This article will help you understand the importance of creating a power of attorney and will answer many of the common questions you may have about what a power of attorney is and how it operates. If you decide a power of attorney should be a part of your estate plan for the future, an estate planning attorney can help you to make the informed decisions that are required to create an effective power of attorney that accomplishes your goals and that is right for you.
Establishing a proper estate plan requires time and serious consideration of many different aspects of your life. It can require uncomfortable conversations with loved ones and difficult decisions about retirement, financial savings, and family expectations. One of the most difficult parts about estate planning is simply making decisions about the future.
- What is the most favorable tax plan?
- Should I execute a revocable living trust?
- Should I provide for certain family members?
- To which charitable organizations should I contribute?
- Who will handle my affairs if I become incapacitated?
The list of decisions to be made can seem endless.
If you are estate planning for the future, one of the decisions you should make — in fact, one of the most important decisions you should make — is the decision of who should make your decisions for you, should you become unable to make them. This is called a “power of attorney.” And although deciding to create a power of attorney requires that you make several more decisions about your future, choosing the appropriate power of attorney can be one of the most important estate planning decisions you make for achieving your long-term financial or health care goals.
A power of attorney is simply a legal instrument through which you (the “principal”) authorize another person (the “agent”) to act on your behalf with regard to specific issues that you designate. The most common issues for which a person creates a power of attorney are:
- Personal finances
- Operation of an existing business
- Medical decision-making
The power of attorney authorizes the agent to act as an attorney-in-fact for the principal, when the principal is unable or unwilling to make decisions in these matters.
There are many reasons why a power of attorney may be important to you and your loved ones. Consider all the aspects of your daily life for which you make financial or medical decisions on a regular basis:
- Using bank accounts
- Operating a business
- Paying bills
- Utilizing services in the home
- Saving money
- Making health decisions
- Taking medicine
Now imagine that you suddenly become incapacitated by an unforeseen illness or unfortunate injury. These circumstances are difficult to imagine and, unfortunately, many fail to prepare for such circumstances until they happen. However, if (or when) they do happen:
- Who will access your bank accounts?
- Who will make decisions about your business?
- Who will pay your bills?
- Who will make your medical or health care decisions?
For many who are married, the answer to all of these questions is, “My spouse.” And for many issues to be decided, a spouse automatically has the authority to act in these areas. But what if your spouse is no longer living? Or is injured in the same accident? Or cannot run a business or balance a check book? What if your spouse simply cannot make difficult decisions or is timid in asserting authority? What if your spouse simply disagrees with your decisions or the decisions of other family members? Does your spouse even know what you would want to do about these issues? If so, is he or she willing to make decisions according to your wishes rather than their own?
If your spouse is not available, willing or able to make decisions for you that are in your best interest or conform to your wishes, a power of attorney can ensure that someone is in control of your affairs who will make sure decisions are made the way you would want them to be made if you were able to make them. Your estate planning attorney will help you make sure the control of your affairs rests with the person you trust to serve in this capacity.
One of the advantages of a power of attorney is that you can define the terms of it. You can decide exactly what issues you want to be decided on your behalf and how much authority you want to give to your agent. You can even decide when you want your agent's authority to begin and when you want it to end. Your estate planning attorney will help you determine the specific terms of your power of attorney that are best for you.
There are basically three kinds of powers of attorney:
A general power of attorney gives your agent the power to manage your affairs while you are alive. You must create your general power of attorney while you have the legal capacity to do so and be able to give clear and concise instructions to your agent. The term of the appointment may be for a fixed period of time, or you can revoke the appointment at any time, as long as you continue to have the legal capacity to do so. If you do not revoke the agent's authority before you die, the agent's authority will automatically terminate upon your death.
Unlike a general power of attorney, a durable power of attorney continues to operate even if you become incapacitated or unable to handle your own affairs. If you do not expressly designate your power of attorney as “durable,” it will automatically terminate if, later, you should be determined to be incapacitated.
