This article discusses estate planning documents and court procedures that manage an Illinois resident’s personal and financial decisions once he or she is unable to make those decisions because of incompetence. The authors review the benefits and disadvantages of powers of attorney for healthcare and property, revocable living trusts, and guardianship. The article also analyzes probate issues and factors to consider when deciding whether to avoid or embrace guardianship. The authors conclude that powers of attorney and living trusts are effective tools to manage disability and avoid guardianship; however, the involvement of a guardianship court is sometimes desirable.
As the population grows older, legal issues of mental incompetence are taking on greater significance. Recent changes in the federal estate tax have also placed a greater emphasis on the non-tax aspects of estate planning. Planning for a client’s possible disability and the continued management of his or her assets is therefore crucial for Illinois attorneys.
When planning for mental disability, attorneys must counsel clients on (1) who determines mental incompetence, and in what manner; (2) who should manage the client’s assets and make key and/or daily financial decisions, as well as personal decisions; and (3) once determined incompetent, how the client is protected from abuse, neglect, and mismanagement.
Illinois defines a disabled adult as "a person 18 years or older who (a) because of mental deterioration or physical incapacity is not fully able to manage his person or estate, or (b) is a person with mental illness or a person with a developmental disability and who because of his mental illness or developmental disability is not fully able to manage his person or estate, or (c) because of gambling, idleness, debauchery or excessive use of intoxicants or drugs, so spends or wastes his estate as to expose himself or his family to want or suffering." 755 ILCS 5/11a-2.
Who should make decisions for the client when they are no longer able to do so themselves, and how is the client protected once determined incompetent are discussed under each of the following three disability strategies: (1) powers of attorney for healthcare and property; (2) guardianship through the probate court; and (3) revocable living trusts.
Powers of Attorney for Healthcare and Property
The Illinois Probate Act, 755 ILCS 45/2 et seq, Durable Powers of Attorney (hereinafter referred to as the "Act"), recognizes "that each individual has the right to appoint an agent to deal with property or make personal and health care decisions for the individual, but that this right cannot be fully effective unless the principal may empower the agent to act throughout the principal’s lifetime, including during periods of disability, and be sure that third parties will honor the agent’s authority at all times." The Illinois General Assembly enacted the Power of Attorney Act to address this need.
Powers of attorney are the most convenient and inexpensive strategy for disability planning. There are statutory forms incorporated under the Act, but any form may be used. Attorney’s fees to counsel who draft these powers are considerably less expensive than the other strategies referred to in this article. The statutory forms may even be purchased at local stationary stores, eliminating legal fees altogether. However, an attorney’s advice at some level is certainly appropriate and prudent.
The Act provides in relevant part that the "principal may specify in the agency the event or time when the agency will begin and terminate, the mode of revocation or amendment and the rights, powers, duties, limitations, immunities and other terms applicable to the agency and to all persons dealing with the agency." The principal may designate the power is effective upon execution of the document, or for example, upon a determination by the personal physician that the principal cannot give prompt and intelligent attention to their person or financial matters. Every agency may be amended or revoked by the principal at any time or in any manner communicated to the agent or to any other person related to the subject matter of the agency. Healthcare powers may be amended or revoked without regard to the principal’s mental or physical conditions by several methods including an oral or any expression of the intent to revoke in the presence of a witness 18 years or older who then signs and dates a writing confirming that such expression of intent was made.
In a perfect world, the low cost, control by principal, and flexibility of powers of attorney appear to be the most appropriate strategy for disability planning. However, the potential for abuse is great, despite an agent’s responsibility to the principal. In particular the Act provides that the agent shall use due care to act for the benefit of the principal in accordance with the terms of the agency and shall be liable for negligent exercise. The agent is under a duty to keep a record of all receipts, disbursements, and significant actions taken under the agency.
However, where a principal’s mental capacity is diminished (e.g. due to dementia), he or she may not be able to monitor or review the agent’s actions. Neither the court nor any other person has an obligation to monitor the agent. When an agent is an adult child of the principal, often that adult child is the only person having contact with the principal, and even when communication of revocation is stated to the agent, the agent may not honor it.
