Incapacity planning: who will manage your affairs if you cannot?

When most people think about estate planning, they think about preparing a Will. A Will is important, but it only takes effect after death.

What happens if you are still alive but become unable to manage your financial, personal or health affairs?

Incapacity can arise through an accident, illness, stroke or cognitive decline. It may develop gradually or occur without warning. Effective incapacity planning helps ensure the right people can step in, that they have the necessary authority, and that they understand what you would want them to do. 

Incapacity planning involves more than an Enduring Power of Attorney

An Enduring Power of Attorney is an essential part of incapacity planning, but it may only be one piece of the puzzle.

Depending on your circumstances, an effective plan may also involve:

• your Will;
• an Advance Health Directive;
• a General Power of Attorney;
• trust deeds;
• company constitutions;
• shareholders agreements;
• succession provisions;
• corporate appointments; and
• practical information about your finances and your professional advisers.

A useful starting point is to ask:

If I became unable to manage my affairs tomorrow, would someone know what to do?

• where your important documents are kept;
• which bank you use;
• where your investments and superannuation are held;
• how your regular bills are paid;
• what insurance policies you have;
• who your accountant, solicitor and financial adviser are;
• how to access essential digital information; and
• how your trusts, companies, business interests or lending arrangements operate?

A good incapacity plan is designed to reduce delays, maintain access to funds, support the continuation of a business and reduce the risk of family disputes. Most importantly, it gives future decision-makers a clearer understanding of your wishes. 

Capacity is not simply “all or nothing”

Capacity refers to a person’s ability to understand relevant information, consider their options, make a decision and communicate that decision.

A person does not automatically lose capacity because they are getting older, have received a diagnosis or need assistance with paperwork. Capacity depends on the particular decision being made and can fluctuate due to factors such as illness, fatigue, stress or medication.

For example, someone may still be able to purchase groceries and pay routine bills but may struggle to understand a complex property sale or changes to their superannuation.

The question is not, “Does this person have capacity?” It is “does this person have the capacity to make this particular decision at this particular time?

In QLD adults are presumed to have capacity unless there is evidence otherwise. Wherever possible, people should be supported to continue making their own decisions before another person takes over. 

Can a spouse or adult child simply step in?

It is commonly assumed that a spouse or adult child can automatically begin managing someone’s affairs if they become unwell.

In practice, this is not always the case. Without appropriate legal authority, banks, superannuation funds, insurers and other organisations may be unable to deal with family members, even where the relationship is clear.

A General Power of Attorney is usually used for a specific purpose or limited period. An Enduring Power of Attorney is different because it can continue to operate after the principal loses decision-making capacity.

An Enduring Power of Attorney (EPOA) can specify:

• who will act;
• whether different attorneys have different responsibilities;
• whether multiple attorneys act jointly, independently or by majority; and
• when their authority begins. 

The person closest to you is not necessarily the person best equipped to act as your attorney. An attorney may need to communicate with banks, accountants, solicitors, Centrelink, financial advisers and aged care providers while making difficult personal and financial decisions.

Integrity, sound judgement, willingness to act and the ability to work with any co-attorneys are therefore critical considerations.

Document what matters to you

Appointing an attorney tells people who can make decisions. It does not necessarily tell them what decisions you would have made.

Your attorney may know you very well but still not know:

• whether you wish to remain in your home;
• what type of aged care or accommodation you would prefer;
• how you want your investments managed;
• how much investment risk you are comfortable taking;
• whether financial support for children or grandchildren should continue; or
• which charitable donations or family gifts are important to you.

When making decisions, an attorney may need to consider what the principal would have decided if they still had capacity. This is sometimes described as substituted judgement. It can produce a different outcome from simply asking what another person believes is financially prudent or in the principal’s best interests. 

The more clearly your wishes, values and financial preferences are documented now, the less your attorney will need to guess later.

Pay particular attention to family gifts and conflicts of interest

Conflicts of interest are common because attorneys are often family members whose personal and financial affairs are already connected with the principal.

Potential conflicts can arise where:

• a spouse is both an attorney and a joint property owner;
• an adult child is both an attorney and a future beneficiary;
• the attorney works in or depends on the family business;
• the attorney leases property from the principal;
• the attorney receives financial assistance from the principal;
• family loans or gifts benefit one person more than another; or
• the attorney is also a trustee, director or business partner.

