How a power of attorney works

Most estate planning documents deal with the disposition of assets after death. One of the more important areas of estate planning, however, is the handling of your affairs if you become incapacitated. A properly drafted power of attorney addresses this issue, providing a mechanism for resolving lifetime planning issues at a critical time.

Why do you need a power of attorney?

A power of attorney is a legal document in which an individual (the principal) designates another individual as an agent (attorney-in-fact) to perform certain transactions on the principal’s behalf. This document is very powerful and, in most instances, becomes effective upon signing. Great care should be taken when choosing an agent because you are giving this person, the attorney-in-fact, the ability and the power to perform all the transactions outlined in the document, which can amount to any transaction you as the principal could perform if able. The most important traits are trustworthiness, integrity and availability. In many instances, a spouse, child or other close family member is designated as the attorney-in-fact.

Durable power of attorney

A durable power of attorney means that powers granted to the agent under the agreement continue to be effective even if the principal becomes incapacitated. All 50 states, plus the District of Columbia, recognize the validity of a durable power of attorney. Please note that in all cases, however, the power terminates upon the death of the principal.

The following types of powers of attorney are typically durable:

General power of attorney. The principal authorizes the attorney-in-fact to handle all business, financial and personal transactions on the principal’s behalf.

Special or limited power of attorney. The principal limits the attorney-in-fact’s authority to perform a specific transaction, for example, to fund a revocable trust or to sell a parcel of real property.

Springing power of attorney. The attorney-in-fact’s designation becomes effective upon the occurrence of a future event, such as the principal’s becoming disabled or incapacitated. The standard for determining the principal’s incapacity and the mechanism to carry out this determination should be clearly defined in the document.  Some states (e.g., Florida) have abolished the concept of springing powers of attorney.

Advantages of having a durable power of attorney 

• It is a valuable estate planning tool in situations where the extent, nature and value of your assets do not merit the expense associated with the creation of a revocable trust.
• The document remains effective despite your (the principal’s) incapacity or disability, without the need for court intervention or court supervision.
• It is inexpensive and allows you to cope with the risks of future incapacity without the potential delays and expenses (including legal, bond, accounting and filing fees) of a court proceeding for the appointment of a guardian or conservator.
• A properly drafted power of attorney provides certainty about who will handle your financial affairs if you become incapacitated. In addition, you are not required to transfer property to the attorney-in-fact.
• You may be able to designate a guardian or conservator through a power of attorney, but that authority is a matter of local law, and counsel should be consulted in the appropriate jurisdiction.

Disadvantages of a durable power of attorney 

• The power of attorney should not be used as a substitute for a revocable trust. A power of attorney should be used in conjunction with a properly drafted agreement creating a revocable trust.
• Please be aware that no mechanism such as court supervision exists to monitor the actions of your attorney-in-fact.  Although the power of attorney is a very important estate planning tool, a power of attorney may also be a source of fraud, waste and abuse. Some situations may warrant the use of a court-supervised guardianship or conservatorship instead.
• Some banks, brokers and other third parties may be reluctant to deal with an attorney-in-fact under a valid power of attorney. Many institutions require that their own forms be used and may refuse to honor any others.  Recent changes in the laws of some states (e.g., Pennsylvania) allow financial institutions to be held liable for refusing to honor acknowledged (notarized or verified) powers of attorney.
• Unlike a trust, a durable power of attorney does not survive the principal’s death.
• The validity of the document and the scope of an attorney-in-fact’s authority may be subject to suspicion after the passage of time. The power of attorney should be renewed periodically.
• Laws are still evolving in this area, and some uncertainty remains regarding the type of powers that can be granted to the attorney-in-fact.

Generally, however, the benefits of a well-drafted power of attorney outweigh any drawbacks.