How then is the principal protected from agent abuse? The Act provides in relevant part that "upon petition by any interested person and a finding by the court that the principal lacks the capacity to control or revoke the agency, the court may find that the agent is not acting for the benefit of the principal or that the agent’s action or inaction has caused or threatens substantial harm to the principal’s person or property. The court may order a guardian of the principal’s person or estate to exercise any powers of the principal under the agency, including the power to revoke the agency. As well, the court may enter such other orders without appointment of a guardian, as the court deems necessary to provide for the best interests of the principal."
In all likelihood, interested parties do not have access to bank or medical records. Often the elderly disabled client fears or is dependent upon the agent and refuses to revoke the powers of attorney because that action may anger the agent. Siblings may argue over what is in the best interests for the parent principal; consequently, the sibling with the authority to act as agent may find his or her actions justifiably or unjustifiably questioned or even litigated. It is not unusual to have non-agent siblings take issue with the expenditures or medical decisions of the agent.
The Act also provides that an agent shall provide a record of all receipts, disbursements, and significant action when asked by a representative of a provider agency as defined in section 2 of the Elder Abuse and Neglect Act, 320 ILCS 20/1 et seq, when the representative is assessing an elder abuse or neglect complaint under that act, or (2) a representative of the Office of the State Long Term Care Ombudsman when investigating a complaint of financial exploitation of a nursing home resident 20 ILCS 105/1 et seq. Anyone can make an anonymous complaint.
Therefore, the principal’s protection comes from an interested person’s concern and willingness to file a petition asking the court to revoke powers of attorney because the principal will not or cannot do so, and/or reporting to the appropriate agency elder abuse or neglect. If and when the court revokes the powers of attorney, guardianship proceedings may become necessary to adjudicate the disability and appoint a guardian.
Another situation may arise whereby an incompetent principal, necessarily hospitalized by his or her agent, revokes the power of healthcare (competency is not required to revoke) and self-discharges from the hospital. If this occurs, the agent must also seek an adjudication of mental disability and appointment of guardianship.
In sum, powers of attorney are wonderful tools where the principal’s agent is an honest, caring person who has the principal’s best interests at heart, exercises a standard of care compliant with the Act, and with relatives who do not interfere. Unfortunately, all too often these circumstances do not exist.
The Illinois Probate Act, 755 ILCS 5/11a-1 et seq, Guardians for Disabled Adults, provides for the adjudication of disability, the appointment of a guardian of the person or estate, and court oversight of asset management personal decisions.
Guardianship proceedings begin with the petition for guardianship filed by an interested person. A guardian ad litem appointed by the court represents the best interests of the alleged disabled person, conducts an investigation, reports to the court and makes a recommendation either for or against the guardianship. The alleged disabled person is entitled to a jury trial on the issue of incompetence.
Upon adjudication of incompetence, the appointed guardian is required to file a report with the court on an annual basis concerning the person and estate of the ward. Residential placement of the ward requires court approval, and the court reviews all expenditures.
The advantages of guardianship include court oversight of the person and estate, a ready forum to resolve disputes, and procedural safeguards to the determination of disability. Family members often view the court’s supervision as welcome, and that may mitigate allegations against the guardian as opposed to those against agents under powers of attorney. Unless waived, the guardian is required to post a surety bond to protect the ward’s assets.
Disadvantages of guardianship include the court costs, legal fees, probate bond premiums, and the requirement of providing an annual report of the person and estate to the court (which may be seen as a disadvantage by the guardian but an advantage by other family members). Probate guardianship proceedings are also public. A client may have strong opinions about a public guardianship proceeding, especially if the disabled person owns a business. The family may not want clients and vendors of a business to learn of the owner’s incompetence.
Revocable Living Trust
Many attorneys and clients seek to avoid guardianship because of perceived disadvantages such as substantial expense (legal fees, court costs and bond premiums), lack of privacy, mandatory accounting and perhaps a loss of control via court permission for major decisions and litigation. Guardianship also adopts the legislature’s defaults as opposed to the express wishes of an individual.
