Guardianship Alternatives

Guardianship is often unnecessary or limited thanks to guardianship alternatives which include appropriate estate planning.

Guardianship is the court process by which a Judge appoints a person to make decisions on behalf of someone who cannot make them for themselves.  Guardianship is a very involved process which removes or reduces the legal autonomy of the individual and appoints a decision maker for that person.  Guardianship can be invasive, time-consuming and costly.  Although guardianship is sometimes necessary and beneficiary to the individual, many clients seek to avoid guardianship and, in fact, Texas (and virtually every state’s) law directs you to use less restricting guardianship alternatives where available.  The best options require preplanning however, so if you want to avoid the need for guardianship, you should consider some of the following guardianship alternatives.  See the article entitled “Guardianships Should Be a Last Resort–Consider These Less Draconian Options First” from Kiplinger for more. 

Durable Financial Powers of Attorney

Guardianship often is necessary when an elderly individual loses legal capacity due to dementia, Alzheimer’s or other conditions leading to cognitive decline.   In that case, the person cannot make their own financial decisions anymore, so a guardian would need to be appointed to manage their assets.

However, if an individual has a durable financial power of attorney (POA) in place, then this may not be necessary.  The POA names an individual to take financial action for you if you can’t yourself.  It is usually much better than guardianship as you are the person choosing who will act and you can set the rules as you want.  It is also substantially cheaper than guardianship litigation.  It is also one of the most important estate planning documents for this reason.

You can see here for a bit more on POAs:  https://galligan-law.com/which-powers-should-a-power-of-attorney-include/

Trusts

Trusts are more than just will substitutes.  In this context, the trustee of the trust can control the assets owned by the trust.  So, if the person who created the trust becomes incapacitated, the successor trustee (again a person you choose) can take over and start controlling the assets.  This is often a major reason for clients who create revocable trusts later in life or who have concerns about long-term care or management of their assets.

Medical Powers of Attorney

This echoes the issues of the financial POA, namely that you can appoint a person to make medical decisions for you.  Now, the law does provide default decision makers for medical decisions makers, so this isn’t typically the reason for a guardian.  However, it too is a critical document for several reasons.  Among them, you may not want the default to be your decision-maker, it provides clarity of responsibility and lets the decision-maker know in advance what’s expected of them, and finally, avoids delay in a medical crisis when the documents have to figure out your family history to determine who a default decision-maker is.

Naming Fiduciaries for Minors

Another common guardianship scenario is leaving property to minors.  Although there are multiple state-based alternatives which might be helpful, such as creating UTMA/UGMA accounts (Uniform Trusts for Minors Act/Uniform Gifts to Minors Act), paying to a court registry or possibly to a parent of that child depending on the circumstance.  However, if these alternatives don’t work, you may need a guardian for the minor.

In any case where leaving property is intentional, such as in a will or trust, an easy solution is to establish a trust for the minor within your own documents.  This accomplishes several goals, but here, allows for an adult to hold the property for the child.  They can then spend the assets on their behalf, such as on education, daily living and so on,

Now, the above are mostly proactive steps, so these are what you can do now to avoid guardianship later.  However, if you or a loved one find yourself without sufficiently covering these concerns and contemplating guardianship, there are still some alternatives that might help or help reduce the scope of the guardianship.

Limited Guardianship

This a blog unto itself so this will be brief, but guardianship can be limited in nature.  Essentially, the powers of the guardian are limited so that the least autonomy is taking from the individual as possible.  This could mean that only assets are under the control of the guardian, or perhaps only to control some personal decisions such as medical decisions.

Joint Ownership

Some families take the step of making a family member a joint owner on a bank or other assets.  Now, I didn’t include this as a proactive measure because joint ownership has a litany of difficulties.  It includes the risk of creditor issues, potential concerns over gift making, disruption of the estate, plan, tax implications and lends to family disputes.  However, should you find yourself with the need for guardianship, this can be a less restrictive guardianship alternative.

