A Shrewd Look at the Power of Attorney

A Power of Attorney is an essential part of an estate plan. You know that from past visits. The POA ensures that someone can manage your estate when you are unable to. Bills can be paid; investments can be managed; and other actions can be taken.

Having a document called a power of attorney does not mean your problems are solved. All POAs are not the same. An off-the-shelf POA is not adequate for everyone and might not be right for your situation. Here are some key details of a POA to consider as part of your plan.

Is your POA a springing or durable one? The standard POA is a durable POA. It takes effect as soon as it is signed. That means if you appoint an unscrupulous person as your POA, he legally could immediately use the power to write checks, change investments, and sell assets. This is not an issue if you have done a good job of selecting the agent holding the power. It should be someone you trust and who will act as a fiduciary in using the power to act according to your wishes when you cannot.

To avoid this potential pitfall of the durable POA, there also is the springing POA. The agent under this POA has authority to act only after the principal (you) is disabled. Initially that sounds like a solid solution, but it has the potential to make thing worse.

Not all states allow the springing POA, so it might not be available. When the springing POA is allowed, someone has to determine that the principal is disabled before the agent has authority. Does there have to be a letter from a doctor? Which doctor? How is disability defined? If the letter certifying the principal is disabled is two weeks old, should financial firms rely on that? Or should they require a more recent letter certifying that the principal still is disabled? Because of these and other potential problems, a financial services firm might not comply with the agent’s directions unless the POA contains a clause indemnifying from liability anyone who reasonably complies with the agent’s directions.

You can have the springing POA drafted more tightly to answer these and other questions, but there still will be issues and many financial firms might decline to comply with the agent’s directions because of the questions. If you are using a springing POA, ask your financial services firms if they will comply with it.

Do you intend for the agent to manage investments? Some people expect an agent to be a caretaker, paying bills and performing other routine tasks. If there are actions you want the agent to be able to take, spell them out in the POA. Otherwise, a financial advisor or firm might decline to follow the agent’s instructions. The same advice holds for other assets such as real estate and collectibles. A buyer might be advised by an attorney not to close the transaction unless the POA specifically authorizes it. If you own a business, the POA should spell out the actions the agent is authorized and not unauthorized to take regarding it. Some people create different POAs for different assets.

Are gifts allowed? State law generally prohibits an agent acting under a POA from making gifts. If you want the agent to continue your estate planning gifts or make gifts in other situations, the POA needs to say so. The IRS has stated that it will include in the estate any gifts made under a POA that does not specifically authorize gifts.

The gifting power might need to be broader or more detailed than in many POAs. Do you want the agent to make gifts only up to the annual gift tax exemption ($12,000 in 2007 and 2008), or are estate planning gifts above that amount allowed when advisable?

The POA also should state who can receive gifts. A standard provision is to limit gifts to lineal descendants (children and grandchildren). That means gifts cannot be made to your parents, siblings, or other family members who need help, even if you have been helping them.

Another issue is whether gifts should be equal. You face this decision whenever gifts are made. Your preferences should be spelled out in the POA. If one child is better off financially and might not need as much help, state whether it is permissible to give another child larger gifts and under what circumstances.

Is the agent allowed to fund accounts? If the POA only allows gifts to family members or other people, it does not authorize contributions to accounts for their benefit such as 529 education savings plans. If you want the agent to be able to consider such options, spell it out in the POA. State the types of plans that may be funded, for whose benefit contributions are allowed, and the maximum amount that can be contributed.

Will the POA be followed? After the POA is drafted, contact your financial service providers. Some firms insist that their own forms be used or that the POA be on file with them before the agent takes actions. They also might want it updated every few years.

You should understand the POA. Know under which conditions it can be used and the actions the agent is empowered to take. Consider whether it covers all the actions that might need to be taken, and also any limits you want to place on the agent.