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Planning Ahead For Your Loved Ones? Don’t Overlook a Key Decision

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October 17, 2016
Financial planning and the cost of legal issues during retirement.

It happens all too often.

A married couple owns a piece of real estate such as a vacation home. One spouse falls ill with a crippling disease like Alzheimer’s, and unfortunately, though the couple may have an advance directive for healthcare decisions, they don’t have a “durable power of attorney” to make financial decisions if the other is incapacitated.

Needing money to pay for medical care, the healthy spouse decides to sell the vacation home. But both spouses’ names are on the deed, and the spouse can’t sell without getting a signature from his or her incapacitated loved one. Without durable power of attorney signed previously by the incapacitated spouse giving the other spouse authority to handle the couple’s joint finances, there’s no way to make the transaction except through complex legal channels.

“The only way they can sell the property is to go to court for a guardianship proceeding, which is costly and takes a long time,” said Michael T. Thompson, J.D., LL.M. (Taxation) of Cestone & Thompson, P.C., a New Jersey law firm. “And you’re having someone declared incapacitated, so there’s an element of taking away someone’s dignity.”

The Financial Importance of Power of Attorney

A lot of the complications and potential loss of privacy could be avoided, Thompson said, if more people took time earlier in their lives to make durable powers of attorney giving both partners authority to undertake financial transactions on the other’s behalf. In case of mental incapacitation, "durable" powers of attorney are needed for medical care and finances. A durable power of attorney means that the document stays in effect if someone becomes incapacitated and unable to handle matters on his or her own. A durable power of attorney also comes in handy when an adult child must handle financial matters for an incapacitated parent.

Many people are aware of the need for health care proxies, a legal document that empowers an agent to make medical decisions for them. For this reason, the health care proxy is sometimes referred to as medical power of attorney or power of attorney for health care. The health care proxy appoints someone who can serve as an agent to make decisions on the incapacitated person’s behalf. This can be a spouse, an adult child, or even a trusted friend. Complimentary to the health care proxy is the living will, an advance directive in which a person expresses what sort of medical care they’d want in case of a serious accident or illness that prevents them from making medical decisions.

Beyond the Living Will

But a durable power of attorney goes beyond the living will and health care proxy to cover financial processes. This can be helpful not only if a couple owns property together, but also in cases where one partner requires access to shared finances and retirement savings, or needs to make Social Security or Medicare decisions for his or her spouse. It’s also something adult children should discuss with aging parents.

Unfortunately, many people prepare advance directives like living wills, but forgo the process of preparing a power of attorney that identifies a financial agent.

“If you get estate planning, you’ll get the will done, but I try to point out the whole estate plan is more than just a will,” Thompson said. “Without a health care proxy and advance directive and power of attorney, the estate plan isn’t complete. It’s basic planning but it covers so many situations. Without power of attorney, the healthy spouse  can’t unilaterally sell a property even if the couple has owned it jointly for 50 years.”

And without power of attorney, he added, one spouse can’t withdraw the Required Minimum Distribution (RMD) from the incapacitated spouse’s Individual Retirement Accounts (IRAs), or even a savings account in the incapacitated spouse’s name.

The solution? Start early by working with financial advisers to spell out advance directives and durable power of attorney before a crisis. The process is far less complicated than going to court after a crisis occurs. Or, for adult children with elderly parents, sit down and have the conversation with them, even if it’s uncomfortable. Ask if they’ve planned for a time when one or both of them becomes incapacitated, and make sure they understand the concept of advance directives and the importance of preparing a durable power of attorney.

“It’s such an innocuous document, but it’s often the single most important piece of the estate plan, even more than the will,” Thompson said.

Visit Retirement Planning for more information and tools to help you develop and manage your retirement strategy. 

TD Ameritrade does not provide tax or legal advice and this information is not intended to be relied upon as such. You should consult with a qualified tax or legal professional with regard to your specific circumstances.

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

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