal and financial documents in a safe place, such as a fireproof, waterproof and portable box in your home. Tell someone you trust where the documents can be found.

Documents that are important to round up include:

  • A copy of your will*
  • A revocable trust
  • A living will
  • A healthcare power of attorney
  • A financial power of attorney
  • A formal financial plan
  • An investment policy statement
  • Insurance policies
  • Deeds, mortgage papers, automobile titles
    or other statements of ownership
  • Stock and bond certificates
  • Social Security payment information
  • Rental income paperwork
  • Monthly or outstanding bills
  • Prior years' tax returns (going back at least three years)
  • A marriage license
  • Children's birth certificates
  • Veterans' discharge papers

Create a written or electronic master document that lists the following items along with any usernames, passwords, personal identification numbers (PINs) and contact information required to gain access to more details about the items:

  • Bank and investment accounts
  • Retirement assets (employer-provided plans, IRAs and Keoghs)
  • Real estate
  • Assets held in trust
  • Liabilities (mortgage, car loans, credit cards and other debts)
  • Business interests
  • Insurance policies
  • Financial or investment advisors

Keep your master document in a safe deposit box at a bank or wherever you store your other essential financial and legal documents. In addition to this document, you can use a password manager, either in the form of software or a web-based service, to store and organize passwords and PIN codes.

At least once a year, you and your spouse or partner should review the master document and any data stored in a password manager to keep all information current.

Consider long-term care insurance

With life expectancy on the rise, chronic diseases such as diabetes and Alzheimer's are increasing the need for long-term care, which is comprised of services to help a person carry out essential, daily activities like eating, bathing and dressing. The high cost of long-term care can pose a significant threat to your financial security and quality of life. Employee health insurance doesn't cover long-term care and generally, Medicare doesn't either. Medicaid does cover it, but only after the patient—and in many married-couple cases, the patient's spouse—has spent or transferred away almost all assets other than a home and car.

Long-term care insurance helps defray the costs of such care, so you should consider such protection, particularly as you near retirement. In many cases, the younger you are when you take out a long-term care policy, the lower your annual premiums will be. Restrictions and limitations apply.

Don't put it off

Incapacity isn't something pleasant to think about, let alone plan for. But it's an essential part of sound financial planning. Knowing that you've safeguarded your finances from the risk of incapacity will provide you with peace of mind, particularly as you move closer to retirement and then continue through that life stage.

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