Social Security Representative Payees

Social Security pays to an account with a designated rep payee for beneficiaries who can’t act for themselves.  So, on this particular account, the rep payee, which is typically a close family member, but could be someone else, is already authorized to control that particular asset.  So, this doesn’t typically completely avoid the need for a guardianship, but does mean that one account receiving income can be accessed and utilized for an individual without the intervention of a guardian.

Community Property Administration by a Spouse

This is distinctly a Texas solution, but we have community and separate property.  Community property is owned by the marriage, as opposed to the individual.  So, depending on the assets of the individual, her marital status and suitability of the spouse to do this, community administration might be a helpful guardianship alternative.

Guardianship Appointment

Although this isn’t a guardianship alternative, I’d be remiss if I didn’t mention it.  You have the power to name the person who you would want to be a guardian for you if guardianship is necessary.  We routinely prepare these for clients so that should guardianship be necessary, you’ve told the court who should do it.  They are very seldom necessary due to the estate planning we put in place, but it serves a belt and suspenders approach to ensure you have as much control over a guardianship process as possible.

Other Alternatives

There are other guardianship alternatives beyond what I included here, but key factor is that preplanning is the best guardianship alternative.  Talk with an experienced estate planning attorney to protect yourself or loved ones from having to pursue guardianship.

Reference: Kiplinger (July 7, 2022) “Guardianships Should Be a Last Resort–Consider These Less Draconian Options First”

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How to Claim and Use Life Insurance

Many people have life insurance, and they have it for a multitude of reasons.  These include funeral costs, liquidity in an estate, help paying off taxes and so on.  Whatever your reason for having it, I wanted to talk about how to make a claim on it, and separately, what to do with it once you have.  You can see more at Kiplinger’s recent article entitled “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

When making a claim, you’ll need a couple of things.  First and foremost, perhaps blindly obvious, is that your beneficiaries need to know you have it.  If an insurance company becomes aware of a death they might reach out to named beneficiaries, but that is a big assumption.  So, your life insurance beneficiaries or whoever may claim the insurance needs to know it exists.

Holding that aside, the person entitled to the money will start by contacting the insurance company.  The company will send or direct that person on where to download a form to claim the insurance.  Beneficiaries typically need to provide proof of who they are, a death certificate for the insured (which in most places is issued within a few weeks of death) and other information about how to pay the insurance.  For example, some companies ask if you want to turn it into an investment fund at their financial institution, others arrange how to cut the check and so on.

It is worth noting that your executor or trustee won’t have the right to do this unless the estate or the trust is the beneficiary of the life insurance.  All told, the process typically takes something like 30 days.

Now, what to do with the insurance proceeds varies based upon the purpose and need of the life insurance.  I’m also going to assume for now that the insurance isn’t being paid to a trust which is designed to hold assets long term such as a descendant’s trusts.  That might have different concerns.

So, with that said, here are some ideas on how to use the life insurance.

Funeral Costs. Use life insurance money to cover these costs to decrease your financial strain.  Most funeral companies actually have you purchase a small insurance policy in order to prepay a funeral.

Ongoing Expenses. This is especially true when one spouse dies, but living expenses do not stop. Your income is frequently reduced. In fact, after the death of a spouse, household income generally declines by about 40% due to changes in Social Security benefits, spouse’s retirement income and earnings. The death benefit from a life insurance policy can help provide the funds you need to help cover your mortgage, car payment, utilities, food, clothing and health care premiums.

Debts. You are generally not personally responsible for paying off the debts of the decedent. However, when an estate does not have enough funds to pay all the debts, any gifts that were supposed to be paid out to beneficiaries will most likely be reduced. Note that you may be responsible for certain types of debt, such as debt that is jointly owned or a loan that you have co-signed. Talk to an experienced estate attorney to understand the laws of your state, so that you know where you stand concerning all debts.  By way of example, you have very few responsibilities to pay a decedent’s debts in Texas.

