– One in two men and one in three women aged 40 and over will develop coronary heart disease in their lifetime. 95% survive the first heart attack.
– One in three Canadians will develop a life threatening cancer. 75% will survive.
– One in four Canadians will suffer from a stoke-related illness. 75% of stroke victims survive the initial event.
(Sources: Heart and Stroke Foundation of Canada; National Cancer Institute of Canada)
Most people have a will in the event they die. However, the risk of a significant long term incapacity is 8 times greater than premature death and very few people have the necessary legal and financial arrangements in place to deal with this much larger risk. This article will focus primarily on the legal aspects of incapacity and planning for this substantial risk. The article concludes with comments on some specific funding issues for successful business owners.
As we all know, one of the major reasons for having a will is to appoint an executor who has the legal authority to deal with your financial affairs after you are gone. However, a will only becomes legally effective if you die. It has no impact if you are incapacitated but still alive. What happens in the event of an incapacity? Who has legal authority to act on your behalf if you are not able to do so? If the appropriate legal arrangements are not put in place, the answer is NO ONE!
Where no one is legally appointed to represent you, the government steps in and your financial affairs are taken over by the office of the Public Trustee. For most of us that is not a desirable alternative. In addition, no one (not even the Public Trustee) will have any authority to make medical decisions on your behalf.
What can be done? Historically, under common law, any granting of power to another person to deal with your affairs was deemed to be revoked upon an incapacity occurring. In order to remedy this situation, all common law provinces in Canada have passed legislation overriding the common law rule and specifically authorizing the legal empowerment of another which will survive your incapacity. Depending on which province you live in, you now have the ability to execute an enduring power of attorney, representation agreement or both. This is an area of exclusive provincial jurisdiction and the situation varies from province to province. A detailed discussion of the rules in each province is well beyond the scope of this aritcle but suffice it to say, that the legal mechanisms are now available and there is no excuse for not dealing with the issue.
Enduring Powers of Attorney
Enduring powers of attorney are a simple, efficient, proven mechanism to authorize another person to deal with your financial affairs in the event of incapacity. They can be “springing” (the power is held in abeyance until such time as the incapacity occurs and then it “springs” into effect and subsists during the period of incapacity) or “immediate” (the power is granted immediately and will last until revoked by the grantor). There are at least two concerns with springing powers. First, what criteria will have to be met to invoke the power? Who will decide if you are sufficiently incapacitated to bring the power into play? This is a very real practical concern and there is no clear answer. A triggering event often used is the written verification by a licensed medical doctor. A second and more serious issue results from recent case law which has called into question the legal valididty of “springing powers” (the Goodrich decision in British Columbia for example). In B.C. it is now questionable if springing powers are valid and, although the decision is not binding in other jurisdictions (remember, this a matter of provincial law), this still raises doubt elsewhere. The better solution is often to grant an immediate power. This works very well IF you have someone you trust (a spouse for example). In our experience the immediate power is often valuable even where there is no incapacity (i.e. something needs to be done and the person is out of the country or otherwise not available). The obvious limitation of an immediate power is what to do if you do not want to give the power immediately.
Another significant limitation of enduring powers of attorney is that they typically do not deal with authorizing another person to make medical decisions on your behalf.
In response to the limitations and concerns regarding enduring powers of attorney, many provinces have now enacted specific representation agreement legislation. The rules differ substantially from province to province and these tend to be much more complex in their creation and administration than enduring powers of attorney. The main advantages are that the issue of the validity of springing powers has not been raised (at least to this point) and the ability to include advance health care directives. The main disadvantage is the complexity and sometime uncertainty of the operation of the legislation.
In some jurisdictions (B.C. for example) you have the ability to use both enduring powers of attorney and representation agreements. In such cases, the recommended solution is to use an immediate, enduring power of attorney for financial decisions (assuming an immediate power works for you) and a representation agreement for health care decisions.
Advance Health Care Directives
To this point we have been focusing the discussion on authorizing another to manage your financial affairs in the event of incapacity. What about authorizing someone else to make medical decisions on your behalf when you are not able to do so? Do you want to be kept alive by heroic measures even when the chance of recovery is minimal and, at best, you would be a vegetable? For religious reasons, do you not want to have a blood transfusion or have other medical procedures performed? What degree of control do you want to have over your physical body when you are not able to make the decisions? These are the issues advance health care directives are designed to address.
At common law, the legal position of advance health care directives is somewhat uncertain. The cases have gone all over the place and it depends in which province you live as to the legal position. In order to remedy the situation, many provinces have passed legislation to specifically address the issue and, if available, this is the preferred vehicle. The point is that if this is something you are interested in, the legal mechanisms may now be available and you should check it out.
A final word on advance health care directives. Many cirtical illness insurance policies contain a provision that there will be a pay out IF you survive for a specified time (usually 30 days). Does your advance health care directive contain a provision that the plug does not get pulled until the 31st day?
Partnership and Shareholder Agreements
Notwithstanding that the risk is 8 times greater than premature death, very few buy/sell agreements address the issue of incapacity. Although a detailed discussion of this topic is the subject of an entire article in itself, here are a few points to consider:
For many successful business owners, there are often two specific issues which must be addressed in the area of incapacity. Both relate to qualification for benefits.
One partial solution to both of the above problems is critical illness insurance which will pay irrespective of whether the person is back at work or the level of “earned “ income is too low.
The risk of incapacity is 8 times greater than premature death yet it is often not adequately planned for. The legal and financial mechanisms are available and there is no basis for this failure. It is simply a matter of addressing it with our clients.