>> Chosing your Attorney-In-Fact
>> Chosing your Attorney-In-Fact
The Durable
Power of Attorney
by Robert Coplan
Ernst & Young Financial Planning Reporter
An Ounce of Prevention is Worth a Pound of Cure
Preparing
a will is truly a smart move, one of the most effective ways of providing
for the proper management and disposition of your estate after death. but
what would happen if an illness or injury prevented you from overseeing
your financial affairs while you're still alive?
Who's Minding The Store?
In
the event you were incapacitated, your family might have to petition a court
to appoint a guardian or conservator for you so that your finances continue
to be properly managed. Meanwhile, the inevitable delays associated with
the court hearings could result in unpaid bills and taxes, mounting legal
expenses, and even public disclosure of your disability.
Some
married couples think that the spouse who isn't disabled can simply step
in and take over for the other, but that's often not the case. Without a
properly-drafted durable power of attorney, he or she may not have the legal
authority to perform certain acts on behalf of the disabled spouse, even
if the property is held in joint tenancy.
Its Durable and Powerful
The
good news is that there is a convenient alternative to guardianship. A durable
power of attorney is one of the safest, simplest, and cheapest ways of continuing
the management of your affairs in the event of your incapacity. It is typically
a short legal document prepared by your lawyer stating simply that you (the
"principal") grant authority to one or more individuals (your
"attorney(s)-in-fact") to manage your financial affairs (and personal
affairs such as health care, if you wish) on your behalf.
You
retain the right to modify or revoke the power at any time, and it terminates
automatically on your death. Remember though, that if you do revoke the
power without informing third parties (e.g., a bank), they can continue
to rely on the directions of your attorney-in-fact without penalty. Keep
in mind also that if a guardian ultimately needs to be appointed for you,
that guardian can revoke the power just as you could have done.
The
power is "durable" because the document creating it specifically
states that it remains in force even if you become disabled or incapacitated.
This feature is what gives the power its value in ensuring continuity of
your financial management.
General & Special Powers
A "general"
durable power grants your attorney-in-fact the authority to handle virtually
all financial matters you would ordinarily manage yourself. But if you prefer,
you can grant a "special" durable power, under which the attorney-in-fact's
authority is restricted to one or more specific functions designated by
you. Of course, the general power is better designed to avoid the problem
of guardianship.
If
you're a business owner, you may want to consider executing two durable
powers with separate attorneys-in-fact: Your spouse or other close relative
could handle your personal affairs, and a business associate or trusted
advisor could handle the business. The underlying document could provide
that the latter be paid a fee.
Typically,
a durable power takes effect when it is created so that the designated attorney-in-fact
can assume responsibility as soon as it becomes necessary. To be sure that
control is not assumed prematurely, you may want to give the original copy
of the document to your lawyer or accountant for safekeeping, since your
attorney-in-fact cannot legally act for you without possession of the document.
Another
way of dealing with the problem of premature exercise is through a "springing"
durable power, which is worded so that it becomes effective only in the
event of the principal's disability. One drawback to the "springing"
power, however, is that while all 50 states and the District of Columbia
recognize durable powers, the validity of a springing power is unclear in
some states and specifically denied in a few others.
Another
problem stems from the fact that operation is triggered, or sprung, by disability.
In some cases it could be unclear to the attorney-in-fact whether disability
has in fact occurred and that it is safe to begin acting for the principal.
Thus, the document must contain a clear definition of disability, such as
certification of two designated physicians.
Disability Planning
with a Revocable Trust
Like
a will, revocable trusts can provide for the management of your assets after
death. When you set up a revocable trust, you direct a trustee how to manage
and distribute the trust assets legally owned by the trustee. Unlike a will,
however, they can also provide an asset management function during your
lifetime (e.g., in the event of your disability).
There
are various reasons why people establish and fund revocable trusts. But
if you otherwise don't feel you need a revocable trust and you're only interested
in guarding against disability, you don't have to "fully" fund
the trust. You can generally create it with a nominal amountsay $10and that
will make it available as a "standby trust." The durable power
of attorney can be drafted to direct the power holder to fund the trust
with selected assets, or with the principal's entire estate upon becoming
incapacitated.
Spread the Word
If
a durable power of attorney makes sense for you, it's even more sensible
for aged parents and any other older close relatives. These senior citizens
should be encouraged to consider a durable power in your favor to relieve
you of a significant burden if and when they are unable to shoulder their
own responsibilities.
For
example, assume your widowed parent suddenly became incapacitated and unable
to write checks. Without a durable power in place, you might have to pay
bills out of your own pocket, at least temporarily, and you would be powerless
to make other important decisions on your parent's behalf.
Conclusion
A durable
power of attorney can reduce the physical, psychological, and financial
burdens that will fall on your family if you become disabled. And durable
powers you hold will do the same for older members of your family. Although
some form of this financial planning tool is provided throughout the United
States, the state laws and required forms are not identical, so consult
your legal advisor before proceeding.
Editor's
Note: Robert Coplan is editor of
the Ernst & Young Financial Planning Reporter, P.O. Box 33337,
Washington, D.C. 20033, 1 year, 6 issues, $96. Visit the Web site at www.ey.com/pfc.
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