Taxes.  As a tie-in to debts, some people use life insurance to give an influx of liquidity to pay estate taxes.  This often helps when an estate is large due to real estate or businesses or other illiquid assets.  The IRS of course wants the tax paid in cash, so life insurance gives you the cash to do so without liquidating other assets.

Create an Emergency Fund. Life insurance can help build a liquid emergency fund, which should cover three to six months of expenses.

Supplement Your Retirement. When one spouse passes, the survivor becomes much more economically vulnerable. To retire, a person typically needs 80% of their preretirement income to live comfortably.  So, insurance provides and extra supplement to cover that need.

Reference: Kiplinger (Dec. 17, 2021) “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

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Why Won’t My Power of Attorney Work?

Powers of attorney are critical estate planning tools, but there are some instances they don’t work, such as with SSA and the IRS.

Powers of Attorney (POAs) are excellent and often overlooked estate planning documents.  They name an agent to act on your behalf if you cannot do so yourself, such as due to incapacity.  However, there are some instances where traditional POAs won’t work.  The IRS and the Social Security Administration (SSA) are two examples of entities that don’t recognize traditional POAs. Forbes’s recent article entitled “Two Times When Your Power of Attorney Isn’t Going to Work” explains why.

The IRS says that you must use Form 2848, “Power of Attorney and Declaration of Representative” to allow anyone to act on your behalf. This form requires you to state the tax matters and years for which the agent is authorized to act. That’s different from a traditional POA for financial matters, which usually has blanket statements allowing the agent to take any or a broad range of actions on your behalf in certain matters.  For this reason, we often include language in our POAs to create a Form 2848 specifically to deal with the IRS.

A married couple that files joint tax returns must also have each spouse separately complete and sign a form. There is no joint form.

Technically, the IRS might accept other POAs as the instructions to Form 2848 indicate this. However, the POA must meet the requirements of Form 2848 to be accepted as a substitute. That can be a tall order.

The Social Security Administration is similar. It says on its web site that it doesn’t recognize POAs. When you need someone to manage your Social Security benefits, you contact the SSA and make an advance designation of a representative payee.

A 2018 law created this feature that lets you name one or more individuals to manage your Social Security benefits. The Social Security Administration must usually work with the named individual or individuals. You can rank up to three people as advance designees. Therefore, if the first one isn’t available or is unable to perform the role, the SSA will move to the next person on your list.

Someone who already is receiving Social Security benefits can designate an advance designee at any point, and a person claiming benefits for the first time can name the designee during the claiming process. The designation can be made using your “my Social Security” account on the Social Security web site or by contacting the Social Security Administration by phone (800-772-1213) or at the local field office. A designee can also be named through the mail by using Form SSA-4547 – Advance Designation of Representative Payee.

Representative payees generally must be individuals, but it also can be a social service agency, nursing home, or one of a number of other organizations recognized by the SSA to serve as payees. If you don’t name any representatives, the SSA will name a representative payee for you, if it decides you need help managing your money. A relative or friend can apply to be representative payees, or the SSA can make the selection.

These are two very common scenarios where a POA may not work, though there are others.  Aside from the obvious cases of badly prepared or defective POAs, the Veterans Administration has their own representative system as well. But, careful planning and the advice of competent counsel can help tremendously by preparing a POA that can address as many scenarios and contingencies as possible.  Counsel can also help you identify tools outside of the POA that can assist with financial management such as trusts.  Also, before addressing your POA it might be helpful to get an idea as to the types of POAs and issues to consider with them, which you can find here.  https://galligan-law.com/what-is-the-right-kind-of-financial-power-of-attorney-for-you/

If you encounter problems using your power of attorney, consult with a lawyer who can help you navigate the system you are coping with and can advise you on how to take action for your loved one.

Reference: Forbes (Jan. 28, 2021) “Two Times When Your Power Of Attorney Isn’t Going To Work”

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