home loan finance blog
Are you a gambler? Do you like to play the odds? Here are some real-life odds for you to consider: 90% of people become incompetent before they die! Of course, your spouse might not think youre of sound mind right now, but thats beside the point! If you dont take action, you could needlessly cost your spouse thousands of dollars and countless headaches in order for them to make decisions on your behalf.
Competence refers to the ability to make rational decisions about your affairs. For instance, if you develop Alzheimers or dementia as you age, youll become incompetent. Two critical areas are affected by incompetenceyour ability to make your own financial decisions and your ability to make your own medical decisions.
Unless you give someone the ability to make these decisions for you prior to becoming incompetent, it will be left up to a court to decide who should make these very personal decisions for you. The person the court appoints may not know you very well and, as a result, the decisions they make may not reflect your desires.
Theres a simple way to protect you and your spouse. You can legally name someone you would want to make these decisions for you ahead of time. Then, should you become incompetent, that person you named can step in and make decisions for you without the involvement of the courts. You choose them. You can also make them aware of your wishes to better insure they are carried out. If you are single, this is even more important!
The legal document that accomplishes this is called a Power of Attorney. I recommend each person have one Power of Attorney that covers financial decisions and a separate Power of Attorney that is used solely for medical decisions. That way, you can name someone who is financially minded to handle your money matters and someone more compassionate to handle your medical decisions.
There are two types of Powers of Attorney (POA)General and Durable. The General POA gives someone the ability to make decisions for you while you are competent. The Durable POA is only active while you are incompetent. Many of my Private Wealth Management clients are concerned about keeping control as long as possible, therefore, most of them rely on the Durable POA. By the way, most Durable POA only spring into action based on letters from 2 physicians attesting to your incompetence.
Some people think their children will be able to make medical decisions for them should they become incompetent, they cant without a POA. Spouses can make medical decisions for each other but thats it. One spouse cannot make financial decisions for the other spouse. For example, if I were to become incompetent my wife, Julie, would not be able to give any instructions or effect any transactions within my retirement account unless she had a POA (she does).
One of my newer clients now wishes he heard this several years ago. Chuck and his wife have been married forever and are in their early 80s. About 3 years ago Chuck noticed that his wife was becoming a little forgetful. Dementia had begun and she slowly lost her mental capacity. Like most couples, the real estate they own is in both of their names. That way it will automatically go to the other spouse should one pass away.
Unfortunately, Chuck does not have a Power of Attorney over his wife. No one does. Therefore, he cant sell any of the real estate to use the money to help pay for her care. He doesnt have the authority to sign on her behalf and since she is no longer competent, she doesnt have the legal capacity to sign for herself!
To correct this, Chuck will have to go before a court to become her conservatora long drawn-out process that is humiliating and cost thousands and thousands of dollars. He will then have to appear before the court each year for the rest of her life to account for his actions.