A conflict does not necessarily mean that an arrangement is automatically inappropriate. However, it needs to be identified, appropriately documented and carefully managed. Conflict clauses (in your EPOA) can be particularly important for families with businesses, farms, property or ongoing financial support arrangements, but they should be properly drafted and reviewed by a solicitor. 

Gifting is one area where clear directions can be especially valuable. If you regularly pay school fees (for grandkids), assist adult children, support grandchildren or donate to charities, consider documenting:

• what support you normally provide;
• why it is important to you;
• whether it should continue if you lose capacity; and
• the circumstances in which it should reduce or stop

Your instructions may also need to recognise that your circumstances can change. A commitment that is affordable today may no longer be sustainable if you later require aged care, your income falls or the value of your investments decline.

Start involving both members of a couple

In many relationships, one person is the family’s financial manager. They know where the money is held, manage the investments and banking, organise tax information and communicate with professional advisers.

If that person loses capacity, their spouse may suddenly be expected to manage responsibilities they have never previously handled.

Practical preparation can include:

• attending financial review meetings together;
• ensuring each person has an email address and mobile phone for appropriate technology access;
• becoming familiar with banking and security processes;
• having professionals copy both spouses into important correspondence;
• preparing a clear list of assets, income sources and policies;
• recording contact details for professional advisers; and
• gradually building the less-involved spouse’s financial knowledge and confidence.

These actions may appear simple, but they can make a substantial difference. Good incapacity planning is not just about who has authority. It is also about ensuring that the people you love have the knowledge, confidence and systems needed to continue with as little disruption as possible.

Business owners may need additional arrangements

For a business owner, a personal Enduring Power of Attorney may not be enough as the EPOA does not necessarily enable an attorney to act in the principal’s role as a company director or trustee (of a Trust). Company constitutions, trust deeds, shareholder agreements, succession arrangements, finance documents and corporate powers of attorney may all require review. 

Business owners should consider:

• Who currently controls each entity?
• What happens if that person cannot act?
• Who can sign company and banking documents?
• Who can appoint or replace a director or trustee?
• Are there appropriate succession arrangements?
• Do the various legal documents work together?

This type of review will generally require coordinated input from the family’s solicitor, accountant and financial adviser.

Acting as an attorney is a serious responsibility

An attorney must understand the scope of their authority, when that authority begins and whether they need to consult or agree with another attorney.

Their practical responsibilities may include:

• keeping a decision diary;
• retaining receipts, invoices and bank statements;
• recording what was decided and why;
• keeping the principal’s money separate from their own;
• consulting co-attorneys where required;
• protecting confidential information; and
• obtaining advice before making major decisions. 

Before acting, an attorney should ask:

1. Am I authorised to make this decision?
2. What would the principal have wanted?
3. Does the decision respect their rights and preferences?
4. Do I have a conflict of interest?
5. Have I documented the decision and my reasons?

A practical incapacity planning checklist

Consider using the following questions when reviewing your arrangements:

• Is my Enduring Power of Attorney current?
• Are the right people appointed?
• Can multiple attorneys work together effectively?
• Does the document clearly state when their authority begins?
• Have I documented my wishes, values and financial preferences?
• Have I addressed family gifts and potential conflicts?
• Does my spouse understand our finances and know our advisers?
• Are my important documents and certified copies accessible?
• Have I considered my future health and accommodation preferences?
• Do my trust, company and business succession arrangements work?
• Do my attorneys understand the responsibility they are accepting?
• Have my arrangements been reviewed by an appropriately qualified solicitor?

Plan while you can participate in the decisions

The most valuable time to address incapacity planning is while you can still choose who will act, explain what matters to you and participate fully in the process.

Your plan should be tailored to your family, assets, business interests and financial structures. It should also be reviewed as circumstances change.

A well-considered incapacity plan cannot remove every difficult decision for your Attorneys, but it can provide clarity, reduce disruption and help ensure that future decisions remain connected to your wishes.

We're here to help

Incapacity planning can be complex, particularly when you have a range of personal, financial or business interests to consider. Our wealth management team can help you understand what to consider and work with your professional advisers to ensure your arrangements are clear and fit for your circumstances.