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| Powers of Attorney |
Coupled with a will and an advance medical directive, the durable power of attorney is for many people a superior alternative to the simple living trust in planning for disability or incompetence. These documents are more familiar to folks than the concept of a "trust," and their total cost is less than to prepare a trust.
A power of attorney ("POA") is a document in which you, as the "principal," give authority to your "attorney-in-fact" (who need not be a lawyer) to act on your behalf. The scope of the power can be quite limited, for example, the purchase of a single real estate investment - or almost unlimited. You can even grant the power to make gifts of your property, but not to make a Will.
All powers of attorney end at the death of the principal.
Limited Power of Attorney
A limited power of attorney can make business or financial transactions much easier, simply by allowing a busy or absentee party to send somebody to act in his or her place.
A limited power of attorney refers only to the matter at hand (i.e, "the purchase of the real estate in Anytown, USA, known as 123 Oak Street") and details the expiration date and full extent of the power.
Without this limitation and specificity, finicky banks or others to whom it is presented might not accept the power of attorney. Additionally, some parties require your bank to guarantee your signature on the power of attorney.
If you plan to use a stand-in at a real estate or business closing, make sure he or she is acting under a power of attorney that has been approved in advance by the other parties.
Durable Powers of Attorney
A durable power of attorney allows you to delegate broad authority over your personal financial affairs, even - and especially - when you become disabled or incompetent.
This kind of power of attorney takes effect immediately; it does not wait until disability. So it's possible, in theory, for the attorney-in-fact to act independently, behind your back, even if you're healthy. Presumably, of course, your attorney-in-fact is trustworthy beyond reproach. If there is any doubt about this, perhaps the durable power of attorney is just not for you.
Springing Powers of Attorney
An alternative to a durable power of attorney is the springing power of attorney, which doesn't become effective until you're disabled.
This can pose a big problem: there must be a formal determination of disability before the power of attorney will be considered operative and be accepted. At best, this means at least a short delay and expense. (A springing power of attorney might provide, for example, that two doctors examine you and attest to your disability.) At worst, there might be uncertainty, disagreement or squabbling among doctors and/or family over the degree of your disability. Banks or others might balk at recognizing the authority of the attorney-in-fact for this reason. When this situation unfolds, the matter often winds up in court - which was the very thing you wanted to avoid.
The springing power of attorney is used because some people just feel uncomfortable making a delegation of power today, while still healthy. While that sentiment is quite understandable, the potential problems should be considered, too.
What Should a Power of Attorney Include?
In addition to a wide ranging variety of "standard" powers, discuss with your lawyer including the following useful, but often overlooked, provisions in your power of attorney:
- Power to handle tax matters and deal with the IRS
- Power to handle retirement accounts and investments
- A compensation clause detailing how much your attorney-in-fact should be paid and where the payment should come from
- Power to make gifts. If your estate is to be administered by an attorney-in-fact under a power of attorney, you might want to initiate or continue a gifting program. If so, the power to make gifts should be specifically authorized and precisely spelled out.
- Power to create & amend trusts for your benefit. This allows flexibility in implementing an estate plan, despite your incapacity. It can be particularly useful in some situations, since a power of attorney can't authorize an attorney-in-fact to write your will.
Although blank power of attorney forms are readily available, this is a document best prepared by an attorney. Experience shows that the one page, fill-in-the-blank form will simply not be acceptable if the attorney-in-fact is engaging in a transaction involving much money. That is especially so when there are any questions about mental capacity.
Michael Palermo is a Lexington, Kentucky estate planning lawyer and Certified Financial Planner. More information about estate planning can be found on his Web site.
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