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Disability Protection for Affluent Families

Disability Protection for Affluent Families

Most wealthy individuals understand that plans must be made in case they become unable to manage their financial affairs. If no plan is in place, the choice of who manages your affairs during disability can be made by a judge in a guardianship or conservatorship hearing. Not only is the process public, it is also costly and time-consuming. If you are an affluent person or if you own a business, and if your disability becomes public knowledge, it can put you and your family at a distinct disadvantage, and attract “predators.”

To avoid guardianship proceedings, many people already have in place Durable Powers of Attorney. They are called “durable” because their effectiveness endures through a period of disability. (General Powers of Attorney, by contrast, will terminate if you become disabled.) The problem with Powers of Attorney is that they tend to be overbroad, thus providing the person you name with almost unlimited access and control. The problem is that few people are suited to manage a diverse portfolio of financial, business, and personal assets.

For example, in volatile markets or for investors who are active traders, a disability may leave someone else in control of the investment portfolio that doesn’t have a firm grasp on the overall investment strategy and risk tolerances. Or if you are heavily invested in real estate, you need a person who is able to do such things as ensuring that capital improvements are made, keeping tenants happy, and maintaining and improving cash flow.

Because of the inherent weaknesses of the Power of Attorney, many advisors recommend that clients use other disability planning tools. For example, business owners might draw up comprehensive buy-sell agreements with partners or family members, and virtually every comprehensive wealth strategies plan includes a revocable living trust. Unlike a will which takes effect at death, a revocable trust is active throughout your lifetime. It can provide detailed instructions for your trustees to follow in the event of your disability.

Perhaps the two most important decisions are how to determine when you’ve become mentally disabled, and who will be in charge once disability has been determined. In determining disability, a Power of Attorney or judge will usually say that the opinion of a physician is enough, but you may want a stronger standard. Perhaps you’d like to include more than one doctor such as your primary care physician plus a physician who specializes in your particular illness.

Perhaps you’d like to include family members. After all, they are the ones who live with you day to day, and are most often going to know if you’re mentally capable or not. You could establish a panel that includes the physicians plus your spouse or adult children, and specify if the determination of disability must be unanimous or a simple majority.

Once disability has actually been determined according to your wishes, you can then name who will take care of your specific affairs. For example, you could appoint your spouse to care for paying the bills, collecting disability checks, making charitable donations on your behalf, and other matters of day-to-day life. You might appoint your long-time financial advisor who understands your investment strategies and risk tolerances to make investment decisions in consultation with your spouse. You might name a business partner to take over the leadership and management of your business, and appoint your CPA to monitor company financials.

In each case, you determine the right person for the job and decide the powers and authority that each appointee holds in managing your affairs, thus maintaining control even during disability.

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