Power of Attorney – Your Best Friend (and Worst Enemy) Part 1

Sorry for the absence, but I figure it just makes your heart grow fonder.

One of the most essential estate planning tools available is the Power of Attorney. In fact, in my practice, I recommend 2 different PoAs for my estate clients: 1) a Durable Power of Attorney and 2) a Medical Power of Attorney. These are two separate documents, with two very different goals.

Durable Power of Attorney

A Durable Power of Attorney (in this post, “PoA”) is a document that: 1) is in writing, 2) is signed by a competent adult, aka “the Principal”, 3) names a trusted person called an “agent” or “Attorney-in-fact,” 4) expressly states the Principal’s desires regarding incapacity, and 5) is acknowledged. Essentially, a PoA lets you name someone to act as if they were you, so that third parties doing business with your agent may assume they are actually dealing with you. A Power of Attorney need not be filed, unless real property transactions are going to take place, and it can be revoked at any time.

Several things must be considered when planning to sign a Power of Attorney, not least of which is 1) to whom do you give the power, and 2) what powers do you give.

With a Durable Power of Attorney, your attorney-in-fact acts as if he/she were you, in whatever capacity you allow them. Therefore, your agent must be someone you trust implicitly with all your financials and property. Often, that person is a spouse, parent, child, or sibling, but can be some other trusted family member or friend in many cases. In any case, this must be someone you trust and have known for an extended period of time.

In terms of what powers to give to your attorney-in-fact, that is entirely up to you and what purpose the PoA will serve. You can make a power of attorney very specific, so that, say, your sister may deposit certain checks into a specific bank account, or your friend can sign a deed to sell a piece of property in your absence. In the other direction you can give your attorney-in-fact the power to perform any act that you could undertake, including making decisions regarding taxes, filing lawsuits, and borrowing money in your name. You can determine the breadth of the PoA, and nearly anything is possible. Usually, a spouse has a general Durable Power, which gives broad powers to buy, sell, gift, loan and borrow property for you.

Also, you must decide when the PoA is to become effective, either immediately or when you become incapacitated. Basically, the power can become effective only when you can’t make decisions for yourself (with a doctor’s opinion) and disappears when you can, or it can start the moment you sign it and last the next 60 years. In addition, you can determine whether the PoA end at a given date or time, if it ends when your incapacity ends, or whether it is good for an indeterminable time.

With my estate planning clients, I usually recommend a broad Durable Power of Attorney, that allows the attorney-in-fact to perform any task that the client could, including making gifts, making property decisions to enhance the client’s tax situation, make distributions to ensure proper receipt of entitlements like Social Security and Medicaid, borrow and loan money, and sell/encumber real estate, so long as the attorney-in-fact is absolutely trustworthy. (And I have counseled clients against that move in situations where the agent was questionable.)

A properly drafted power of attorney can allow an elderly lady, who isn’t able to make it to the bank anymore, to let her son handle her bills and Social Security payments, or it can allow your wife to sign the paperwork for the purchase of your new house while you’re out of town for work.

That’s some of the good from Powers of Attorney. Here’s the bad: the Power of Attorney lets any third party treat your attorney-in-fact as if that person is you. And your agent can make any decisions allowed under the PoA. Without you knowledge or approval (warning: pay story). Daily, there are stories in American newspapers and news programs about elder abuse and the use of powers of attorney to defraud, abuse, and steal from people. And often, the third-party to the transaction will be able to claim innocence – meaning, the only course of action, after the fact, to get back missing property or assets means bringing civil and criminal cases against the agent, often a family member. Special care should be taken in the decisions surrounding the creation of your Power of Attorney to avoid these serious problems.

Regardless of your decisions about the details, a Durable Power of Attorney is an indispensable part of an effective estate plan, and needs to be part of your planning. Talk to an attorney about the best way to accomplish creating your own, and picking the right attorney-in-fact for your situation.

(Part 2 of the post discusses Medical Powers of Attorney – coming right up…)