Mike S. is a 40-year-old venture capitalist who fell on the wrong side of the law. He faces a two-year incarceration and needs to make some financial plans for his wife, a stay-at-home caregiver, and two minor children. Mike has several concerns, including paying the bills for his family and business, providing his family with a monthly income, and planning for the future, including how his income might be affected after being released from jail and the need to develop a will.
Let us discuss Mike’s concerns one at a time. Advance financial planning can help protect your financial assets while you are incarcerated and help mitigate the expected economic repercussions on your long-term earning potential after being released.
More than 1 in 100 adults are now behind bars in America, by far the highest rate of any nation. — Pew Center on the States (2008)
How will Mike pay his bills if he is incarcerated?
The quick answer to this question is, he cannot. Mike needs to name an agent for an immediate, durable financial power of attorney (POA). Mike needs to choose a trusted person to handle his financial matters while he is incarcerated. An obvious choice is his wife or a business partner, but Mike can appoint anyone. Mike chooses his business partner as his agent and completes the form. His business partner signs an acceptance form acknowledging his responsibilities to act as Mike’s financial power of attorney for the next two years. A financial power of attorney has the following benefits:
- You can name one or more agents to act on your behalf.
- You determine the level of authority for your agent.
- You choose which areas of your financial life are included in the POA.
- You can provide added instructions as part of the POA.
- The POA can start at once.
- You can still conduct your own business, but you also have a backup.
- If something should happen to you, your POA will continue.
- The POA can be revoked as long as the principal has the mental capacity to do so.
With a plan for paying his bills in place, Mike’s attention turns to how his money and property will be managed for the next two years. A revocable living trust (RLT) may be the ideal solution. A revocable trust can be modified as long as you are not incapacitated or dead. You, as the grantor, place your assets in the trust. Although you no longer own the assets, you still retain control over them.
Advantages of a living trust include:
- Avoids the probate process upon your death
- Allows you to make changes as needed
- Protects your privacy
- Avoids challenges to a will
- Provides an opportunity to assign a durable power of attorney and guardianship
- Minimizes estate taxes2
Mike works with his estate attorney to structure his trust. He and his brother-in-law are co-trustees. Mike and his family can benefit from the trust’s assets during their lifetime, and Mike can designate what will happen to his assets and property upon his death. Mike’s property and assets will go directly to his beneficiaries upon his death instead of being stuck in the probate process. Pre-planning will ensure that Mike’s assets go to his family in a way that he sees fit instead of being determined by the court.
Mike structures his trust so that funds are set aside for his financial power of attorney to pay all the business and family bills, and a monthly stipend is deposited in his wife’s account for discretionary spending. Mike can rest assured that while the incarceration will be stressful for him and his family, he will not have to worry about his family’s financial well-being for the next two years.
What about his children?
What parent has not had many a sleepless night worried about who will care for their minor children if both parents unexpectedly die? Financially, Mike can ensure that his minor children are cared for using the tools he already has in place. His trust can include provisions for paying his children’s expenses until they reach adulthood and how they might inherit his estate.
As the children’s other parent, Mike’s wife will continue to care for all other needs for the children. When Mike and his wife meet with their attorney, they take an additional step and name Mike’s sister as a guardian for the children, in case anything should happen to Mike’s wife while he is incarcerated or to both parents after he is released. Mike and his wife incorporate this information into their Last Will and Testament, along with how they want any money and property distributed that is not in their trust.
What could happen if Mike did not invest in pre-planning? A court-appointed attorney would manage his money and property. Once his minor children reach adulthood, the rest of the assets would be given to them in a lump sum. Would your 18 or 21-year-old be able to manage their inheritance responsibly? Pre-planning can provide the structure and guidance necessary to ensure that your children are taken care of financially. However, be aware that a revocable living trust does not protect your money or assets from creditors.
Plan for your health care
HIPAA protects your privacy and restricts access to your medical information. However, you may want someone, such as your spouse, to be able to get test results and speak with your health care provider. Completing a HIPAA authorization form can allow someone to access your medical information without giving them the authority to act on your behalf. A medical power of attorney allows you to name someone to make medical decisions for you if you cannot do so. If you choose not to name a medical power of attorney and cannot make your own decisions, your family will need to have a court-appointed person make these decisions. Finally, a living will or advanced directive allows you to make known your end-of-life choices.
Facing incarceration is a stressful event. Meeting with an attorney well in advance can help you and your family pre-plan, so your family is financially protected during your absence.