Power of Attorney for Estate Planning

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Power of Attorney for Estate Planning.

Durable power of attorney empowers "agent" to act on your behalf

A key document for everyone, including you, is a durable power of attorney. If you are sick or disabled, who can handle financial matters for you? Who can pay your bills so your bank doesn't foreclose on your mortgage or the utility company doesn't cut off your phone, electric, heat, and power? The answer is to set up a durable power of attorney.

WARNING Do not rely on your spouse's ability to automatically handle any emergency just because of being married to you. Don't assume that your spouse has legal authority to sign your name. She won't. If you have a joint checking account, your spouse can sign the checking account but that's about it.

This article explains the "how to's" and a few of the words you must understand to get through the form reproduced in the appendix to the chapter. Beyond the form, there are some very important, no-cost, and simple steps to make it easier for the people you designate to manage your assets if you are sick or disabled. This chapter includes a practical checklist to help you implement these tips. At the end of this chapter is a sample power of attorney with comments and pointers to help you understand how to handle the fill-in-the-blank form at the end of this book. Make lots of notes in the margins of changes you want to make to the fill-in-the-blank form to make it easier to work with.

OBSERVATION The rules differ from state to state. Be certain to consult with an attorney in your state about the specific rules that apply to you. For example, some states limit the people you may name as an attorney in fact to certain close relatives. In some states it may be advisable to file (record) the power of attorney in the appropriate governmental office. At a minimum, you need to go to your local library and read your state's laws on power of attorney. Also be sure to check for any updates for recent law changes. If there are provisions you don't understand, consider seeking professional help.

What is a Power of Attorney?

A power of attorney is the most important, and the most commonly used estate planning document. It is a contract in which you (called the "grantor") delegate ("grant") to another person (called your "agent") the power and right to act on your behalf in the event you are ill, injured, or unavailable for any reason. Your agent is given the important responsibility of handling your financial matters in the event of any emergency that prevents you from taking the necessary actions.

Words You Must Know To Work with Powers

Powers of attorney contain all kinds of buzz words and technical legal terms. There are durable powers, non-durable powers, springing powers, general powers, and special powers! Understanding the technical legal terms is an important part of understanding the power of attorney.

Power of Attorney. Power of attorney refers to the document in which you name a trusted person to be your agent and carry out your financial and legal wishes while you are alive.

Durable Power of Attorney. A durable power of attorney gives your agent the right to act even in the event of your disability. If the form is not durable, it would become invalid upon your becoming disabled. Why would you want to sign a power of attorney that's not effective when you're disabled? Isn't that the whole point of signing it? Certainly! But just because of the quirky history of how common law developed in England centuries ago, you need to be certain that your power of attorney is a durable power. Somewhere in the form should be a statement to the effect that: "This power of attorney will remain in force and effect even if I'm disabled." In many states, this is all that's necessary to achieve this important goal. The power of attorney form in this book includes such a clause. However, read your state's power of attorney law or consult a lawyer to be sure that the form meets the requirements of your state.

General Power of Attorney. A general power of attorney enables the agent to take care of any matter that the power of attorney form or state law permits an agent to do. This is usually a very long and broad list of legal, financial, and similar matters. In most, but not all situations, you should use a general power of attorney. The form in this book is a general power of attorney. If you don't feel comfortable giving your agent such a broad power consider using another agent.

Special Power of Attorney. A special power of attorney is a power that is limited in scope. It allows your agent to handle only one particular transaction or one type of transaction. The following example illustrates why you may want to have a special or limited power of attorney.

EXAMPLE Assume you're going out of town for a business meeting that cannot be cancelled. Unfortunately, your contract for selling your house is scheduled to close that same week. What do you do because you have to be present at the closing to sign papers? A special power of attorney is an option. You can name a trusted friend or family member as your agent to sign any documents necessary to complete your house closing. This is a special power because you've only given the agent one limited right. After the house closing is completed, the agent's authority ends.

A special power is useless for general planning if you become disabled because you don't know what legal and financial issues you're going to face and what problems will arise, and you cannot know what type of limited powers to give to an agent under a special power of attorney. This is why, for general protection and estate planning, you need to give someone a general power that will be broadly effective if you're disabled and that will enable the agent to handle any financial matters that are foreseeable.

Springing Power of Attorney. This power of attorney is one that only becomes effective or springs into use when you become disabled. This prevents your agent from having any authority until you are actually disabled and need assistance. This may be the better approach if you prefer not to grant any authority to your agent until it becomes absolutely necessary. The argument against the springing power of attorney is that you should not grant any power of attorney unless you trust the person named. If trust is not an issue, why risk restricting the power of attorney until you become disabled? This can raise questions as to whether the power of attorney has become effective (i.e., whether you are disabled). You can, state law permitting, have a primary agent's power effective immediately upon your signing of the power of attorney (e.g., your spouse or partner), while the authority of alternate agents only becomes effective when those agents demonstrate your disability.

WARNING Some states do not accept springing powers of attorney. If you feel comfortable naming certain people as agents if their power is effective ONLY if you are disabled, consult an estate planning attorney in your state.

The power of attorney described in this book is not a springing power of attorney. Therefore, it does not include restrictions to make an agent's authority effective only in the event of your disability.

