The Durable Power of Attorney:
An Essential Financial and Estate Planning Tool
Estate planners warn their clients about the risks of dying without a will. Failing to plan for future incapacity could also result in irreparable harm to an individual and his or her family. Furthermore, the likelihood of a long-term disability is much greater than that of death during much of a person's lifetime. The risk of serious incapacity increases with age, and the demographic trends indicate that the segment of the population over age 65 is growing much faster than the rest of the population. The durable power of attorney is an inexpensive device that permits a person to designate a family member or professional adviser to make critical financial and personal decisions when incapacity occurs.
What is power of attorney?
A power of attorney is a document in which the client (the principal) authorizes an agent (otherwise known as an attorney-in-fact) to act in his or her behalf. The power may be quite limited: for example, permitting the agent only to make deposits to the principal's bank account. Or the power can be broad, authorizing the agent to engage in nearly any transaction that the principal could.
A power of attorney is also limited in its duration. It can be expressly limited in time. For example, the agent may be given a power of attorney that terminates when a specific act is completed. Even if no duration is specified, a conventional or common-law power of attorney becomes inoperative upon the incapacity of the principal. To extend the power beyond the incapacity of the principal, the power must be made expressly durable.
A durable power of attorney takes effect immediately when the document is executed even thought it may not be needed until much later, if ever. Some individuals, however, are reluctant to grant an agent broad powers to act at a time when the principal is capable of acting. These people would prefer to use a "springing" durable power of attorney. Recognized in many states, a springing power lies dormant and ineffective until a designated time, such as the principal's incapacity.
When should durable power be used?
A durable power of attorney should be used whenever an individual feels he or she will need someone to make important financial and/or personal decisions after the individual loses capacity. Most individuals will have assets or personal affairs that must be managed should they lose capacity. If the individual who has a complex estate plan, the durable power is essential. A wealthy individual who has begun his or her estate plan by making lifetime gifts or charitable donations will need someone to have the power to continue making such gifts or donations after the donor loses capacity. It would often be devastating to the individual's estate plan if the gifts could no longer be made.
What can durable power accomplish?
One of the primary uses of a durable power is the delegation to an agent of the management and control of the principal's financial affairs during his or her incapacity. The following is a sample of the types of property management powers that might be considered for a power of attorney:
- to make deposits and withdrawals from bank accounts
- to sign tax returns and appoint qualified individuals to represent the principal with the IRS
- to make investment decisions
- to deal with retirement plans, including IRA's
- to have access to the principal's safe-deposit box
- to create a living trust and fund a previously created living trust
- to revoke or change beneficiary designations
- to vote the principal's stock
- to forgive or collect the principal's debts
- to enter into contracts on behalf of the principal
- to make gifts on behalf of the principal
- to disclaim gifts or bequests made to the principal
- to deal with life insurance on the life of the principal
Why must the durable power be drafted carefully?
An individual might be tempted to avoid attorney's fees by purchasing a durable power document form from a business supply store or using consumer-oriented computer software to draft the power. However, a power of attorney is useful only if it works as intended. The likelihood of success is far greater if the appropriate professional advice is sought.
Because the possibility of abuse exists when the agent is managing the principal's financial assets, financial intermediaries such as banks, stockbrokers, and insurers are often hesitant about complying with broad powers granted to an agent. If court intervention is required, it will be costly and will perhaps further limit the flexibility of the agent to use the durable power since the courts are likely to construe the power narrowly.
Drafting the document so that the powers granted the agent are very specific is helpful in persuading third parties to enter into transactions with the agent. The more specific the language, the more likely it is that third parties will honor the power because the intent of the principal is expressly stated in the document.
Another important point is the effectiveness of the exercise of a power of attorney for tax purposes. The IRS has successfully challenged and denied the annual gift tax exclusion for gifts made under broad-form powers of attorney in which the agent was not expressly empowered to make the gifts. A similar result should occur if the agent attempts to disclaim property inherited by the principal. The IRS may treat the disclaimer as invalid for tax purposes. A power of attorney granted without these express powers would render these estate planning techniques ineffective and increase the amount of estate taxes the principal's family will have to pay.