Estate Planning

Make Sure Your Finances Will Be Managed Should You Become Incapacitated. Here Are Some Ideas.

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by Alli Thomas

Nov 11, 2020

It may be unpleasant to think about, but one of the most important aspects of financial planning is making sure that your financial responsibilities will be managed properly in the event that you become incapacitated.

Much like you would with estate planning, before you get started, you want to determine who you want to manage your finances and ensure that they are up for the job.

Once you have identified that person – or people – here are three things you can do to ensure they have the right authority to manage your finances, along some pros and cons for each:

 

1. Add them as a joint account owner.

Making your trusted individual a joint owner of all of your accounts is the quickest and easiest way of giving them authority over your finances. The downside is that it also provides the lowest amount of protection in case of incapacity.

Pros

  • Easy
  • Quick
  • Inexpensive

Cons 

  • The joint owner can do whatever they please with your money, even if you don’t agree or consent to it
  • Your assets become subject to the joint owner’s creditors in the event of bankruptcy and could even become up for grabs in the event of a divorce or lawsuit
  • Not available for all accounts

 

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2. Grant them Power of Attorney (POA).

Granting someone Power of Attorney provides more protection for your finances than simply making that person a joint account owner while still allowing them to manage your finances on your behalf.

Pros

  • The person assigned becomes an agent for you who is legally required to act in your best interests at all times—including not using your money on themselves
  • Can assign a general POA (to control all accounts to the extent legally possible) or a limited POA (which grants a more limited scope of authority)
  • Can assign a “springing” POA (who only takes over at the moment of your incapacity), a durable POA (who takes over as soon as the POA is authorized and may act on your behalf indefinitely) or a nondurable POA (who is typically authorized to act on your behalf for a set period of time or for a specific transaction)
  • Can be revoked or changed

Cons

  • Many financial institutions will not honor your generic POA and will require you to complete their own version of POA documents
  • You must ensure that the POA documents include specific wording to carry out your wishes

 

3. Establish a revocable living trust.

A revocable living trust provides the greatest protection for your assets, but can be costly to set up and manage.

Pros

  • You can put your accounts/assets in the trust and ensure that they benefit you for the duration of your lifetime
  • You may change the terms of the trust at any point during your lifetime, up to and including termination of the trust
  • The trust must be administered by a trustee, who has a fiduciary responsibility to act in the interest of the trust’s beneficiary (you)
  • Trusts are typically accepted by most financial institutions
  • Trust can bypass probate following your death or can be terminated upon your death
  • You can name a successor trustee (to take over the trust after your death) or a co-trustee (who can manage the trust immediately)

Cons

  • A co-trustee could potentially act irresponsibly (however, the creator can revoke the co-trustee and name a new co-trustee)
  • The trust must be funded in advance of the creator’s incapacity
  • More expensive to establish and administer
  • The assets in the trust are not protected from creditors

It can be difficult to decide how your finances will be handled if you become incapacitated and to set up everything correctly, especially if you have a complex financial situation or significant assets. Because of the risks involved in letting someone else manage your finances while you’re incapacitated, it is important to ensure your money is protected.

But you don’t have to stress out on your own. An experienced financial advisor can not only help you determine what the best plan of action is for your unique situation, but also help make sure that all of the paperwork is properly filled out.

Not sure how to get started? Click here to schedule a no-cost, no-obligation appointment with an advisor in your area.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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