Every day people come into my office and ask for a will. And, every day, I spend a portion of my meeting with them explaining why they also need a power of attorney. A power of attorney is the most important document in your estate plan to preserve your dignity. It allows you to appoint the person to make your personal and financial decisions when you are no longer able to do it.
As part of any well-rounded estate plan, you need documents that, of course, transfer your assets at death. But you will also need documents that protect you and your assets during your lifetime. If you are not entirely convinced that you need a will, then hopefully I convince you here that you absolutely need a power of attorney.
WHAT IS A POWER OF ATTORNEY
In general terms, states have 2 types of powers of attorney (POAs). The first is a POA for limited purposes. This could be a power of attorney that operates for a specific purpose (like selling property) or for a specific amount of time (while out of the country).
Today, I want to talk about the second type, which is a durable power of attorney. Like it’s name suggests, a durable power of attorney is meant to endure beyond a person’s incapacity.
Before states allowed durable POAs, a power of attorney was only effective for as long as a person would be able to give his or her own consent. Now, all 50 states have allowed for a power of attorney to “spring to life” upon a person’s mental or physical incapacity.
The power of attorney document simply designates an agent or an attorney-in-fact to make decisions on behalf of the principal (the person making the POA). A person who is designated as the agent can make healthcare, financial, or property decisions on behalf of the principal for so long as the principal is incapacitated or incompetent during his or her life.
NOTE: A POA will always terminate upon death. The POA essentially follows a person to his or her grave. At the point of death, the will takes over!
WHY DO I NEED A POWER OF ATTORNEY
My number one reason for recommending a power of attorney is not just for your own children or the preservation of your own assets. On the other hand, my number one reason for recommending a power of attorney is to preserve your DIGNITY.
If you do not have a power of attorney appointed and you are incapacitated (mentally or physically), then in order for anyone to make a decision on your behalf, that person will have to secure guardianship over you.
WHAT IS GUARDIANSHIP?
Unlike a POA where the document is created by the principal, a guardianship is created by a court. This means that you must prove that you are incompetent and in need of assistance in front of a judge.
A guardian is a court appointed fiduciary who makes decisions on behalf of an incapacitated individual.
Who wants to be hauled into court to prove that he or she is unable to make his or her own decisions?
Sadly, regardless of the delicate touch of the judge or attorney, this results in elderly persons being asked who the president is, whether they know the people around them, and whether they know the balance in their checking account. It’s awful. A simple POA solves the problem.
Further, unlike a POA, a guardian will only ever have as many powers as a court allows them. Want to sell the family home to pay for mom’s care: ask the judge. Want to file for a tax refund: ask the judge. Want to move facilities for better care: ask the judge.
Plus, the guardian is required to file regular accountings with the judge to prove all assets and income are properly received and accounted for. This all leads to more headache and more attorney fees.
The simplest way to avoid a guardianship is to have a Power of Attorney.
WHAT DOES A POWER OF ATTORNEY DO?
Maybe I convinced you that a Power of Attorney is better than a guardianship, but you might still want to know how the document serves you. Well, in short, a Power of Attorney can do anything allowed by state law.
Most states have drafted their POA language to include nearly every power of an individual in a POA. In essence, the POA cloaks the agent in the clothes of the principal. And, unlike a guardianship, a POA can include any financial or healthcare decision that you can make personally.
A POA can even achieve estate planning objectives such as changing beneficiaries, establishing trusts, or transferring property. However, a POA can NEVER sign a will on behalf of the principal. Wills can only be made personally.
HOW DO I MAKE A POWER OF ATTORNEY?
Powers of attorney are simple and straight-forward documents that wield an inordinate amount of power. Thus, they should be crafted with care. In order to create a POA, I always recommend that you consult with an attorney. (However, to be fair, there are a number of great online resources that create state-specific powers of attorney for individuals.)
Your attorney will need to know what kinds of powers you want to delegate (financial/health/etc) and to whom. Always choose someone whom you trust implicitly. Do not choose your firstborn simply because you feel obligated to do so. Instead, choose the person you know will always answer the hospital when called, will know where the checkbook is, and who will communicate openly and honestly about your transactions.
Plus, POAs are simple to tailor to your needs. If you want to allow some powers and eliminate or limit others, you can. If you are comfortable with your named agent having the authority to create a trust but do not want him to change your beneficiaries, do it! Your attorney can easily remove and replace powers to accommodate your family needs –not so in a guardianship.
DRAWBACKS OF A POWER OF ATTORNEY.
Of course, I must tell you about potential pitfalls that pose traps for the unwary.
First, your agent (in most circumstances) is not eligible to act as your agent until you are actually incapacitated. However, not all institutions will know whether you are incapacitated or not. Thus, if Little Jonny goes to the bank with the POA in hand, he may have access to the account without your knowledge.
Contrastingly, even if you are incapacitated, the bank could require proof. This could frustrate your agent, but a simple doctor’s note should suffice.
Finally, your agent will want to know the extent of his or her potential liability. So long as your agent acts in your best interest, he or she will always be free from liability. Further, if someone challenges your agent’s decisions and your agent proves that he or she acted in your best interest, then you pay for it out of your own funds not the agents. However, if it is proven that your agent mishandled your funds, then he or she is responsible for paying you back. In either case, a challenge is lengthy and expensive.
YOU STILL NEED A POWER OF ATTORNEY.
If you are still reading this, then it means that you did not run right out and get a POA! Please do! All persons of any age (over 18) need to be sure to have a POA. The POA is the simplest tool in an estate planner’s toolbox to preserve your dignity and avoid stress.
If you want to know more about the estate planning process, click here.