There was a time when powers of attorney were considered a “throw in” in the estate planning process, to be routinely added to the documents deemed more essential to the estate plan, usually wills and trusts. After all, powers of attorney forms can be purchased at a local office supply store or ejected from a word processor at the touch of a button. This cavalier relegation of powers of attorney is, or should be, a thing of the past.
People are living longer. Due to medical advances, the fastest growing segment of the U.S. population is people over age 65 and the risk of serious incapacity increases with age. The objective of disability planning is to establish mechanisms to shift control of a client’s assets from the client to agents chosen by the client, who will manage the assets in a manner the client would approve of.
What is the alternative to planning? Generally, the default position for an incapacitated person who has not properly planned is a guardianship. Establishment of a guardianship is costly and administratively burdensome. A formal court petition is required; a lawyer will be needed to represent the disabled person; a public hearing may be required and the disabled person may be required to attend; a surety bond must be obtained by the guardian; annual accountings must be filed with the court and approved; and a final accounting must be filed and approved when the ward dies or the guardianship is terminated. Aside from expense, who among us wants a public determination that one is incapable of handling his affairs?
The simplest alternative is the power of attorney, a written instrument authorizes an agent to perform certain acts. The power can be broad, allowing the agent to do any act that is lawfully delegable (e.g., a power cannot authorize the making of a will for the principal), or narrow, authorizing only certain acts or perhaps only one act, e.g., transferring a specific parcel of real property. Compared to guardianship, the power is much less expensive to implement, it does not require public judicial proceedings or a judicial determination of incapacity; its scope may be as broad or as narrow as particular circumstances require; it may be revoked when it is no longer warranted; it does not require court supervision; and it does not result in any loss of rights on the part of the principal.
Usually, a power of attorney should be a “durable” one. Under the common law, a power of attorney was ineffective tool for disability planning because it terminated on the incapacity of the principal, i.e., at precisely the moment the authority is needed. A “durable” power of attorney is, by its terms, effective despite the principal’s later loss of capacity. It must specifically provide either that: (1) it is effective immediately and is not affected by the subsequent disability or incapacity of the principal; or (2) it will become effective only upon the incapacity of the principal (a “springing” power.
A durable power can be used in a wide variety of transactions, some mundane (such as paying expenses and dealing with the tax authorities) and some more sophisticated, such as funding a revocable trust, or making gifts for estate planning purposes and perhaps to qualify for Medicaid benefits. An agent can be authorized to deal with retirement plans, for example, making IRA contributions and electing payout options.
The power has too often been treated as simply a standard form, one supplied to all clients with little consideration or discussion. Virginia has now adopted the Uniform Power of Attorney Act. Under the Act, certain authorities require specific grants. This gives the attorney and the client the opportunity to discuss the desired breadth of the power. For example, unless specifically authorized in the document, an agent may not:
1. Create a living trust;
2. Make a gift;
3. Create or change rights of survivorship;
4. Create or change a beneficiary designation.
Determining who is to exercise the authority granted in the power is a critical decision. Aside from the ability to make what may be sophisticated financial decisions, the holder of the power may fall into a maelstrom of the sensitive dynamics that may exist, for example, in a blended family.
In short, a power of attorney should be carefully crafted after serious consideration and discussion. It is not, as it too often has been, a matter to be taken lightly. In fact, it may ultimately prove to be a document of greater significance than a will.
Ted Troland is an attorney with Glenn Feldmann Darby & Goodlatte – visit www.gfdg.com to learn more.