Incapacity brought on by an accident or a sudden illness can endanger your assets if you do not have the right planning and can burden your family. This blog identifies the legal repercussions of incapacity and means to plan against incapacity.
The Legal Repercussions of Incapacity
Incapacity is the absence of the physical or mental faculties that are necessary to care for your personal care and manage your assets. An incapacitated person cannot consent to medical treatment nor can he or she do any of the following in respect to assets: (i) rent, purchase or sell property; (ii) manage assets and investments; (iii) make gifts; or (iv) execute a last will and testament or take any other estate planning action. This blog will focus on the legal of repercussions in respect to assets.
In all Canadian provinces and US States, the default legal consequences of incapacity are similar: once a person becomes factually incapable, legal proceedings must be undertaken to legally declare the person incapable and appoint persons to administer the person’s assets. In most Canadian provinces and US States, these legal proceedings are called “guardianship”. Under the laws of Quebec, which is a civil law jurisdiction, these legal proceedings are called “protective supervision”. Until these proceedings are complete, your assets are frozen and cannot be administered, rented or sold.
Depending on the degree of incapacity of a person, the court will appoint one or several persons (referred to as “guardians” in many jurisdictions) to manage the incapacitated person’s assets to one degree or another. Although the appointed persons may have full powers to administer an incapacitated person’s assets, they are subject to court supervision and, in certain cases, supervision by third parties and are required to seek approval from the court and/or third parties before making major financial decisions on behalf of an incapacitated person.
Powers of Attorney
A power of attorney is a legal document by which you grant one or several persons (referred to as agent or attorney) to act on your behalf in respect to legal and financial matters. In all Canadian provinces and US States, subject to certain restrictions, if you have signed a valid power of attorney for your assets, upon your factual incapacity, the agents or attorneys you name can manage your assets without undertaking legal proceedings such as guardianship to be formally named by a court to act in this capacity. We clarify that an individual does not have to be a lawyer to act as an “attorney” pursuant to a power of attorney.
In Canadian provinces and US States, there are distinctions between “durable” or “enduring” powers of attorney and “springing” powers of attorney as well as between “general” powers of attorney and “special” or “limited” powers of attorney.
A durable or enduring power of attorney grants one or several agents/attorneys immediate authority to act on your behalf. In contrast, a springing power of attorney takes effect upon an event such as incapacity. Although springing powers of attorney are valid, many financial institutions may be reluctant to accept instructions from an agent or attorney on the basis of a springing power of attorney for fear that the agent or attorney might be abusing the power of attorney.
A general power of attorney grants broad authority to act on your behalf in relation to your assets or to look after your personal care. Unlike a general power of attorney, a specific or limited power of attorney is restricted to one or several actions such as signing a legal document or opening a bank account.
Valid powers of attorney for assets are a fundamental component of estate planning. If you do not have one or have signed one a number of years ago, we highly recommend that you consult one of our highly experienced estate planning professionals to discuss your estate planning.
The Limits of a Power of Attorney in US Real Estate Transactions
Although powers of attorney are essential, they are not always a total solution for incapacity planning. In US real estate transactions, powers of attorney are often of limited use for signing documents to close these transactions. A key concern in any US real estate transaction is conferring title free of defects so that title insurance can be issued. Many title companies and/or title insurance underwriters will not recognize powers of attorney as granting sufficient authority to sign closing documents on behalf of a buyer or a seller. For more information on the role of title insurance in US real estate transactions, we recommend that you read our blog “Title Insurance in US Real Estate Transactions”.
In the context of a US real estate transaction, one solution for you to plan for incapacity is to take title to the property through a trust. When property is held through a trust, you are not the owner on title; the trust is. However, as the beneficiary, you can use the trust property (your US property) and if the property is sold, you are entitled to the sale proceeds. In the event you become incapacitated, the trust property can continue to be managed and can even be sold without the necessity to undertake guardianship proceedings to manage your assets.
However, not just any trust will necessarily work for you. Certain trusts which are ideal for US residents such as a US revocable trust (also called “living trusts”) do not work for Canadian residents because of potential exposure to double taxation in Canada on the sale of trust property. For many Canadian residents who own US real estate or might purchase US real estate, we recommend a Cross Border Trust (CBT) as an alternative ownership structure. It is similar to a US revocable trust, but it avoids double taxation in Canada on the sale of US real estate. In our article entitled “Canadians Owning US Real Estate – Avoiding the Probate Trap”, we describe in greater detail the distinction between a US revocable trust and a CBT in respect to their tax treatment.
Depending on other factors such as whether you intend to use US real estate for personal use or investment purposes, financing and exposure to US Estate Tax, alternative structures to trusts might also be contemplated which also guard against incapacity. If you own US real estate or are in the process of purchasing US real estate, we strongly recommend that you consult one of your estate planning professionals to discuss the best ownership structure for you.
Incapacity planning is a key component of estate planning because it protects your assets in the event of incapacity. Powers of attorney and ownership of property through trusts are some of the most effective ways to implement property incapacity planning. Now is a better time than ever to assess or reassess your estate planning to determine if you have the right planning against incapacity.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Shlomi Steve Levy is a Partner of Levy Salis LLP and is a member of the Quebec Bar, the Law Society of Ontario (L3), the Society of Trust and Estate Practitioners, and the Canadian Bar Association.
Sergei Titorenko is an Associate at Levy Salis LLP and a member of the Quebec Bar. He devotes his practice to US and Canadian tax and estate planning, Canadians doing business in the United States, Americans living in Canada, US real estate transactions for Canadians, and cryptocurrency transactions.