How much do you know about the basics of estate planning? If you’re like most people, probably very little. It may surprise you — or it may not — that 60% of Americans don’t even have a will. So to help everybody get familiar with the basics, I thought it would be fun to provide a primer on some of the important documents in your estate plan. Today I cover Powers of Attorney.
First a little quiz. You can find the answers at the end of the article.
1) A power of attorney is a legal document that grants authority to another person to make legal decisions on one’s behalf. True or False.
2) In most states, a power of attorney will generally be considered “durable” in nature regardless of whether specific “durable” language is included in the document. True or False.
3) A springing power of attorney becomes effective:
a) when the principal becomes disabled.
b) upon the occurrence of a specific contingency.
c) when the document is signed.
d) none of the above.
What is a Power of Attorney?
Historically, estate planning has focused on two objectives: paying as little in estate taxes as possible and making sure assets are distributed the way you prefer after your die. However, there are other important issues — involving health care, finances, and how critical planning decisions are made — that you should also consider.
For example what happens if you become very sick or incapacitated? How, and by whom, will important financial decisions be made? How, and by whom, will important health care decisions be made? Such an event could be either a long gradual process (e.g., a deteriorating medical condition) or something that happens precipitously (e.g., a serious accident). Estate planning tools that can render instructions for certain lifetime contingencies are called advance directives.
One mechanism that can provide for financial decision-making is a power of attorney. This agreement, entered into voluntarily, grants authority to another person to make legal decisions on your behalf. The person to whom you give the authority becomes the attorney in fact (generally, this person must be an adult) who can act as your surrogate or agent. The powers granted can be broad or limited in scope, depending on your preferences and the way you draw up the power of attorney. They can include such areas as: insurance transactions; estate transactions; money management decisions; government benefits; and retirement plan decisions.
Making the Document Binding
There are two aspects critical to assuring maximum benefit from setting up a power of attorney – making the document binding and choosing a triggering mechanism.
First, the principal must have sufficient mental capacity at the time the document is drawn to make it binding in law. This means that the individual must understand the nature and effect of the document, much the same as required for other legally binding documents.
If a power of attorney is to be used in the event of incapacity, then the document must be a durable power of attorney. A durable power of attorney will remain in full force even upon subsequent mental incapacity of the principal. While this may seem obvious (the document remaining effective when it is most needed), it was not long ago that a power of attorney terminated upon incapacity. Now, all 50 states have statutes providing for a durable power of attorney. The expressed language must convey the idea that the powers granted in the document will not be affected by the principal’s subsequent disability.
In most states, laws presume that a power of attorney is not intended to be durable unless specific “durable” language is included. But state requirements can vary, making familiarity with individual state statutes important. For example, some states require that the document be witnessed or notarized, and not all states recognize a springing durable power of attorney (discussed below). Make sure your lawyer is familiar with your state’s laws when creating such documents.
Choosing a Trigger Mechanism
Sometimes, you may want to have the power of attorney take effect only if and when mental incapacity occurs. In such a case, you’ll need to use a springing durable power of attorney. This document goes into effect only after a specific contingency that you specify. For example, you could stipulate that the power of attorney takes effect if your physician certifies that you can no longer manage your financial affairs.
A springing durable power of attorney assures you won’t run the risk of losing important rights while you are still able to make independent decisions. In crafting a springing durable power of attorney, the method of determining the triggering event—e.g., defining mental incapacity—should be carefully spelled out. (For example, relying on a court determination of incapacity would defeat one of the benefits of using a power of attorney, namely, avoiding court intervention.)
A durable power of attorney is generally inexpensive, easy to implement and should be considered an essential estate planning tool for all individuals, regardless of age. Most attorneys that I work with consider these documents and an essential part of estate planning packages.
In the absence of such a document, court intervention (with the accompanying time and expense) may be necessary to carry out one’s financial desires at precisely the moment when facility and timeliness are most important.
Next week, I’ll get into Power of Attorney issues concerning health care.
Have estate planning questions? Feel free to get in contact with me at the links below.
Quiz Answers: 1) True; 2) False; 3) b.