Incapacity Planning: A Vital Part of Your Financial Plan

Incapacity planning is an essential, yet often overlooked, aspect of comprehensive financial planning. It involves preparing for the possibility that you become unable to manage your personal and financial affairs or make important decisions independently due to illness, injury, or cognitive decline.

Why It Matters

Incapacity can strike at any time, regardless of age or current health status. While we may associate it more with dementia or illness it can also be triggered unexpectedly by a serious accident. Without a plan in place, your assets may be frozen, bills left unpaid, and critical decisions delayed, potentially causing significant financial and emotional stress for your loved ones. And in the absence of an incapacity plan your views on what healthcare options you would choose could go unknown. Developing an incapacity plan can help protect your personal and financial well-being if you are unable to make critical decisions on your own.

Two Key Components

1. Power of Attorney (POA): This is a legal document that gives someone you trust the right to make financial or health care decisions on your behalf. This person does not have to be a lawyer. There are two types of POAs, property and personal care. The first designates a person to manage your finances if you become incapacitated. This individual should be reliable, trustworthy and knowledgeable and comfortable dealing with financial matters. In addition to ensuring your bills are paid, decisions this individual may have to make include maintaining or selling your house and making changes to your investments. The second type of POA, covering personal care, is also known as a healthcare proxy and living will. In both cases it is crucial that you clearly understand the scope and duration of the powers you are granting and under what circumstances they take effect. Legislation about incapacity varies by province so getting legal advice on the drafting of these documents is strongly recommended.
2. Healthcare Proxy and/or Living Will: This document appoints someone to make healthcare decisions on your behalf. In most situations this person would also be the one communicating your wishes about medical treatment options to the relevant professionals and family members. A personal care POA ensures that your requirements are respected if you cannot express them due to incapacity. In addition to healthcare choices, a personal care POA could also empower your designee to make decisions regarding housing and other details of your daily life such as meals and clothing. This person may or may not be the same one you grant a property POA to but should also be a trustworthy confidant who will fulfill your wishes. If the two types of POAs are held by different people, it is important that they understand the responsibilities of each and where they might overlap. For example, if you want to remain living in your home to the extent medically possible, doing so might incur considerable expenses over time, such as nursing care. Your financial and personal care POA designees would need to be aligned on achieving that goal.

Steps to Take in Preparation

• Assess Your Situation: Evaluate your current financial and health status to identify your potential needs in case of incapacity. If you are in good health now this may initially seem to be an unpleasant task, but adopting a practical perspective can help you develop solutions for managing potentially serious eventualities. If you have a personal partner, consider involving them in this assessment. It may even make sense to appoint your personal partner as your healthcare proxy. Note that if you and your partner have shared assets the designation and scope of a property POA must be carefully considered. Professional advice can help guide you through this assessment and uncover factors you may otherwise miss.
• Gather Key Documents: If you don’t already do so, keeping all relevant legal, financial, and medical documents (including those discussed above) in an easily accessed and organized manner is a simple but important step. Collecting and reviewing them with incapacity planning in mind can also help clarify your thinking on these issues. Tell one or two key people, including your POA designees, where you store these key documents to ensure immediate action if needed.
• Consult Professionals: By middle age our personal and financial affairs can become quite detailed and even complex, often more so than we may think. Working with legal and financial advisors (and in certain circumstances medical professionals) to assess your circumstances and begin developing your incapacity plan will help ensure your directions are clear and promptly acted on if required.
• Communicate: Discuss your incapacity plan with your family and POA designees to avoid any confusion or conflict in the future. While the details of your plan are important it is critical that the relevant people understand them. Clear communication, particularly with family, is key to successfully achieving your goals. For example, end of life care choices can be emotional and potentially divisive for families. You can prevent this by discussing your personal perspective and wishes well in advance to resolve possible misunderstandings and answer questions.

Incapacity planning is a proactive measure that can safeguard your personal and financial well-being and provide peace of mind for you and your loved ones. By taking these steps now, you can put in place a process that will, if needed, ensure that your financial affairs and daily life will be managed according to your wishes if you cannot do so.

This is particularly important if you have substantial or complex investments, including securities, real estate and corporate holdings. A comprehensive incapacity plan can also reduce potential legal headaches, and bills, by preventing the need for court appointed oversight of your affairs. Developing a well thought out plan today can prevent a crisis tomorrow.