Understanding the Law Affecting Your Power of Attorney

Your best source of information is to review the applicable law for your state in your local library. Try looking up "power of attorney" or "agent" or "attorney in fact" in the index for your state's statutes. Most states have standard forms that address the laws in that particular state. Almost all banks and brokerage firms have their own standard forms. Their legal departments can often assist and answer questions at no cost to you. However, if you have a technical question, consult a lawyer.

Why a Power of Attorney May Not Be Right for You

Powers of attorney are serious documents and can convey substantial authority. If you do not have someone you truly can trust, don't sign a power of attorney. There are other options.

EXAMPLE An elderly widow's nearest living relative was a nephew she saw a few times a year around the holidays. She named the nephew as agent under a general power of attorney. The nephew, realizing that his elderly aunt had limited mobility and limited awareness, began to actively use her funds for his benefit. By the time he was discovered and the powers revoked, he had nearly wiped out his aunt's estate. By then his aunt was too elderly and infirm to pursue the matter and had insufficient funds to hire an attorney. The nephew was never taken to task for his actions.

If you don't have someone that is 100 percent trustworthy, consider setting up a revocable living trust with yourself and a bank or trust company as co-trustees. This will give you total control of your money, provide for professional management of your investments, and assure you that your assets will be safe because of liability insurance, government regulations and audits, and internal controls, which all large institutions have.

Terms to Include In Your Power of Attorney

Name Several Alternate Agents

You should name several alternate agents as a precaution in the event that the primary agent (often your spouse or partner) is unable to take the necessary actions. Your agent and alternates should sign the power of attorney agreement indicating their agreement to act in the manner described in the form, and to indemnify you for any losses resulting from unauthorized actions.

Should Your Agent Be Given Unlimited Power?

Your agent is generally authorized, for example, to sign checks to pay for your medical care if you are hospitalized unexpectedly. He is also generally authorized to handle financial affairs, collect dividend checks, and sell stocks and bonds.

You may also wish to place restrictions on the scope of your agent's actions. For example, you may permit only the payment of certain emergency expenses or you may permit or not permit the sale of certain real estate assets. You may or may not permit the agent to make gifts. The form in this book does not place any restrictions on your agent. If you are concerned, there are several options you should evaluate. You may have selected the wrong person to be your agent. If you do not feel enough trust and confidence in the agent and you're thinking of restricting the agent's powers, you should consider naming a different person as your agent. If you don't have anyone else to name, you might need a revocable living trust with an institution as a co-trustee. If you cannot resolve your concerns, you should consult with an estate planner.

Business Powers

If you have a business, such as a home based business, which is not a corporation, partnership, or other entity, your agent under your power of attorney can probably handle business matters for you. If your business is a corporation, partnership, limited liability company, or other type of entity, your power of attorney may not authorize your agent to take action for that entity. The entity itself must take action through the appropriate legal channels (e.g., an officer for a corporation).

EXAMPLE If your business is a corporation, the shareholders will appoint people to serve as directors. The directors will generally appoint officers. Sometimes, but not always, all officers will be approved in the corporate minutes to sign bank accounts or handle other transactions. If you own an interest in a closely-held corporation, don't take chances. In all such cases, consult with a corporate or business attorney. A shareholder agreement or buy-sell agreement can address planning for the corporation in the event that you are disabled. This is essential because your personal power of attorney cannot affect the corporation, which is a separate legal entity.

Power to Make Gifts If you are disabled, a power of attorney can authorize your agent to make gifts to people you designate and to take other actions to minimize your estate tax. If the agent is authorized to make $10,000 annual gifts (the amount that you can presently give to anyone to avoid current gift or estate tax costs), this can add up to a substantial amount of money. This can be great where it is saving estate taxes, but it can be a nightmare if it is abused. The power of attorney form in this book includes the right to make gifts to the people you specify. If you do not want that clause, put an "X" through it, delete it, and initial next to it.

Power to Deal with the IRS Dealing with the IRS to sign a tax return, handle an audit, or address a lien erroneously placed on your accounts can be essential. Your power of attorney should include specified rights to deal with IRS matters. To deal with the IRS it is helpful to include your social security number on the form. A blank line has been provided for this purpose.

WARNING Dealing with the IRS can be a very important right. An agent acting in haste or without proper tax advice can create significant tax problems.

How Does Your Power of Attorney Relate To Your Other Documents?

How does a power of attorney relate to other estate documents? A revocable living trust (this book does not address how to prepare a revocable living trust because it is not one of the core essential documents everyone needs) is not a substitute for a durable power of attorney. This is because your revocable living trust can only provide control to your trustee over the assets for which you have completed the legal steps necessary to transfer assets to the trust. A power of attorney, however, if broadly written, can give your agent access to all of your assets that have not been transferred to your living trust. Since a durable power of attorney terminates on your death, it can never be considered a substitute for a will or trust arrangement. Thus, a will or revocable living trust, which becomes irrevocable on your death, will continue after death, although the power of attorney will not.

Summary

Powers of attorney are essential estate planning tools. Because of the simplicity, ease of preparation, and nominal cost, you and your family members should all have powers of attorney.

ESTATE PLANNING STEP-BY-STEP by Martin M. Shenkman, CPA, M.B.A., J.D. Copyright ) 1997 by Martin M. Shenkman. Published by arrangement with Barron's Educational Series, Inc.

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