When incapacity strikes a person who has been handling the bill-paying or investment decision-making in a household, the finances of everyone in the household could be at risk. Here are a few proactive steps to consider taking now to plan for this risk.
Prevent hassles with legal documents
Every adult should have these legal documents in place:
A living will. You specify in advance what types of medical treatment you do or do not wish to receive in the event you become unable to make such decisions on your own.
A health care power of attorney. You use this to appoint someone to make medical decisions on your behalf in the event of incapacity. This enables the person you designate to act in circumstances in which the living will does not specify your wishes.
A financial power of attorney. You appoint a trusted person to make financial decisions on your behalf in the event of incapacity.
A will. This outlines how your assets will be distributed after your passing. If you have minor children, you can use a will to name a guardian. A will also directs how debt, taxes and expenses are to be paid and names an executor to file tax returns and manage your estate until everything has been distributed.
Explore a revocable trust
A revocable trust is a legal instrument you can use either together with, or in place of, a will. You transfer assets to the trust and specify how the assets are to be distributed after your death. Legally speaking, the trust owns the assets, but you can use them yourself for any purpose. You can terminate or amend the trust at any time.
Compared to a will, a revocable trust is generally harder to contest after your death. And because it doesn’t become public record, a revocable trust keeps your personal affairs private.
Keep documents organized
Store essential legal and financial documents in a safe place, such as a fireproof, waterproof and portable box in your home. Tell someone you trust where the documents can be found.
Documents to store include, but are not limited to, copies of your will and other legal documents discussed above, insurance policies, deeds, mortgage papers, vehicle titles, and stock and bond certificates.
Keep an up-to-date master list of bank and investment accounts, retirement assets, real estate, debts, insurance policies and financial or investment advisors along with any usernames, passwords, personal identification numbers (PINs) and contact information required to gain access to more details about the items.
Consider long-term care insurance
With life expectancy on the rise, chronic diseases like diabetes and Alzheimer's are increasing the need for long-term care, services to help a person carry out essential, daily activities like eating, bathing and dressing. The high cost of long-term care can put your financial security at risk. Employee health insurance doesn't cover long-term care and generally, Medicare doesn't either. Medicaid does cover it, but only after the patient has spent or transferred away almost all assets other than a home and car.
Long-term care insurance is available to help defray the costs of such care, so you should consider such protection, particularly as you near retirement. This insurance can be costly. In many cases, the younger you are when you take out a long-term care policy, the lower your annual premiums will be.
Peace of mind from planning
Incapacity isn't pleasant to think about, but being prepared is an essential part of financial planning. Knowing that you've safeguarded your finances from the risk of incapacity will provide you with peace of mind, particularly as you move closer to retirement and then continue through that life stage.