Planning for Incapacity

Planning for Incapacity

Protect your Financial, Estate, and Business Goals from the Risk of Incapacity or Disability

Research by the U.S. Department of Health and Human Services estimates that about half (52%) of Americans turning 65 today will develop a disability serious enough to require long-term services and support.

Long-term physical and mental incapacity can have far-reaching implications on the plans you have for supporting the people and causes that are important to you and achieving your financial, estate and business goals. Should you no longer be able to make or articulate decisions yourself, documenting your intentions and implementing wealth strategies ahead of time may help allow for your wishes to be fulfilled.

For purposes of this discussion it is important to understand that we are not talking about items that are on your wish list, things you would like to see happen, or financial goals that would be nice to achieve. This is a discussion of goals that are important, that would cause a negative emotional reaction today if I told you they would not be achieved. What really matters to you, and what impact would a physical or mental long-term incapacity have on your ability to see those goals achieved? If it is important to you, consider plans you could put in place today to assure they come to fruition.

Take, for example, the common goal of paying for the education of grandchildren. Should you become incapacitated, those in charge of your finances may not be aware that you had intended to provide such a gift, or they may not share the same desire. Even if they are aware of your plans and want to support them, they may not be legally permitted to use your assets to pay the college expenses of a grandchild without proper planning and legal documentation. A current gift to a 529 plan for the benefit of the grandchild may be a simple solution. By contributing to a 529 plan today you are providing a source of funds to pay for college or K-12 education costs in the future.

In a similar fashion, consider the impact an incapacity may have on your charitable goals. You may intend to support the cause of a local charity you feel passionate about, give back to your alma mater, or make a substantial donation to a religious organization you are a member of. If you want to make sure that these gifts are made should something happen to you, consider putting plans in place today. There are many vehicles you can contribute to today that place your charitable gifts on “auto-pilot”. Strategies such as charitable gift annuities, charitable remainder trusts, retained life estates, etc. provide a means for assuring the charitable gifts you intend to make in the future actually occur, whether or not you suffer an incapacity in the meantime. For more information on which strategies may be right for you see our May, 2020 newsletter.

What about the situation where you intend to pass on certain assets to a family member at some point in the future, but for now you still need the income generated by that asset? An incapacity that occurs prior to the transfer could derail your plans. Would other individuals who have control (e.g. power of appointment) over the assets know your goals? Can you be certain today that, even if they knew your goals, they would transfer the assets? One option would be to contribute the assets to a Grantor Retained Annuity Trust (GRAT). A GRAT is a trust that pays out a predetermined amount of income to the grantor (the person who contributed the assets) for a set period of time. When that time frame ends, the remainder in the trust passes on to the designated beneficiaries. It is a future gift with retained income set on “auto-pilot.”

Considerations for Business Owners

Long-term physical and mental incapacity can have far-reaching implications on the plans you have for supporting the people and causes that are important to you and achieving your financial, estate and business goals. Should you no longer be able to make or articulate decisions yourself, documenting your intentions and implementing wealth strategies ahead of time may help allow for your wishes to be fulfilled.

For purposes of this discussion it is important to understand that we are not talking about items that are on your wish list, things you would like to see happen, or financial goals that would be nice to achieve. This is a discussion of goals that are important, that would cause a negative emotional reaction today if I told you they would not be achieved. What really matters to you, and what impact would a physical or mental long-term incapacity have on your ability to see those goals achieved? If it is important to you, consider plans you could put in place today to assure they come to fruition.

Take, for example, the common goal of paying for the education of grandchildren. Should you become incapacitated, those in charge of your finances may not be aware that you had intended to provide such a gift, or they may not share the same desire. Even if they are aware of your plans and want to support them, they may not be legally permitted to use your assets to pay the college expenses of a grandchild without proper planning and legal documentation. A current gift to a 529 plan for the benefit of the grandchild may be a simple solution. By contributing to a 529 plan today you are providing a source of funds to pay for college or K-12 education costs in the future.

In a similar fashion, consider the impact an incapacity may have on your charitable goals. You may intend to support the cause of a local charity you feel passionate about, give back to your alma mater, or make a substantial donation to a religious organization you are a member of. If you want to make sure that these gifts are made should something happen to you, consider putting plans in place today. There are many vehicles you can contribute to today that place your charitable gifts on “auto-pilot”. Strategies such as charitable gift annuities, charitable remainder trusts, retained life estates, etc. provide a means for assuring the charitable gifts you intend to make in the future actually occur, whether or not you suffer an incapacity in the meantime. For more information on which strategies may be right for you see our May, 2020 newsletter.

Incapacity for a business owner presents a number of unique challenges. If you are actively participating in the management or operations of the business prior to your incapacity, it is important to consider and plan for questions such as who will take over your role if you are no longer able to and will your absence negatively impact the success of the business and, therefore, its value?  How will employees respond to your absence?

Many business operating agreements or separate buy-sell agreements have terms that trigger a forced sale should an owner become physically or mentally disabled. Such agreements typically state a fixed value or a formula for determining the price to be paid for the business interest. Business owners should be aware of what obligations are contained in their agreements and the impact an incapacity may have. After a triggering event occurs, such as the incapacity of an owner, your family may have little recourse should the agreement not treat them fairly.

Owners of family owned businesses who intend to pass down the business to their children also need to consider the impact on the business, on their employees, and on their family should an incapacity strike. If their children are not prepared to take over, are there other non-family key employees who would become vital to the ongoing success of the business? What would keep those employees from looking for a new position with a different company should the owner no longer be active in the business? What impact would their exit have? A simple “stay-bonus” agreement could be put in place to provide a financial incentive for such employees to remain with the company for a period of time after the owner becomes incapacitated and transitions ownership to their adult children.

The discussion above touches on only a few of the financial, estate and business goals individuals and families may have. The point to be made from these examples is that, 1) the potential for an incapacity that could derail your goals should be considered, and 2) there may be strategies you could implement today to make sure those goals are met – it may not be the best plan to leave it to chance.

Finally, a discussion on incapacity would not be complete without recognizing the challenges that may be faced by those who will be charged with caring for them.  And in many cases, these are not professional caretakers, they are family members and friends who are not trained in caregiving and may not be completely prepared for the physical, financial, and emotional challenges. We thought it might be valuable to provide those individuals with the names of a few organizations that provide support for caregivers, including education, policy advocacy, social networks, and other resources:

  • The National Family Caregiver Support Program (NFCSP) – https://www.acl.gov
  • Family Caregiver Alliance – https://www.caregiver.org
  • Caregiver Action Network – http://www.caregiveraction.org
DISCLOSURES: The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Past performance is no guarantee of future performance. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.