Plan for clients’ incapacity

A secure estate plan shouldn’t end with an up-to-date will. It should also anticipate possible future incapacity. This usually means preparing powers of attorney for both property and personal care.

A power of attorney (mandate for incapacity or protective mandate, in Quebec) is a legal document that gives someone else the right to act on your behalf. There are two main types: one for management of property, another for personal care.

In British Columbia, representation agreements govern personal care and may also be used for the management of property. Depending on your client’s province of residence, you may also be able to prepare living wills and advance directives.

(Ontario nomenclature and laws will be referenced in this article.)

Will and estate planners generally advise clients to prepare both types of powers of attorney. Most often the documents are prepared as part of the client’s estate plan along with the will. But the documents can be prepared at any time, so long as the client has the requisite capacity (as defined by the applicable provincial legislation).

Personal care

A power of attorney for personal care allows the grantor to authorize someone to make decisions concerning the grantor’s personal care in the event she becomes incapable of making these decisions herself.

Why trusts work for incapacity planning

Your client owns property and wants to protect it in case she becomes mentally incapable of managing it. She has two options: a trust or a Continuing Power of Attorney for Property (CPAP). If she’s over 65, either an alter-ego or joint-partner trust can be a better choice.

That’s because these trusts can be more:

• Comprehensive Trustees’ duties and powers can be tailored to many circumstances. CPAPs rarely outline how to appoint and replace attorneys, and they don’t usually give detailed directions explaining how to manage the property.

• Continuous A trust continues to exist after a client dies—so management of the property continues uninterrupted. Neither incapacity nor the settlor’s death affects a trustee’s authority.

  On the other hand, a CPAP ends when the client dies, so beneficiaries have to wait until her will goes through probate for the executor to take over property management.

  This can cause major delays, because banks and other third parties typically require probate as proof of authority.

Margaret O’Sullivan is a Toronto lawyer and principal of O’Sullivan Estates Lawyers, a boutique trusts and estates firm.

Pursuant to Ontario’s Substitute Decisions Act, 1992 (SDA), a person has capacity to give a power of attorney for personal care if the person is at least 16 years old and “has the ability to understand whether the proposed attorney has a genuine concern” for her welfare and appreciates that the proposed attorney may need to make decisions. Personal care includes decisions concerning health care, nutrition, shelter, clothing, hygiene and safety.

Property

Powers of attorney for property are important professionally.

A continuing power of attorney for property may authorize the attorney to do anything with respect to property that the grantor could do if capable, except make a will. (In New Brunswick the attorney can make a will for an incapable person, subject to confirmation by the court).

As set out in the SDA, a person is capable of giving a power of attorney for property if they are at least 18 years of age and meets the criteria listed in the act: s8.(1) (a)-(g). The person must:

• Know what kind of property he or she has and its approximate value
• Be aware of obligations owed to his or her dependants

The term “continuing” (or “enduring”) refers to a power of attorney that may be exercised during the grantor’s subsequent incapacity to manage property. Given that most grantors want the power of attorney to be used only if they become incapable, it’s important the document is properly drafted to ensure it will survive the grantor’s incapacity.

What grantors need to know

A continuing power of attorney for property is a powerful document. Unless otherwise stated in the document, in all provinces except Quebec a continuing power of attorney is effective when signed. In Quebec, a Mandate for Incapacity must first be “homologated” (approved) by the court.

The document is effective when signed and provides the attorney with significant powers in respect of the grantor’s property. The act explicitly requires grantors to acknowledge that this authority can be misused. As part of the capacity test for granting a continuing power of attorney, the grantor must appreciate that the property may decline in value if not prudently managed, and be aware that the attorney could misuse the authority (see “Limiting powers of attorney, page 2”).

In Ontario, any PoA restrictions should be set out in a side document, not in the power of attorney itself. Third parties called upon to rely on the document prefer to accept a properly executed document with no restrictions. A financial institution, land titles office or other third party presented with a continuing power of attorney for property with the restriction “effective only in the event of the grantor’s incapacity” will require satisfactory evidence of the grantor’s incapacity.

Such evidence may be difficult to obtain. One solution is to set out terms of use in a separate “authorization and direction” from the grantor and have all original copies of the power of attorney held by a trusted third party. The grantor may, for example, direct that the document be released only if:

• the grantor tells the attorney she want him to start acting
• the grantor is declared incapable of managing her property
• one or more physicians advise that the grantor would benefit from assistance in managing her affairs
• certain specified family members advise that the attorney should begin acting

A grantor may appoint one or more attorneys, concurrently or in succession. Where the continuing power of attorney names two or more people (or a person and a trust company), they must act unanimously unless the document states otherwise.

A joint appointment provides a level of protection in that both (all) attorneys must agree on all actions. A “joint and several” appointment has the benefit of flexibility, allowing either (any one) attorney to conduct business. Clients wishing to name two or more attorneys must weigh the pros and cons of each appointment type.

Many people choose to appoint the same people or trust companies to be both their attorneys for property and their executors. Although there is no requirement to do so, the same list of key attributes — expertise, availability, accountability and trustworthiness — apply to both roles.

What attorneys need to know

Acting as an attorney involves significant duties and obligations. An attorney’s overarching duty is to act with honesty, integrity and in good faith for the incapable person’s benefit. The Ontario act goes on to list specific obligations an attorney shall perform.

For example, attorneys shall:

• explain their powers and duties to the incapable person
• encourage the incapable person, to the best of their abilities, to participate in decisions concerning their property
• foster regular personal contact between the incapable person and supportive family members and friends
• keep account of all transactions involving the grantor’s property

An attorney should be aware of other rules set out in the act as well. For instance, the attorney is expected to make reasonable efforts to determine whether the incapable person has a will and, if so, know its provisions. The primary reason for this is that the attorney must not sell or transfer property that is subject to a specific gift in the will, unless necessary.

The act also contains explicit instructions regarding both required and optional expenditures. Examples of the latter include charitable gifts where the incapable person made similar expenditures when capable and so long as sufficient assets are available. Attorneys should also be familiar with the rules concerning how and when they may resign, what compensation they may be entitled to and the standard of care expected of them.

No direction could be costly

Understanding what happens if someone dies intestate usually motivates people to prepare a will.

Similarly, understanding what happens when someone becomes incapable of managing her financial affairs or personal care, without having appointed a substitute decision maker, may help motivate people to plan for potential future incapacity.

If your client fails to properly prepare for these outcomes, an application to court may be required to appoint someone to make these decisions for them. Having a will doesn’t help because an executor is only authorized to act after death.

The court process can be both costly and time-consuming. Depending on the circumstances, the Public Guardian and Trustee (or provincial equivalent) may be required to get involved. Clients also lose the opportunity to appoint people or companies of their choice and establish any parameters regarding the actions of their substitute decision makers.

Encourage your clients to seek expert advice to develop a comprehensive estate plan that anticipates possible future incapacity and delivers peace of mind.

Limiting powers of attorney

It is possible to limit the powers granted to an attorney. Where a grantor wishes the attorney to act only for a specified time period (the grantor’s vacation or hospital stay) or in respect of a specific transaction (the closing of a real estate deal), a limited or specific power of attorney may be advisable.

In the case of a general continuing power of attorney, many (likely most) grantors want the document to be used only if and when they become incapable of managing their property themselves. Although the document is effective when signed, it is possible to include provisions in the document itself that defers it to a future date or the occurrence of a specified condition. These are sometimes referred to as “springing” powers of attorney.

Elaine Blades is director, fiduciary services at Scotia Private Client Group.