The revocable living trust offers an attractive asset management solution in many situations. Typically, a client (grantor) creates a living trust naming his or her self as the trustee and lifetime beneficiary of the trust. Assets are then transferred out of the client’s name individually and into the name of the trust. The trust agreement specifies successor trustees to manage trust assets in the event of the grantor/trustee’s death or disability. Disability of the grantor is carefully defined in the trust instrument.
Both powers of attorney and living trusts can avoid guardianship proceedings. Living trusts, like powers of attorney, can include language that defines when a grantor is deemed incompetent. For example, if a grantor’s spouse or his children unanimously certify with the written concurrence of a physician that the grantor is incompetent, the designated successor trustee becomes empowered to manage the grantor’s property. This places control of the incompetency determination with the client’s family and not with the courts.
A guardianship is not necessary when disability occurs because the client’s assets have been placed in the trust. Disability establishes a new trustee. A living trust can also provide continuity of asset management and probate avoidance upon the grantor’s death. Financial accounts, business interest and real estate must be marshaled when a guardian or power of attorney agent assumes control. A living trust provides for a change of trustees without the need to retitle a disabled person’s property. Typically, assets are consolidated and organized during the funding of a living trust, which saves a guardian or agent from having to search for missing deeds, bank accounts or stock certificates. Finally a living trust may also appoint a " trust protector" to amend the trust after disability without the need for court permission to reflect changing circumstances or tax laws.
Like powers of attorney, living trusts can be revoked, leaving the grantor without a successor to manage his or her assets. However, the trust instrument can prevent the grantor from revoking or amending the trust if the grantor is deemed incompetent. The Power of Attorney Act is not clear whether disability can prevent a principal from revoking a power of attorney for property (compared to the Healthcare Power Act which specifically permits revocation by an incompetent principal).
Living trusts are not, however, without disadvantages. Attorney fees to prepare and fund a living trust estate plan are usually greater than fees to prepare a will and power of attorney plan. Some financial institutions may be hesitant to honor a living trust without some form or certification that the trust instrument is valid. The funding of a living trust (i.e. changing asset title to the trust) can require time and effort from the client and/or attorney. A trustee has control only over trust assets. Therefore, any asset not titled in the name of the trust, for example, social security payments, would require a power of attorney or guardianship. Living trusts control property; a power of attorney for healthcare or guardianship is still required for healthcare and personal decisions.
Living trusts avoid guardianship of the estate. However, guardianship avoidance may be a disadvantage because there is no oversight of the trustee. Trustees, like an agent under a power of attorney, can abuse or neglect their powers and duties notwithstanding their fiduciary duty to the grantor. The Trust and Trustees Act, 760 ILCS 5/1 et seq, provides trustees with both powers and duties, including the obligation to provide periodic accountings to trust beneficiaries. Care must be exercised in selecting an appropriate trustee (who may be an individual or corporate trustee) because once acting, a trustee may be difficult and expensive to remove.
Estate planning with powers of attorney or living trusts offers a means by which a client can manage property and personal decisions in the event of incompetence. Both strategies are subject to fiduciary abuse and mismanagement. guardianship provides a court procedure and forum to manage disability and resolve disputes. A probate guardianship protects the rights of a disabled person and minimizes the potential for financial abuse and neglect. Guardianship provides the means of managing property for incompetent individuals who have not engaged in estate planning. Although relatively expensive, Guardianship may also be appropriate if court oversight and protection is desired.
Carol A. Nolan is in solo practice in Wheaton and concentrates her practice on elder law, probate & trust administration, and estate planning. She is a repeated speaker on guardianship, probate and trust administration for the Illinois State Bar Association and the DuPage County Bar.
Michael Overmann is an attorney in Darien and limits his practice to estate planning, probate, trust administration and taxation. He served as counsel to the previous DuPage County Public Guardian (Dewey Pierotti) and was formerly with the Trust and Estate Settlement Divisions of The Northern Trust Company, Chicago.