Welcome to our Wealth Advisory Series, where we discuss topics related to Life and Legacy.
As we speak with clients about strategies to hold and transfer wealth across generations, a conversation that often emerges is probably one of the most difficult ones—how to plan for a potential incapacity. “This is a situation where we lose control, as we cannot make decisions for ourselves. By proactively planning or facing this difficult prospect, we can put a plan in place where we are able to, in some ways, take control over the situation,” says Megan Worrell, Wealth Advisor at the International Private Bank.
In this episode, we focus on the main considerations of this process: How to choose the right people to make decisions for you after a potential incapacity, how to choose people for each type of asset (personal, trust or business) and finally, how and when to discuss your incapacity choices with your loved ones.
Welcome to our Wealth Advisory Series, where we discuss topics related to life and legacy. I’m Sarah Collins, and I’m joined today by my colleague, Megan Worrell. Megan and I are Wealth Advisors in an International Private Bank. We speak with clients about strategies to hold and transfer wealth across generations. Today, we will discuss an important, but sometimes difficult topic—how to plan for your possible incapacity. The three considerations we will discuss are how to choose the right people to make decisions for you while you’re incapacitated, choosing different people for different types of assets, such as personal assets versus business assets. And finally, how and when to discuss your incapacity choices with your loved ones. So, Megan, how can you choose a decision-maker for your possible incapacity?
Thanks, Sarah. I have to admit that I find this to be a very difficult topic for me personally, I tend to push it out of my mind, thinking it’s only going to happen to people who are older than me, or just that it’s not going to happen to me, but in reality, this is something that can happen to any one of us at any time in our lives. It can be something that occurs gradually or something that happens suddenly, something that’s temporary or an incapacity that lasts the rest of our lives. So, I tried in my own head to reframe the way I think about incapacity. And this topic is at its core, a situation where we cannot make decisions for ourselves and we are out of control. So, by proactively planning for this or facing it, I can put a plan in place where I’m able in some ways to take back control over the situation.
So, there are many legal tools that are available to us to proactively plan for incapacity, but that isn’t really our focus today. As you noted, the questions you asked, which are the harder questions, they revolve around who we can, or better maybe, who we should put in control in the event that we’re unable to make decisions for ourselves. We need to ask what the role is, what are the qualifications? Who do I trust? So, I want to preface this with the understanding that this is a very personal process. There’s no one correct answer for every family, but in our experience, it has been a more successful approach. When you name one person at a time with the successors named as well, and this person should be someone who can take the lead in a difficult time. I want to share a client example with you. It helps, I think, helps illustrate what we’re trying to say.
I worked with a family that had three children. All of them were adults. All self-supporting, had their own families and jobs and all of them got along very well. The parents came to us and said, we want to treat our children equally. And this is something that you and I hear as Wealth Advisors regularly. It’s a common statement. And by equally, the parents didn’t mean just in terms of assets or inheritance. They meant equal responsibility and equal power within family decisions. And so, they put into place legal tools, which required all three children to agree when making a decision for an incapacitated parent. Unfortunately, while well-intended the plan did not take into account that people deal with stress differently. We process family illness and family crisis at different paces. And these things can have an impact on our sibling and family relationships. So, in this particular case, the delay calls by requiring all three to agree impacted the care the parents needed and the ability to make appropriate financial and investment decisions.
I want to contrast that example with the second client example. Again, there’s no one right answer for every family, but in my second client experience, this family had four children, but one child was very active in the medical care of an incapacitated parent. She had the time and flexibility to be active, to take the parent to doctor’s appointments. She knew the medications, she knew the doctors, but she was unable to deal with financial issues, mostly because she was just very uncomfortable when it came to speaking about money. And incapacity doesn’t just affect our health. It affects our financial well-being. So, another child took on the responsibility of financial management and this child wasn’t necessarily a part of the financial industry, but she was comfortable speaking to financial professionals and seeking out appropriate help, and making informed financial decisions.
That’s very helpful Megan. But you know, in both of those examples, your clients were very fortunate that they had children or close family members that they could rely on for their incapacity and to help them with these decisions. But what happens if the client doesn’t have a family member or a child, or he doesn’t want for that person to serve as their agent or trusted person while they’re incapacitated. Who might, who else might they be able to appoint in that case?
That’s a great question, Sarah. Thank you. Uh, we work with a number of clients who do not have children, or as you said, um, for some families who don’t want to name their children because they feel like it could create too much family strife or sibling issues. So, they choose instead to turn to extended family members or friends or independent parties, such as professional fiduciaries. For example, J.P. Morgan often steps into this role, from a financial perspective. So, Sarah, I think now might be a good time to talk about planning for different asset types.
