What Documents Should be Part of the Estate Plan if an Aging Parent Becomes Unable to Make Financial or Medical Decisions?

Planning for the possibility of incapacity is critical for anyone, but especially for an aging parent. Without proper planning in advance, many adult children are forced to file a court action to obtain conservatorship over their parent when incapacity strikes. You can avoid this expensive and burdensome process by having certain documents as part of your parent’s estate plan.

The key documents in a solid estate plan are a Trust, Statutory Power of Attorney, Expanded Durable Power of Attorney, Advance Health Care Directive, and a HIPAA Authorization for Release of Medical Information.

First, having a Trust is key to the future management of assets in the event of incapacity (whether it be a temporary or a permanent incapacity). Revocable Trusts are Trusts which are amendable by the person creating the Trust. The assets inside the Revocable Trust are generally part of the estate at death when calculating whether there is an estate tax. There are many benefits to the use of revocable Trusts. The most commonly known is the ability to avoid a probate court action.

Revocable Trusts are also great tools to manage property in the event of incapacity. However, assets placed into a Revocable Trust will not be protected in the event it becomes necessary to qualify a parent for Medicaid (Medi-Cal in California) or prevent an Estate Recovery action by the state if benefits are obtained.

Irrevocable Trusts on the other hand are not amendable, with a few minor exceptions. In the context of planning for long term care, these types of Trusts can be powerful asset preservation vehicles so long as there are trusted children or other family members or friends that are willing to be a part of the plan and the trust is properly drafted. Irrevocable Trusts are commonly utilized in high net-worth estates to reduce or eliminate estate tax exposure.

Today however, we have borrowed many of the strategies from high net-worth estate planning to achieve asset preservation for more modest estates to pre-plan for the possibility of a future long term care need and more options in accessing skilled nursing benefits.

To bring this concept to life, imagine the case of Uncle Bob. Uncle Bob has been a widow for five years. He is now 79 years old and he has 2 adult children. Bob’s mother passed away at the age of 89 from Alzheimer’s disease. Now, Bob is starting to exhibit early warning signs of the disease. Bob’s daughter, Linda, is very concerned about her father and wants to make sure he is happy, healthy and secure. Bob is recognizing his own deficits and is worried about the future and how he is going to pay for his long term care. Both of his children work full time and have children of their own. Bob owns a home in Newport Beach near the coast that he has lived in for 35 years. His home is now worth $800,000 and Bob has about $200,000 in liquid assets. Bob does not want to have to sell his home immediately in the event he needs funds to pay for his care (including skilled nursing care).

In this case, an irrevocable trust (also sometimes referred to as Medicaid Trust) can provide an efficient solution and prevent a future Medi-Cal estate recovery action, while maintaining many of the tax benefits as though Bob owned the home in his own name (see Chapter 8 for more details on this special type of irrevocable trust). After consulting with his attorney, Bob and his daughter Linda, have decided that an irrevocable trust is an ideal solution for him. He decides to transfer his home by gift to the trust. Because of the way the trust is drafted, Bob can maintain his Proposition 13 property tax basis he has in his home and is still able to apply his Internal Revenue Code Section 121 federal capital gains exemption should his home be sold inside the trust while he’s still alive.

The IRC Section 121 Exemption, as it is commonly called, allows a single person to exclude up to $250,000 of capital gains ($500,000 for married couples) on the sale of a primary residence resided in for 2 of the last 5 years prior to the sale as a primary residence. Bob also decides that he’d like to move $100,000 of his liquid assets to the trust in order to reduce the Medi-Cal ineligibility penalty period should he need to immediately apply for benefits. For Medi-Cal eligibility, we devised a gifting strategy to the trust that actually triggered no ineligibility period.

Bob wants to keep the other $100,000 in his Revocable Trust that he can use for his lifestyle and as a rainy day emergency fund. He has approximately $3,000 a month in income from Social Security and his $1000 a month pension, which is all he needs for his lifestyle at this point in time. Bob is very close to both of his children, but Linda has been the one who is most involved with Bob’s healthcare and well-being. Bob has decided that he would like Linda to serve as Trustee of the new Irrevocable Trust and as co-trustee with him on his Revocable Trust. Bob’s son John is the successor Trustee after Linda and will serve as a successor Trustee after Linda on Bob’s Irrevocable Trust.

After Bob’s home and the $100,000 are transferred to Bob’s Irrevocable Trust, Linda will then manage the property inside the Trust. Bob decided to list both Linda and John as lifetime beneficiaries and death time beneficiaries. What this means is that during Bob’s lifetime, Linda, as Trustee, has the authority to make distributions of trust principal and income to both John and herself. Bob is not a beneficiary of his Irrevocable Trust. Remember, by transferring the home and the $100,000 to the Irrevocable Trust, a gift was made to his children through the Irrevocable Trust and he no longer owns that property.

The children are free to do what they wish with the trust assets and in a good family such as Bob’s, one might expect that Linda and John will look out for Bob’s best interest down the road should he ever need them to. Although we have tried to make this look like a simple transaction, there are many details and considerations that go into the design of this type of trust, as well as the gifting strategy to this trust. It is very important that you seek appropriate legal counsel to accomplish this transaction.

The next document Bob needs to make sure is part of his plan is a Durable Power of Attorney. For our clients, we prepare two financial Power of Attorney documents. The first one is a Statutory Durable Power of Attorney and the other is an Expanded Durable Power of Attorney. We like to have both working together because each has a tactical advantage. The Statutory Power of Attorney is helpful because if a bank or financial institution refuses to accept it, they could be liable for attorney’s fees and damages if they fail to accept California’s statutory document. The Expanded Durable Power of Attorney on the other hand helps us to plan for Medi-Cal planning and qualification, disclaimer planning, and advanced estate planning just to name a few (should the need arise in the future and Bob does not have legal capacity to sign documents or move his assets into an irrevocable trust). It is more expanded in terms of what it can do than the Statutory Form Power of Attorney, so we like to have both in place in all estate plans. It may also be advisable to make both of these Power of Attorney documents active immediately instead of springing into activity at incapacity when we have an elder parent we are trying to protect. If a springing Power of Attorney is opted for, an Incapacity Declaration by one or more doctors will likely be required depending upon how the document is drafted.

The last two documents that are critical to have in the estate plan are the Advance Health Care Directive and the HIPAA Authorization. The Advance Health Care Directive is California’s statutory form for nominating an agent to make medical decisions for you if you cannot, the election for end of life decisions and election for being an organ donor. It is important to list two or three agents in the order in which you would like them to serve just in case your first choice is unable or unwilling to act. The HIPAA Authorization allows you to give certain people access to your medical status or documents, as well as to talk with your doctor about your health care options or capacity. It can help a family member discover if and where you have been admitted to a hospital and allow your attorney to talk with your doctor about your capacity to sign documents.

The Advance Health Care Directive is governed by state law and involves who can make medical decisions for you. The HIPAA Authorization is federal law and governs the release of medical information to authorized parties.