Powers of attorney that allow someone else to make financial or legal decisions on your behalf are an essential part of your estate plan. Various types ensure that your wishes will be carried out if you become incapacitated, providing security for you and your loved ones.
Think of crafting your estate plan as fitting together pieces of an intricate puzzle. Every plan has many parts and works seamlessly as a whole only if each part is properly designed to fit in with the rest. A power of attorney grants another person the legal authority to make decisions on your behalf.
There are many circumstances in which you might become unable to make financial or legal decisions on your own behalf, whether due to illness or absence. Having a proper power of attorney included in your estate plan allows someone you trust to do so in your place. So a power of attorney is one of the most important pieces of the puzzle. Without it, your careful plans and express desires might not come to fruition.
You must be mentally competent in order to execute a power of attorney, so it is important to do so when you initially create your estate plan rather than waiting until later. Many, if not most, states require that a power of attorney be written, witnessed and notarized. These requirements are similar to the requirements for a will, although the latter may be more stringent.
Being able to take care of witnessing and notarizing multiple documents at one time is just one more reason to grant a power of attorney at the same time you're writing your estate plan. And there's no reason to worry if you set it up well in advance and find you want to change the person named (the “agent”) down the road; as long as you're still mentally competent, you are free to change it at any time.
Choosing an agent starts with thinking about who you trust most to manage your financial affairs. Often, a spouse or adult child is the reasonable choice, but it's possible to love them while having concerns about their ability to handle complex financial matters. If that's the case, you can choose another relative or close friend.
You should also nominate a second choice in the event that the person you named is not able to serve as your agent. This is especially important if you name a similarly aged spouse, relative or friend, and even more so if you and your spouse name each other. If you both become incapacitated, neither of you could serve for the other, so having a second choice makes sense.
Once you've chosen an agent, it's time to consider what type of power of attorney is right for you. Powers of attorney may be general or limited. A general power of attorney gives your agent the right to act on your behalf in all situations, whereas a limited power of attorney is granted for a specific purpose and a specific, usually short, period of time. Most estate plans include general powers, and the main differences lie in when the general power takes or loses effect. What are the options?
Non-durable power of attorney
A general, non-durable power of attorney is general because it gives your agent all of your individual rights. This person can sign your name to any contract and you would be legally bound to abide by it. They could also pay bills in your name or trade stocks on your behalf. But when you die or become incapacitated, the power is revoked.
Thus, it is not typically the right choice when you are creating your estate plan, since the purpose of including a power of attorney in your estate plan is to make arrangements for what would happen if you become incapacitated. You are free to include more than one type, however, and including a non-durable power alongside one of the other two options may be right for you.
Durable power of attorney
A durable power of attorney takes effect immediately, and remains in effect after you become incapacitated, terminating only upon your death. It is a good choice for many people crafting estate plans because if you don't have a durable power of attorney, no one other than a court can decide to appoint someone to manage your affairs if you become incapacitated. The person they choose might well be someone you would never have chosen yourself. The way to avoid this outcome is to include the power in your estate plan from the beginning.
Springing power of attorney
You may be thinking that a durable power of attorney would be nice to have, but be concerned that it takes effect right away because you're perfectly healthy and don't want someone having that kind of power over your life right now. Instead, you want it set up just in case. If this is you, then a springing power of attorney is a better choice.
A springing power of attorney allows your agent to act on your behalf if, and only if, you become incapacitated. If you go this route, it is important to specify in detail exactly what circumstances constitute your incapacitation. For example, would you need to be on life support, or simply hospitalized? Is illness even a requirement, or would being out of the country and unreachable suffice? The more detail that you include, the better.
Speaking of detail, it's important to have a qualified attorney draft whatever power of attorney you choose to include in your estate plan. If this essential puzzle piece isn't properly drafted, then the person you carefully chose as your agent may not actually be able to exercise the power. And at that point all of your careful planning would be for naught.
While you may not feel that you have enough assets for it to “matter,” the truth is that it always matters. Someone needs to be able to pay the bills to keep the lights on in your home while you're in the hospital. It may not be pleasant to think about, but by taking care of it now, you're removing one less worry for your loved ones if a worst-case scenario occurs. Hopefully, you'll be able to put it aside and not think about it for a long time. And if it's needed, it will be there.