I’ve always said that the durable power of attorney is your most important estate planning document. It appoints your agent or agents (called your “attorney-in-fact”) to step in and act for you on financial and legal matters in the event you ever become incapacitated. It can permit them to pay your bills, make investment decisions, take planning steps, and take care of your family when you can’t do so yourself.
In theory, the durable power of attorney is a relatively simple document. All it should need to say is the following:
I, Joe Blow, hereby appoint Janet Planet to step in for me in the event of my incapacity to handle my financial and legal matters.
But in fact most durable powers of attorney run to several pages and involve a number of important decisions. Now, two nationally-known estate planners, Jonathan Blattmachr and Martin Shenkman, have written a whole ebook just on powers of attorney: Powers of Attorney: The Essential Guide to Protecting Your Family’s Wealth.
Here are some of the decisions you will need to make on your durable power of attorney:
- Who to appoint. Of course, you need to appoint someone you trust to have your best interests in mind. The person also needs to be organized and responsible and have the time available (or be able to make the time available) to carry out the functions of paying bills, guiding investments and handling any legal matters that may arise. Generally, people appoint family members to this role, but sometimes none of their relatives are appropriate, in which case they may appoint a friend or even an accountant, attorney, or clergy person. If there’s no one to appoint, despite the benefits of the power of attorney, the client may need to resort to a court-appointed conservator in the event of incapacity.
- How many agents to appoint. You may appoint one or more agents on your power of attorney. Having multiple agents allows more than one person to share the responsibility and permits them to divvy up tasks. If you appoint more than one, make sure that the document permits each to act on his or her own. Requiring them to act together provides checks and balances, but it could become very cumbersome if all of your agents have to sign every check or other document. Also, if you appoint more than one agent, make sure they get along and communicate. If not, difficult misunderstandings can arise. This is why we generally advise against naming more than two agents, though it’s not unusual for parents with three children not to want to leave one out, so they name three. We have seen some attorneys prepare two separate power of attorneys naming different agents rather than name two agents on the same document. This makes us uncomfortable since anyone dealing with either agent may not know that the other document exists and it may discourage communication between the agents.
- Alternates. In addition or instead of naming multiple attorneys-in-fact, you can name one or more alternates in case the first person or people you appoint cannot serve. For instance, you may name your spouse as your agent and your children as alternates. If you do name alternates, make sure the document is very clear about when the alternate takes over and what evidence he or she will need to present when using the power of attorney. Otherwise, banks or other financial institutions might deny access to accounts if they’re not certain that the alternate has indeed taken over. For this reason, we often advise clients to appoint multiple agents rather than one and then an alternate, if they feel comfortable doing so. This avoids any question of proof when the second agent steps in.
- “Springing” or current. The idea behind powers of attorney is that they will be used only when the person who creates it (the “principal” in legal speak) becomes incapacitated. Interestingly, traditionally powers of attorney expired when the principal became incompetent, the theory being that the attorney-in-fact stands in his shoes and can only do what he can do—if he’s incompetent, then so is his agent. Every state has passed laws providing for “durable” powers of attorney that survive the incapacity of the principal. But when should they take effect? One would think only upon incapacity—a so-called “springing” power of attorney. In fact, we advise against springing powers of attorney because they create a hurdle for the agent to get over to use the document. When presented with a springing power of attorney, a financial institution will require proof that the incapacity has occurred, often in the form of a letter from a doctor. Obtaining that letter will be one more task the attorney-in-fact will have to carry out, often when already overwhelmed dealing with a parent’s illness while still trying to stay employed and care for children. It can also mean a delay in access to funds needed to pay for care or to maintain a home. In most cases, if a client trusts someone enough to name her as his agent, he also trusts her not to use the document until the appropriate time. And if this trust is misplaced, then he can always revoke the appointment. A final argument for executing a current, rather than a springing, power of attorney is that it may be needed when the principal is competent, but unavailable. For instance, a financial or legal matter may come up while the principal is vacationing in Europe. It could be important that the attorney-in-fact can step in and act while the principal is out of the country.
- Gifting. While, in theory, powers of attorney could be very short, as is suggested above, they in fact go on for several pages listing the various powers the attorney-in-fact may carry out. This is because financial institutions and tax authorities often look for and demand specific authorization for the tasks the agent seeks to carry out. Often, powers of attorney authorize the agent to make gifts on the principal’s behalf, even though, strictly speaking, that may not be in her best interests. But it may well be what she would want to do if she were competent to act on her own—to support children and grandchildren or to take steps to reduce taxes or qualify for public benefits. Often, power of attorney forms limit these gifts to the annual gift tax exclusion—currently, $15,000 per individual per year—which, with the recent evisceration of federal gift and estate taxes, is meaningless for all but a few of the 1 percenters, since you have to give away $11.58 million (in 2020) to be subject to any gift taxes. So, in our opinion, this limitation should be removed from powers of attorney and, in addition, attorneys-in-fact should be empowered to make gifts to themselves. (Some argue that the power to make gifts to oneself can have adverse tax consequences if the attorney-in-fact were to pass away. Without going into details, we both disagree and feel that even if we were wrong, it would affect few people under the current tax regime.)
- Trust powers. Similar to the power to make gifts, it can be important to authorize the attorney-in-fact to make, amend and fund trusts on behalf of the principal. Power of attorney forms often permit the funding of preexisting trusts but not their modification or the creation of new trusts. These powers can be extremely important in the context of long-term care planning, asset protection, or special needs planning for spouses, children and grandchildren.
- Copies and Storage. Once the agents and wording of the power of attorney have been determined, how many originals should be executed and how should they be held? Most powers of attorney include language saying that a copy should be treated like an original, but this is not always honored by third parties. In addition, an original may be inaccessible. For instance, in transactions involving real estate, an original must be recorded with the deed. It will be returned, but perhaps not for several months. Our practice prepares three originals for our clients to execute. But, then, what should we do with them? Again, our practice is to keep one original in our safe and give two to the client. I can’t tell you how many times over the years clients have misplaced original documents. Clients may keep their originals themselves or give them to their agents. The usual practice is for clients to keep the originals themselves and to tell their agents where they’re located in case they are needed. We also create paper and digital copies of the powers of attorney (and other estate planning documents) that the client may keep or provide to agents and other family members.
One other important consideration is to see if any of the financial institutions with which you have accounts has its own power of attorney form. If so, make sure you execute their forms as well as a general durable power of attorney because banks and investment houses have been known to reject powers of attorney that are not their own for spurious reasons.
We could go on and discuss a myriad of other issues around powers of attorney, which is why they go on for several pages and why a whole book can be devoted to this topic, but most of these additional considerations are only of interest to practitioners in the field.