Estate planning and end-of-life planning can be extremely complex. It is also a topic area many people want to avoid because it forces us to face our own mortality and the what-ifs of life and death.
However, just as we plan for a good life, we should plan for a good end of life. Part of that end-of-life planning process includes estate planning. A number of strategies, documents, or structures might be utilized to help achieve one’s desired outcome within any good estate planning process. One such important document and legal mechanism is a power of attorney. These can be extremely broad in nature, so a brief understanding of their role can be important.
In general, a person named in a power of attorney document is given some degree of authority to act on your behalf as your agent. State law – and the document itself – will govern a lot of the authority that the agent can have to act on your behalf. You can limit the powers to a set time or action, or give indefinite and broad authority to someone to act on your behalf.
The main reason to set up a power of attorney is to make sure your wishes are carried out when you aren’t around or able to do it yourself. This could happen for a number of reasons. Maybe you are traveling and maybe you give someone a power of attorney to make financial decisions on your behalf. This could be buying and trading stocks, managing property, and paying bills. More commonly today, powers of attorney are set up to grant people the authority to manage our health care or life situations if our mental capacity or health begins to fail. As such, this becomes an important part of a good retirement, end of life, and estate plan.
Features for a Valid Power of Attorney
Let’s dive into some of the features and requirements for a valid POA.
First, there are typically three parties involved with a power of attorney (POA) document: (1) the principal (the person or grantor of the authority ); (2) agent or POA or attorney-in-fact (person receiving the authority); (3) the third party carrying out the actions given (a bank or hospital, etc.).
A POA can be created several ways under the law, but generally these are created by a legal document or contract. Agents and principals have to sign specific documents or language under state laws – including acknowledgments and notices. Typically, you want to work with an attorney to get the right documents for your state. Remember these are state law directed documents. While there is not a national standard, roughly half of the U.S. states have adopted the Uniform Power of Attorney Act created back in 2006.
Who to Pick
Sometimes you might pick a family member or a spouse to be the person in the POA document, in other cases you might select a professional with specialized skills to represent you in a specific business, legal, or financial area.
When it comes to end-of-life planning, it can make sense to set up a spouse or loved one as the primary POA and another family member or trusted friend as the successor POA. A successor POA can step in if the original POA can no longer act in the role. Essentially, this person is the backup.
Deciding on the people who will serve as your POA and successor POA are incredibly important decisions that shouldn’t be taken lightly. These people will be making decisions on your behalf, so you need to be able to trust them. There’s also little to nothing you’ll be able to do to fix the situation if you pick the wrong person, because in many cases they step into the role when you can’t act for yourself anymore.
While you should trust the person you are making your agent, you will be able to put any number of restrictions into the document to limit the full scope of their authority. Under state laws, there are some generally assumed powers in any POA unless otherwise stated. These are often called general powers of attorney. These can include things like managing property, insurance, making payments, and other financial transactions. However, there are also powers called “hot powers.” These need to be specifically identified if the agent is expected to have them in the POA document. These often include gifting over a certain threshold, changing trusts, the ability to exercise fiduciary powers, change beneficiaries, or disclaim benefits. There are certain things even a POA cannot do – like change a will directly or deny the principal of certain legal rights.
Splitting the Power
Health care decisions are also important. Sometimes it can make sense to split up the POAs into someone that makes financial decisions for you and someone who makes health care decisions for you. When both are controlled by one person, conflicts of interest can arise that might deprioritize your health care in favor of managing the money more prudently.
This is a personal decision, but splitting these two responsibilities should be at least considered. Ultimately, a POA document can be done on one page but more common under state laws is a three- to five-page document. I often suggest that people use state-directed language if it’s provided, instead of reinventing the wheel. The main reason being that it will simplify headaches with financial and health care institutions later on. Both of those entities often look for standard language and will process requests faster if they can clearly understand the document.
Consider the Time Horizon and Timing
In addition to health care or limited powers of attorney documents, you can also limit the time horizon of the POA. For instance, a durable power of attorney can start today and run through any time period that you are incapacitated. You can also create a POA that terminates and becomes ineffective if you are incapacitated. This type of POA is more useful in a business arrangement than in an end-of-life planning scenario.
Lastly, you can create a springing durable power of attorney that only kicks in once you do become incapacitated in some way. All POAs end upon death of the principal, which makes sense since they cannot act as your agent when you are no longer alive.
Unless otherwise stated in the document, a POA document does not go stale or time out until you die. However, sometimes institutions will say they need a newer POA document, but note this isn’t based on law. Institutions, like banks, are allowed to ask for things when reviewing a POA, like a certification by the agent that the document is true in nature, and that the agent has no knowledge of revocation or death of principal. Most states also allow for an institution to ask for attorney opinion that the party is acting within scope od the POA. Usually, the institution must request these within a certain timeframe – like five to seven days – otherwise they have to adhere to the POA agent request.
Important Things to Keep in Mind
POA documents must follow state law requirements to be valid. Typically, they must be signed, dated, and witnessed. Additionally, they often need to be notarized and be accompanied by an acknowledgement by the agent. The principal must also be competent at the time of execution of the document. While the document must be valid in the state of your residence at the time it is created, it will remain valid even if you move. Still, it can be a good idea if you move to a new state to update your POA document in accordance with the new state laws to prevent potential conflicts or confusion later on.
Remember, spouses need POAs, too. It is a big misconception that spouses are automatically a power of attorney for each other in the event of incapacity. While spouses are granted more rights than most, you do not automatically have any rights to make decisions on behalf of another person or to manage their property. So depending on how property is titled, one spouse could struggle to get control to even pay bills in the event of incapacity of the other spouse.
If you don’t have a POA and become unable to manage your affairs, a court might have to step in and appoint someone to act on your behalf. Don’t leave your situation up to the courts to step in – which can be costly, uncertain, and slow. Instead, incorporate POA planning into your estate, retirement, and family planning. Ultimately, this gives you greater security and clarity into planning for a good life and end of life.