Yes, I think, you know, it’s very important for clients to sit down and make an inventory of their different types of assets. And as you pointed out earlier, Megan, in your example, you know, they don’t have to choose the same person across the board for all of their assets. And in fact, it might be better to have different people serving in different roles. So, for example, for medical decisions, they may choose a child or someone that they think has more flexibility with their time or knows more, or is closer to them to understand what decisions they would make. And when it comes to talking about our client’s financial investments, I think that’s also very important. So, for example, with bank accounts, in that case, it might be better to choose someone who has some financial expertise or also with something as simple as a checking account, even someone who’s geographically located closer to the person, to make those decisions.
With brokerage accounts or investment accounts, you know, that also needs to take into account the expertise and the comfort level of the person that they choose and not everyone is going to be as financially savvy in order to manage or hire the right people to manage or make those investment decisions. I also want to talk about trust assets. You know, many of our clients will use a trust and have a majority or a significant amount of their wealth in a trust. And I want to give an example of a client story too, to show, you know, what you should be thinking about when your assets are in trust. So, I dealt with a family where the matriarch, as I mentioned, had a majority of her assets in a revocable trust. And while she was alive, she directed the distributions from that trust. And also, while she was alive, she paid for all of the education expenses for her grandchildren.
So, she paid for their school and their expenses related to school and both the parents and the grandchildren had come to rely on those on those gifts. But unfortunately, the trust provided that if the matriarch became incapacitated, she was to be the only beneficiary while she was incapacitated, which meant that those distributions to the grandchildren couldn’t happen under the terms of the trust. But that was really unfortunate because the family had relied on these gifts. There was significant money in the trust and the family really felt that the grandmother would have wanted these gifts to continue. So, I think clients have to sit down and really think about the class of beneficiaries while they’re incapacitated. And some clients may feel that the class should be limited to themselves or their spouse to make sure that there’s adequate funds to care for them in case they have a long incapacity, but other clients with significant resources may want to continue those gifts, especially if they have a history of those gifts and they feel like they want those gifts to continue, even if they’re incapacitated.
So again, I think it’s important to make this inventory of your assets and to decide, you know, not just who will choose to make decisions while you’re incapacitated, but who will be a beneficiary as well. And then I think the third class of assets that many of our clients have are business assets, and not just ownership. Many of our clients are actively involved in decision-making and control of the business. And so it’s important to review in the business document and review with management and make sure that there’s a succession plan for the business in case the client were to become incapacitated there.
Sarah I’m, I’m wondering if you take a different approach, when you think about planning for a long incapacity versus a shorter incapacity.
I think Megan, you know, none of us know how long an incapacity will last. And I always recommend to my clients that they plan for the worst-case scenario and build flexibility into their documents. So, I think the trust example was an important one because, unfortunately, the matriarch had not planned for additional people to benefit while she was incapacitated. But that was something that the family felt really would have benefited them. And so, Megan, I think that brings us to the last topic, which is how, and when should we discuss incapacity with our family?
Yes. And, and this too varies within families, and families around the globe deal with it differently. Never every, not everyone is comfortable sharing their ideas about incapacity planning, but again, in our experience, communicating your thoughts to your family about incapacity or other planning issues earlier, rather than later, is beneficial. Communicating. This tends to avoid surprises to children or otherwise allows them time to understand your wishes. And sometimes during the communication process, you learn whether you’ve made the right choice or whether the intended person is actually comfortable serving in that role. So, Sarah, I’m going to flip it back to you now, if the client is struggling with this issue, who can help?
I think that the client should reach out to their legal team, obviously for help with the documents related to incapacity. And they need to make sure that they have the proper documentation in place. But often what I found is that the client’s relationship with their legal teams sometimes can be very transactional. And so, if a client needs additional help here, or because this is such a sensitive topic, feel free to reach out to your Wealth Advisor at J.P. Morgan, who’s equipped to listen to you and to review these scenes with you and to ask some of these questions. I think it’s important, as you mentioned earlier, Megan, that sometimes the process of discussing this and thinking about this will bring up other issues that the client hadn’t thought about. And so, for the Wealth Advisor team, we really appreciate the opportunity to be brought in and to discuss these things with the client and to give them personalized advice on this topic. That concludes our discussion today. Thank you for listening to our Wealth Advisory Series on topics of life and legacy. If you have any questions, please feel free to contact your J.P. Morgan team.