Estate Planning

Considerations When Creating a Power of Attorney

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What is the purpose of a Power of Attorney?

If you are an adult with capacity, you, as the Principal, have the right to designate an Agent, sometimes called an “Attorney in Fact” or “Financial Agent”, to manage your financial affairs for you.

When is a Power of Attorney effective?

The authority of an Agent under a Power of Attorney is only ever effective while you, the Principal, are alive.

            You may choose, for convenience or other reasons, to make your Agent’s authority effective immediately upon signing a Power of Attorney; this means that your Agent can handle your financial affairs now, whether or not you are able to manage them yourself. Alternatively, you may choose to make your Agent’s authority effective only upon the occurrence of a specific event, such as your incapacity to manage your own affairs. When an Agent’s authority only becomes effective at some later date, it is called a “springing” Power of Attorney. There are advantages and disadvantages to these choices, which will be discussed further herein.

            Because your Agent’s authority terminates upon your death, a Power of Attorney is not generally, by itself, sufficient to manage your financial affairs as part of your estate planning. However, it is an important part of a comprehensive estate plan, because it ensures that you have the opportunity to designate someone you trust to manage your financial affairs.

Do I need a Power of Attorney even if I have a trust?

If you have a trust-based estate plan, your successor trustee is authorized to manage any financial accounts brought under the umbrella of your trust – both during your life (as you direct and/or upon your incapacity) and after your death. It is true that your Agent under your Power of Attorney is only authorized to handle financial matters that fall outside the umbrella of your trust, and it is true that your estate plan may contemplate bringing all assets under the umbrella of your trust, meaning that if you have a successor trustee, there would be no role for your Agent under your Power of Attorney to play – but it is still important to have a Power of Attorney to govern any assets that may be left outside your trust (accidentally, or as the result of strategic planning). Because they perform similar functions, you may wish to consider naming the same individuals to serve as your Agents under your Power of Attorney and as your successor trustees. You should discuss the specifics with your attorney.

What is the scope of the Agent’s authority – limited or general?

The scope of an Agent’s authority under a Power of Attorney can be tailored to your needs and desires.

            An Agent’s authority may be limited, meaning the Agent is only authorized to act in certain ways, or with regard to certain matters. This may be particularly useful as a convenience measure. For example, consider the following circumstance:

Yvonne owns a small construction business and regularly buys and sells properties. However, Yvonne is scheduled to be out of the country on vacation for a month and she doesn’t want to lose out on any business opportunities while she is gone. One solution is that Yvonne may grant an Agent, likely a trusted employee, a limited scope of authority to manage certain business affairs on her behalf, for example, the purchase and sale of properties held in Yvonne’s name. Upon her return to the country, Yvonne may revoke (or, for convenience, may maintain) this limited, immediately effective Power of Attorney.

            An Agent’s authority may also be general, meaning the Agent is authorized to act in any way that the Principal could act (or, if the Principal is incapacitated, in any way the Principal could have acted if the Principal were able to act). In other words, the Agent steps into the Principal’s shoes.  

What does it mean to describe a Power of Attorney as “durable”?

When a Power of Attorney is “durable”, that means that the power(s) granted to the Agent continue even if the Principal becomes incapacitated. Therefore, the most common form of a Power of Attorney drafted as part of the estate planning process is called a “General Durable Power of Attorney” to indicate that it is general in that is gives broad authority to the Agent and that it is durable in that the authority continues even if the Principal becomes incapacitated.

Should my Agent’s authority under my Power of Attorney be effective immediately, or should it spring into being only upon my incapacity?

This is a question that should be discussed with your attorney because there are advantages and disadvantages that must be weighed according to your unique circumstances.

            Effective Immediately. As discussed above, making your Agent’s authority effective immediately may be convenient and expedient in that your trusted Agent can act on your behalf now. However, this also opens the Principal up to the possibility of the Agent abusing her authority, by exercising that authority in a way that the Principal does not approve of. For example, Yvonne’s employee could, theoretically, purchase a toxic waste dump site (an unwise investment that Yvonne never would have considered or approved herself) but Yvonne is still obligated on the purchase because the Agent acted within her authority.

            Effective Upon Incapacity. Making your Agent’s authority effective only upon your incapacity can certainly be protective because it only allows the Agent to act if you cannot, however, it also creates impediments to allowing the Agent to act expeditiously because your incapacity to act must be demonstrated in some way before the Agent’s authority springs into being. Although incapacity may be obvious and easily documented in many circumstances (e.g., because the Principal is in a coma), there are circumstances in which capacity wanes, and the problems may be immediately apparent to those closest to the Principal, but not be readily documented. Consider progressive dementia, for example, wherein the afflicted person may begin making less and less rational financial choices and those closest to the Principal may become concerned; however, if the Principal is unwilling to be evaluated for capacity, the Agent’s hands may be tied and the Agent may be unable to step in to prevent financial disaster.

Some sensitive powers must be explicitly granted to your Agent and should be discussed with your attorney. Under the law in California, there are certain powers that must be explicitly granted to your Agent if you wish your Agent to have these powers (Probate Code §4264). For example,  the following powers must be explicitly granted: the authority to create or modify trusts; to make gifts; to change beneficiary designations on life insurance or retirement policies; to make loans. Each of these powers comes with a host of advantages (mostly, providing flexibility to your Agent) and disadvantages (namely, giving your Agent expansive authority that could be exercised in ways you wouldn’t approve of). You should work with your attorney to weigh the advantages of flexibility against the need for protection.

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