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A. Durable Power of Attorney

A. Durable Power of Attorney (POA).

Coupled with a Will, and an Advance Medical Directive (discussed later), the Durable POA is for many people a superior alternative to the simple living Trust in planning for disability or incompetence. These documents are more familiar to folks than the concept of a “Trust,” and their total cost is less than to prepare a Trust.

Let us begin with a few general points. A Power of Attorney (POA) is a document in which one person, the “principal” gives authority to his “attorney in fact” (who need not be a lawyer) to act on his/her behalf. The scope of the power can be quite limited – e.g., the purchase of a single real estate investment – or almost unlimited. The principal can even grant the power to make gifts of his/her property, but not to make a Will. Note that ALL Powers of Attorney – even the “durable” variety described below – end at the death of the principal.

There are two kinds of situations in which POAs are used. First, they can make business or financial transactions much easier, simply by allowing a busy or absentee party to send somebody to act in his/her place. For this purpose, a very extensive POA might be used, reciting a laundry list of specific powers pertaining to every conceivable business transaction. Note that many “do it yourself” forms instead use just broad, general language – “I give authority to my attorney-in-fact to do all things. . .”, with not many more specifics.

Experience shows that if the need for a POA can be seen in advance, it is better to prepare a limited POA, referring only to the matter at hand (i.e, “the purchase of the real estate in Anytown, USA, known as 123 Oak Street”) and specifying precisely the expiration date and full extent of the power. Without this limitation and specificity, the POA might not be accepted by finicky banks or others to whom it is presented. Additionally, some parties require that your signature on the POA be guaranteed by a stamp from your bank.

TIP: This is especially so with regard to real estate transactions. If you plan to use a stand-in at the closing, make sure he/she is acting under a POA that has been OK’d in advance by the other parties.

Secondly, and more important for estate planning, POAs can allow one to delegate broad authority over personal financial affairs even – and especially – in case he/she becomes disabled or incompetent. For this, a Durable POA is necessary. It is a very broad and detailed document that also states: “This POA shall not be affected by my subsequent disability or incapacity, or by the passage of time.” This sentence is what makes it “durable” – even if the principal “takes a licking,” this POA “keeps on ticking.” Without that sentence, state law would probably render the POA inoperative immediately upon the disability of the principal – precisely when it is most needed.

Assuming one has a trusted attorney-in-fact, the Durable POA can easily and inexpensively provide the peace of mind sought by many people contemplating disability. Note, however, that although the DPOA can help avoid the need for guardianship, if a guardian is, in fact, appointed, he/she is usually authorized by state law to terminate the DPOA. In a few states, the law automatically terminates a DPOA if a guardian is subsequently appointed for the principal.

You should understand that this kind of durable POA takes effect immediately – it does not wait until disability. Therefore, it is possible, in theory, for the attorney-in-fact to act independently, behind the principal’s back, even if the principal is healthy. Some people find this thought unsettling, but, usually, it ought not be. Presumably, of course, your attorney-in-fact is trustworthy beyond reproach. If there is any doubt about this, perhaps the Durable POA is just not for you.

An alternative to this kind of Durable POA is the Springing POA. This is a type of durable POA that works, and is worded differently – it does wait until disability, and only then “springs” into action. This can pose a big problem: There must be a formal determination of disability before the POA will be considered operative and be accepted. At best, this means at least a short delay and expense. (A springing POA might provide, for example, that two doctors examine the principal and attest to his disability.) At worst, there might be uncertainty, disagreement or squabbling among doctors and/or family over the degree of the principal’s disability. Banks or others might balk at recognizing the authority of the attorney-in-fact for this reason. When this situation unfolds, the matter often winds up in court – which was the very thing you wanted to avoid.

The springing POA is apparently used because some people just feel uncomfortable making a delegation of power today, while still healthy. While that sentiment is quite understandable, the potential problems should be considered, too.

For a POA to be valid, the principal must be of sound mind when signing it, even if it is to remain valid during subsequent disability (i.e., durable). The rules for determining adequate soundness of mind for a POA are probably not as clear cut as for establishing testamentary capacity to make a Will. State law might require greater mental capacity to prepare a valid POA than a Will. Even so, a POA should be valid if signed during a lucid interval within a prolonged period of incompetence.

TIP: Although blank POA forms are readily available, this is a document best prepared by an attorney. The trouble with any POA is that it is presented to banks and other third parties who can arbitrarily decline to recognize it for their own reasons. It is important to recognize that the party being asked to accept your POA is doing you a favor. If he/she/it has any reason whatsoever to fear “getting in trouble” for honoring the document, it might be rejected. A stock brokerage, for example, does not want to worry about following the instructions of an attorney-in-fact under a customer’s POA, only to have the customer file a lawsuit later, arguing that the document should not have been honored for some reason.

Experience shows that the one page, fill-in-the-blank POA form will simply not be acceptable if the attorney-in-fact is engaging in a transaction involving much money. That is especially so when there are any questions about the principal’s mental capacity. (This is also a good reason why it is best not to wait to prepare the POA until it is “needed.”)

Note, too, that most “do it yourself” POA forms are not durable. They therefore become invalid precisely when they are most needed – at the time the principal becomes unable to act for him/herself.

Banks and other institutions are concerned, too, over reports in recent years of abuses of discretion and “self-dealing” in the principal’s property by persons purporting to act under powers of attorney. Institutions do not want to risk claims by disgruntled account owners that their accounts have been spent down by dishonest attorneys-in-fact, using POA documents that were deficient in some respect and should not have been honored. They might insist that only the bank’s own POA form, for example, will suffice. Some states (e.g., California and Florida) have responded to the reported “horror stories” with tough new rules on signing and notarizing POAs. This might become the trend nationally.

In addition to a wide ranging variety of “standard” powers, discuss with your lawyer including the following useful, but often overlooked, provisions in your POA:

– Power to handle tax matters and deal with the IRS. In the past, the IRS has insisted that its own POA form be used. Now, a specific provision in the taxpayer’s own document, conferring appropriate authority, will be honored. Many POA forms lack this clause.

– Power to handle retirement accounts and investments. These assets are likely to be substantial. Retirement plan custodians and administrators are appropriately cautious about letting anybody else play with your money. These folks, too, will probably require specific authorization in the POA before allowing your attorney-in-fact to act on your behalf.

– Compensation clause. lf your attorney-in-fact is a family member, instead of an unrelated professional, should he/she be paid?

– Power to make gifts. Larger estate owners often use annual tax-free gifts of up to $11,000 per recipient to gradually lower the taxable estate remaining at death. If the estate is to be administered by an attorney-in-fact under a POA, the principal might well desire him/her to initiate or continue a gifting program. If so, the power to make gifts should be specifically authorized and precisely spelled out.

What if, for example, this large estate owner has two children, who have, respectively, two and three kids of their own (i.e., grandchildren)? If one of the estate owner’s children is the attorney-in-fact, should he/she do as much tax-free giving as possible? If so, each child, his/her spouse and each grandchild get $11,000. But because one family has three grandchildren, while the other has only two, optimal gift planning would result in an unequal benefit to the two families. See the potential problem created between siblings?

– Power to create & amend Trusts for the benefit of the principal. This allows flexibility in implementing an estate plan, despite the estate owner’s incapacity. It can be particularly useful in some situations, since a POA cannot authorize the attorney-in-fact to write one’s Will.

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