Determining which powers to delegate

The statutory short form power of attorney provides a good starting point to assist you in determining what types of powers should be included in a durable general power of attorney:

• Real property transactions
• Stock and bond transactions
• Business operating transactions
• Banking and other financial institution transactions
• Retirement plan transactions

The Uniform Statutory Form Power of Attorney Act provides guidelines for creating a short form power of attorney. The National Conference of Commissioners on Uniform State Laws approved the Uniform Act, and it has been adopted in a number of jurisdictions including Arkansas, California, Colorado, District of Columbia, Montana, New Mexico, Oklahoma, Rhode Island, Texas and Wisconsin. Other states that have enacted their own statutory short form durable powers of attorney include Alaska, Connecticut, Georgia, Illinois, Minnesota, New Mexico, New York, North Carolina, and Pennsylvania.

Generally speaking, the following powers are non-delegable (i.e., unable to be included in a power of attorney):

• Matters relating to marriage and divorce
• Executing, amending or revoking a will
• Voting in public elections
• Performing services under a personal services contract
• Fiduciary powers

Suggested additional powers and provisions

Laws regarding powers of attorney vary from state to state and continue to evolve. Check with local counsel to make certain that the following suggested powers and provisions are allowed in a particular jurisdiction:

Gift giving. Power to make annual exclusion gifts, up to $18,000 per year per donee, to identified donees, including the attorney-in-fact, and the power to make gifts to custodians, trustees and guardians on behalf of the intended donee.  In many states, the gift-giving power is unlimited and may authorize gifts of any size above and beyond the annual present interest exclusion gift limitation.  This power is a “hot” power and should be given special consideration.

Advancements. Power to make gifts in an amount up to the $18,000 annual gift tax exclusion when such gifts are made to beneficiaries of general bequests under your will or trust agreement, and to treat those gifts as advancements in partial or full satisfaction of the disposition due the beneficiary under the will or trust agreement.

Medical expenses and tuition expenses. Authority to pay medical expenses and tuition expenses for family members and other specific donees (without any gift tax consequences).

Safe deposit box. Authority to gain access to safe deposit boxes in your name, with authority to add or remove contents and to renew a lease or surrender the box.

Agents. Authority to employ brokers, realtors, accountants, attorneys, custodians, investment advisors and other agents to render services to the principal and to pay such agents for those services.

Create, modify or revoke a trust. Authority to create a revocable trust for your benefit if none exists, and the power to modify or revoke an existing trust, including adding all or any part of the property to any trust for your benefit.  In some states, the ability to create a revocable trust on behalf of the principal is limited to those trusts in which the remainder beneficiary is the estate of the principal.

Qualified disclaimers. Power to make qualified disclaimers of all or any part of a property interest, without court approval.

Nomination of conservator or guardian. Power to nominate a guardian or conservator for your estate or both, including the attorney-in-fact.

Business interests. Power to continue the operation of any business in which you had an interest when the power of attorney was signed, or a business in which you later acquired an interest.

All other matters. Power to act on your behalf regarding all other matters not specifically enumerated in the power of attorney form and which you can execute through an attorney-in-fact.

Successor attorney-in-fact. Consider including a provision in the power of attorney form designating a successor attorney-in-fact to act if the nominated attorney-in-fact is unable or unwilling to serve or continue to serve as agent.

Compensation. If the attorney-in-fact is to be compensated, the document should indicate how the compensation will be determined; if the attorney-in-fact is not to be compensated, the document should indicate that as well. In all cases, reimbursement would be expected for reasonable expenses incurred in connection with the services rendered as attorney-in-fact.

Revocation upon divorce. In some jurisdictions, unless the power of attorney or a court decree provides otherwise, the appointment of your spouse as attorney-in-fact is revoked upon the entry of a decree of dissolution or legal separation or declaration of invalidity of the marriage.

Failure to act. Determines whether the attorney-in-fact will be liable for failure to act under a power of attorney, including obligations to be imposed on the attorney-in-fact to act under the power of attorney.

Accountability. Upon your death, the attorney-in-fact is accountable to the personal representative of your estate and, should circumstances warrant, may be compelled to produce an accounting of all receipts and disbursements made during the term served as attorney-in-fact.

Portability. Acceptance of a power of attorney outside the state in which the document was executed may be difficult to attain. Third parties, including banks, brokerage firms and title companies of outside states, may or may not accept the document. It is generally recommended that if you own real property in a state other than your domicile, you should execute a new (or additional, as the case may be) power of attorney governed by the laws of the state where the real property is located.