Two Estate Planning Documents You Must Have

An estate plan might contain many documents. Estate Planning often fails because of two key and often overlooked documents. Take care that these documents are priority in your estate planning process and that the documents meet your needs.

The first document to consider is the durable power of attorney. Most of us won’t ever use this document, and all of us hope it won’t ever be needed. Accidents and illnesses happen, unfortunately, and the power of attorney acts as an insurance policy when they do. As with other forms of insurance, the document must be prepared in advance or it won’t be available when it is needed.

The power of attorney gives a named person or persons, known as an attorney-in-fact, the legal right to act for the person who signed the document, known as the principal. A general power of attorney grants the authority to act in all matters. A limited power of attorney, as the name implies, grants the power to act on certain matters, such as financial affairs.

A power of attorney can be revoked at any time. The standard power of attorney expires automatically when the person signing the document is incapacitated. Unfortunately, that is the time you most need someone to act for you.

In case you become incapacitated and unable to manage affairs, someone needs to step in to pay bills and manage assets. Many people think a spouse can take these actions.  Unfortunately, a spouse can manage only joint accounts. Otherwise, the spouse has no more rights to handle your accounts than a stranger does. For some types of property, such as real estate, the signature of each spouse might be required before any action can be taken.

That’s why the durable power of attorney was developed. When the proper language is in the document, the power of attorney continues in effect even after the person signing it becomes incapacitated. All states now recognize the durable power. With it, the attorney-in-fact will be able to act when you are unable to.

Without the durable power of attorney, your family could be in a difficult position. If you are unable to manage the finances or file a tax return, the family must go to court and ask that a guardian or conservator appointed to handle matters. In addition to the cost and indignity of this proceeding, there is a possibility that the person appointed won’t be the one you would want handling matters. Family members also might disagree over who should get the power.

A potential drawback to the durable power of attorney is that it is valid when you sign it, even when you are not incapacitated. That means there is a possibility that the person named as attorney-in-fact is not trustworthy and could take actions with your assets.

Some states recognize an alternative document, the springing power of attorney. This power takes effect only after a disability occurs. Some people are more comfortable with this approach, because they aren’t turning over power when they are healthy.

There are disadvantages to the springing power of attorney. First, not all states recognize it. Second, for it to take effect there must be a definition of disability and a process for having you declared incapacitated. That could make the document less effective than the durable power, and disagreements could lead to court action.

A better approach that gives you protection might be to execute a durable power of attorney but have your estate planning attorney or other trusted advisor retain all documents until your family tells the attorney that there is a need.

Perhaps the best protection is careful selection of the attorney-in-fact. You are giving very broad powers to this person. While the immediate concern after a disability is ensuring that bills are paid and other routine matters are handled, the attorney-in-fact will have the ability to sell assets and re-invest or distribute the proceeds.

It is tempting to name a spouse or adult child as the power holder, and that might work well in many cases. Be sure to name someone whose judgment you can trust. For example, if there is a sharp market decline while you are incapacitated, do you want someone who is going to sell all your equities or do you want someone who will adhere to the long-term plan?

Another protection is to name more than one attorney-in-fact. That can protect against both fraud and bad judgment. On the other hand, that means two signatures are required for everything. The two individuals have to be near each other and able to meet regularly. A compromise position is to require two people to act on significant actions such as the sale of assets but allow one person to be attorney-in-fact for routine matters.

Be sure to name at least one alternate attorney-in-fact, because something might happen to the original.

It is not enough to sign one document. Most financial services companies have their own forms and will accept only those forms when someone asserts a power of attorney. You need to contact each financial service company at which you have an account or own a safe deposit box. Ask for copies of their forms, how many copies they will want on file, and how old a copy can get before they want a new one. Unfortunately, your attorney can draft the best power of attorney form and have it be almost useless because your financial institutions want it on their forms. When you change financial institutions, be sure to ask for new power of attorney forms as part of the process.

People who live in more than one state, such as people from other parts of the country who spend the winter in Florida, need to be sure that their documents are effective in each state. It might be necessary to have one document executed for each state.

You decide how much power to give the attorney-in-fact. You might want to grant fairly broad powers as a hedge against a long disability. Estate planning also is a consideration. A power holder can make gifts or other transfers of assets under the document. The IRS, however, will not recognize the tax effects of gifts made by a power holder unless the document specifically states that the holder is authorized to make gifts of property. Be sure this language is in your power of attorney.

The power of attorney can be revoked or modified any time while you are legally competent. It should be reviewed every few years as part of a regular estate planning review. Consider the individual appointed, the powers granted, and whether all appropriate financial institutions have current forms. You also might want to talk with the attorney-in-fact periodically to ensure that your goals and desires for the assets are clear.

A related document is the health care durable power of attorney. This allows someone to make health care decisions when you are incapacitated.

For the last few decades, the Living Will has received a lot of attention. This document states the types of life-saving care that you want or don’t want. Often it states general principles to guide doctors and might state preferences for a few situations. A common choice of language is that medical personnel should not use measures that would maintain the principal in a persistent vegetative state.

Living wills are easy to execute. Most states now have standard forms that can be located on the Internet or obtained from various organizations.

The problems with living wills are that they do not cover all circumstances and cannot keep up with changing medical technology and treatments. Also, surveys show that most living wills don’t make their way into the medical charts and have no effect on treatment.

That’s why a health care power of attorney is a better choice. Instead of trying to draft general principles to cover all situations, appoint someone who knows you to make listen to the medical options and make decisions when you are incapacitated. These documents are recognized in all states and can be written to survive your incapacity. The durable power of attorney for health care can be personalized and avoids getting the courts involved.

The health care power of attorney and durable power of attorney should be separate documents. One is for financial management and one is for health care decisions. You probably want different people as the attorneys-in-fact under these documents.

Powers of attorney should be created at the same time as the will as an essential part of every estate planning process. Be sure to work with an experienced estate planning attorney so the documents will fill your needs.