Planning Ahead for Diminished Capacity

Planning Ahead for Diminished Capacity

Four critical concerns to discuss with clients

Estate-planning discussions with clients often focus on what will happen to the clients’ assets after they pass away. With many Americans living longer and suffering from chronic illnesses before they die, it’s incumbent on estate-planning professionals to also engage their clients about the possibility of losing mental capacity prior to death and to plan for that possibility. Planners should discuss with their clients the following four critical concerns that arise if the client suffers a loss of mental capacity.


Health Care Decisions

Who should make health care decisions for your clients if they lose the capacity to do so themselves? While a client’s knee-jerk reaction is often to choose his spouse or children, in many cases, that’s not the right choice. For example, a spouse of many years may be reluctant to carry out the wishes of his long-time companion because of differences in religion or morality or for financial reasons. Often, a client can easily find individuals who agree to be his health care agent, but when it comes time to make a life or death decision, many of those individuals aren’t able to carry out the client’s wishes, thus, frustrating his intent.

By way of background, the right of individuals to control their health care is clearly established in the law; it’s a fundamental expression of personal autonomy. No one, not the state, a spouse or a child can force medical care on an adult who has the capacity to make his own health care decisions. The right to control one’s medical care doesn’t end even if the individual has lost mental capacity, whether temporarily or permanently. The only exception is if the person needs emergency medical care to stabilize his condition but lacks the mental capacity to agree to the needed procedures. In that instance, emergency medical care can be provided without assent. Later, when the individual regains capacity, he can decide whether to continue the care.

Other than the emergency exception, however, an individual’s lack of capacity doesn’t terminate his autonomous right to control his medical care. The right, of course, can’t be expressed by an incapacitated individual; what’s needed is some way to delegate that power to an agent who can act on behalf of the incapacitated principal. 

This delegation can be accomplished through the creation of a document known as a “health care power of attorney,” “health care proxy,” “appointment of a surrogate health care decision maker” or “naming of a proxy health care decision maker.” Whatever the name, the result is the same: the appointment of someone—an agent, surrogate or proxy—to make health care decisions for the principal in the event that the principal, due to a lack of mental capacity, is unable to do so. 

Lack of mental capacity can occur for any number of reasons. For older clients, dementia is the most likely cause, as over one-third of individuals age 85 or older suffer from some degree of dementia. 

The planner’s role is to help the client create a document that identifies the surrogate who’s going to make health care decisions for the client and avoid the need for guardianship, or worse, a family feud about what care to provide. 

The document should also contain information to guide the surrogate in making these decisions. Because it’s impossible to anticipate all the possibilities, the instructions should be precatory and not mandatory. Some topics worth addressing are: 


What are preferred health care outcomes, as perceived by the client? 

What’s most important: extension of life, pain avoidance or relief, quality of life or personal dignity?

Is cost a consideration?

If a client is severely demented, should that affect the form of health care to which the surrogate consents?

If a client has two residences, at which location does the client want to be treated?

Does the client want artificial nutrition and hydration—even if severely demented? If so, for how long?


To help a surrogate who’s faced with end-of-life medical decisions, the principal must provide clear guidance and:


Grant the surrogate health care decisionmaker authority to terminate medical care under appropriate conditions. 

Identify and describe the appropriate conditions to terminate life sustaining treatment.

Give or deny the surrogate authority to consent to artificial nutrition and hydration. 

Indicate the values and preferences of the principal that might come into play when the surrogate is faced with end-of-life medical decisions.


In addition to the document that appoints and instructs the surrogate, the client must inform and educate family members and other interested parties about his views as to what constitutes appropriate end-of-life care.

Finally, the creation of the document isn’t the end of the matter. The client should periodically update and re-execute the surrogate health care decisionmaker appointment. Everyone concerned will feel more comfortable with a more recent document. Although there’s no hard and fast rule, anything over five years old may be problematic. And certainly, if the client is faced with a life-threatening disease, the document should be redrafted if the client still has capacity, and the new document should expressly refer to the illness and explain how the client wishes to be treated. Keep in mind that some clients may have a change of heart about how they want to be medically treated once death becomes a real possibility. As the old saying has it: “The bull looks different once you’re in the ring.”

Also, be sure to state specifically in the document that the surrogate is expected to act according to substitute judgment—that is, try to do what the principal would have done—and resort to doing what’s thought to be in the principal’s best interest only in extreme situations, when it’s impossible to know what the principal might have wished. The last thing many clients want is someone “doing what’s best for them.”


Asset Protection 

Drafting a durable power of attorney (POA) for clients is standard procedure for almost all estate planners. The need for an agent to take charge of a mentally incapacitated principal’s assets is obvious. And, most planners now rely on a standby POA that delegates the power to the agent on the signing of the document, rather than relying on a springing power that only grants the power on the principal’s incapacity. The latter power has proven to be too cumbersome and prone to creating problems by relying on third parties to be practical. It also presents problems in trying to determine if the principal lacks capacity, a requirement for the springing POA to take effect.