A limited power of attorney simply limits the powers of the agent to those powers that are designated by the principal, such as the power to sign checks, operate a business, or make health care decisions. The agent who is authorized to make health care or medical decisions is sometimes referred to as a “health care proxy,” “patient advocate,” or “health care representative.” Powers granted under a limited power of attorney apply only when, and until, the principal designates in the power of attorney.
What is important to understand is that, no matter which type of power of attorney you create or which powers you authorize your agent to exercise, your agent becomes your “fiduciary,” just like a trustee is to the grantor of a trust. This means that your agent is obligated to make decisions that are in your best interest or conform to your wishes, based on the terms expressed in the power of appointment. Your estate planning attorney will help you to determine which type of power of attorney is best for you and will include terms and powers that accomplish your estate planning needs.
In addition to the powers and rules that you include in your power of appointment, every state has specific rules by which all agents of powers of appointment are governed. Currently there are 30 states that adopt the same rules, which are found in a document called the Uniform Power of Attorney Act. Other states have adopted rules in their individual state probate codes that are similar to the Uniform Power of Attorney Act, but may operate slightly differently. Your estate planning attorney will fully explain the specific rules that apply in your state.
It is quite common that someone will automatically appoint a spouse or adult child to serve as their agent under a power of attorney. Quite often, this is an appropriate choice. However, many people simply automatically appoint a spouse or child as their agent and then hope that he or she demonstrates the qualities necessary to be a good one. This is not an appropriate choice.
Because your agent may be making financial or medical decisions on a daily basis that affect not only your financial or medical future, but the future of those whom you love and wish to provide for, it is important that you understand the qualities of a person who is likely to be an effective agent. Once you decide what qualities are important to you and your estate planning goals, you can then carefully consider who possesses those qualities and who might serve as your agent.
Here are some effective qualities of an agent that you might consider, depending on your circumstances:
- Pays close attention to detail
- Understands the duties of the role and is committed
- Understands personal financial matters
- Understands how to run a business
- Has the ability to collaborate and cooperate with professionals like attorneys, accountants, and other third parties
- Lives in close proximity to you or your property
- Does not try to influence you in your decisions
- Understand you, your values, and your principles
- Decisive and resolved
- Able to communicate and cooperate with your family members
You might discuss with your estate planning attorney which qualities in an agent you should look for, based on your specific estate planning needs.
It is highly recommended, of course, that you discuss with your prospective agent the obligations of the role, the powers you plan to assign, and his or her willingness to serve well in this capacity. Serving as an agent under a power of attorney can be difficult and demanding. If you sense that the person you are considering is not fully committed, is unsure, or does not seem capable, then this is probably not the right person for the job.
If you want to be sure about your agent's capacity to serve in this role before you execute your power of attorney, it may be prudent to include your prospective agent in some of the decision-making you do on a daily basis, and consider:
- Does your prospective agent agree with your decision?
- Does he or she have a strong opinion?
- Is he or she reasonable in making a decision?
- Does he or she try to influence you in your decision?
- How does your prospective agent communicate with third parties?
Obtaining a sense of how your agent is likely to perform is a prudent way to ensure that you are choosing the right person.
Once you decide on an agent, it is recommended that you periodically reassess your agent's performance, attitude, and willingness to continue serving in this role (or have your estate planning attorney make a periodic assessment), and terminate the agent's power if you are not satisfied. You always can appoint another agent. Also, you can appoint multiple agents with each agent having limited, narrow duties, if different persons you trust have particular qualities or skills to make specific decisions. For example, you might appoint your accountant or estate planning attorney to make your financial decisions, but appoint your sibling, who is a nurse practitioner, to serve as your health care proxy.
Understanding the need for a power of attorney is the first step toward effective estate planning for the future. If you determine that executing a power of attorney will ensure sound decision-making in your financial or health care future if you should suddenly become incapacitated, you should make an appointment with an estate planning attorney to determine the correct power of attorney for your specific needs.