A simple estate plan typically consists of a will, durable or financial power of attorney, health care directives, including a medical power of attorney and living will, plus perhaps a revocable trust. This four part series will review the structure and purpose of these basic estate planning documents.
Power of Attorney is the legal authorization that gives a designated person (the agent) power to act for someone else (the principal). It has developed from the broader legal concept of agency where one person acts on behalf of another to create legal relations with a third party. Power of Attorney may be broad or limited and may cover decisions regarding property, finances, business or medical care. This article will focus on financial power of attorney.
Modern Power of Attorney documents are governed by state law and are often created using statutory language which includes basic powers. Although there are fillable forms all over the internet, it is best to consult a legal professional to create these documents. There is no one correct form but it must be in writing and the principal must be competent and have the capacity to create it. It also must meet the state specific signing requirements to be valid.
Under traditional agency law, a grant of authority ends when the principal becomes incapacitated – exactly the time when the agent is needed to act! However, if the document provides for durability of the authority, then it continues after and during incapacity. The consequence of not having a durable power of attorney if you become incapacitated is the likelihood of ending up in court and having the court appoint a guardian and/or conservator for you.
A general power of attorney is very broad and far reaching. Most power of attorney forms provide specific powers that are granted but can also designate powers that are limited or prohibited. The most common powers include a wide variety of tasks and decisions usually related to business management. Prohibited powers include the power to change a will and acting in ways not in the principal’s best interest. The agent also cannot make decisions once the principal is deceased since the authority to do so dies with the principal.
Powers of Attorney become effective once signed and the agent can begin acting immediately. This can sometimes lead to abuse but can be limited by not sharing copies until they are needed, using springing powers or naming a corporate fiduciary to act on your behalf. Springing powers require some event to happen before they “spring” into effect. Typically, this means the principal is declared incompetent by one or more physicians. While this may help prevent abuse, it is much more complicated and burdensome logistically and may be hard to reverse if only temporary.
Perhaps a better way to prevent abuse, is to carefully consider who you choose to name as your agent. Be sure to have a conversation to discuss the responsibilities. Make sure they are willing and able to take on the responsibility and are suitable for the role. You do not have to name your spouse, your children or anybody related to you. While it is perfectly acceptable to name these people, naming an unemotional third party or corporate fiduciary to act as your agent may be a better option to prevent family conflict and/or abuse.
Creating a power of attorney and specifying how it will operate even if you lose your ability to think or function ensures that you will have a plan in place for overseeing your financial affairs if and when you are unable to do so.
Whether you have a will-based or trust-based estate plan, it is important to supplement it with clear and effective power of attorney documents to make sure everything is covered. In the coming issues this year we will review and deconstruct the other core pieces of a simple estate plan.