While the need for a POA is generally appreciated, the planner should give some attention to its elements. First, the planner must be sure that the power comports with state law requirements, such as any special language needed to authorize the agent to make gifts or warnings to the agent about his fiduciary responsibilities. Assuming the state mandates are met, the planner should also closely consider what powers are granted to the agent. While the tendency might be to grant whatever powers are permitted by state law, a careful planner will take note of any particular aspects of the principal’s personal life or the assets that might make some deviation necessary. The planner should also ask the client to consider very carefully who’s named as agent and successor agents because, given the nature of the power, it’s possible that the successor agent will eventually assume the role of agent.  

Many clients will place the bulk of their assets in a revocable trust, with the expectation that the agent will handle only smaller, day-to-day amounts of money. While that may be the intent, the planner must make sure it’s the reality. The planner should carefully consider the relation of the agent to the trust and its trustee and be sure that nothing in the POA can be construed to give the agent power over the trustee or the right to amend or decant the trust. Only the trustee should be granted such powers in most cases.

Speaking of a revocable trust, the planner should always broach its possible use to the client as a means of asset management in the event the client loses capacity. The fiduciary responsibility of a trustee and the general acceptance of a trust and its trustees is much better understood than that of an agent acting under a POA. So, a trust is often preferable to relying solely on a POA.

Naturally, a trust raises its own issues, including who should be the successor trustee and what powers to grant the successor if the settlor—the original trustee—becomes incapacitated. The distribution and investment powers of the successor trustee should be considered with care and in light of the settlor’s needs and successor trustee’s ability. And, as with an agent acting under a POA, the authority of the successor trustee shouldn’t inadvertently be crafted in a way that permits him to overturn the settlor’s estate plan.

Today, the planner should also consider whether to appoint a trust protector to watch over the trustee. The appointment of protectors is increasingly common, as a mentally incapacitated trust beneficiary won’t be able to protect his interest in case the trustee “goes rogue.” But, even if a protector seems like the way to proceed, the planner must determine what powers to grant the protector and whether to hold the protector to a fiduciary standard of care. And then, there’s the matter of whom to appoint as protector, keeping in mind that a successor protector would be a good idea, unless the settlor is willing to leave that appointment up to a court or a third party.


Digital Assets

Imagine if your client becomes incapacitated to the point that he can’t remember passwords needed to access bank and brokerage accounts, as well as social media websites such as Facebook. The planner needs to have the client write down all those passwords and identify all online bank and brokerage accounts. That information needs to be placed in a secure but accessible place, and the client should tell a trusted individual where that place is. Of course, telling someone where to find your password requires a good deal of trust, but it needs to be done. 

Whom should the client select? The agent under the POA is probably the best choice. In fact, the POA should specifically give the agent powers with respect to the principal’s digital assets. For a married client, that agent is most likely to be the spouse. Hopefully, the client won’t fear revealing a hidden side of his life to the spouse after the onset of incapacity. And, the agent may take on his duties during a limited period of incapacity from which the client recovers. For example, a husband may be receiving medical treatment and be unable to handle his financial affairs. Will he be okay with his wife having access to his private emails?

The alternative would be to name a special agent for digital assets whose authority would only come into effect if the client was incapacitated to the extent that no recovery was possible. And, the client may prefer to name someone who’s less close to the situation and might be less emotionally involved about what he discovers in the client’s private emails, pictures and files. 

The client should leave instructions as to what to do with digital assets. Should the agent be instructed to destroy everything but pictures, and perhaps delete even some of those, such as the “selfies” or party shots? Or, should that material be printed and passed out as personal property under the will? The client needs to carefully consider what’s on his digital devices and make decisions as to what the agent should do with that material. The client should keep in mind that an agent might disregard the instructions and release or forward material, such as pictures, to a third party who might appreciate receiving it.  


Place of Residence

If the client loses capacity and isn’t married, who decides where the client lives? Should he be left at home with appropriate, but expensive care? Or, should a surrogate acting under the health care POA be empowered to move the principal into an assisted living facility or even a nursing home? Should the residence of the client be determined by a committee of heirs? If so, should adult grandchildren have a say in the matter? How much of a determining factor should the cost of care be, and should the heirs be wholly excluded from making the decision because they have a conflict of interest? The more spent on the care of the client, the less the heirs stand to inherit after all. 

If the client owns two residences, he must decide what to do with the non-primary one. If one is a weekend residence, the client may prefer that it be sold, even if it’s sold to a family member. The sale would save maintenance costs and produce cash to support the incapacitated client—assuming there’s no spouse who still wants to use the weekend retreat. If the second one is a winter residence, such as a condominium in Scottsdale, Ariz., the client may want the residence maintained because it may be desired by one of the heirs. By retaining the condo, it will receive a step-up in basis on the client’s death, and a possible increase in value won’t be subject to the federal income tax. 

Clients like to age in place and declare that they’ll only move “if they’re carried out feet first.” In reality, loss of capacity due to dementia usually necessitates a change in residence. The thoughtful planner will urge the client to give some thought to who should make that decision and how much should be spent. If the client fails to do so, someone else will make the decision for him.

Loss of mental capacity for aging clients is so likely, that planning for it has become imperative. While not quite as sure as “death and taxes,” a wise planner will assist the client to prepare for this unhappy, but all too likely, eventuality.