Viewpoints on Financial Planning
A main component of any successful estate planning package is the execution of a power of attorney. A power of attorney (POA) is a legal document that creates a relationship between an individual (the principal) and another person (the agent or attorney-in-fact). The POA allows the agent to make important legal and financial decisions for the principal in the event the principal becomes mentally or physically incapacitated. This powerful document is a critical component in planning for the possibility of future incapacity.
The two most common types of financial powers of attorney are durable and non-durable. A non-durable POA allows the agent to act on the principal’s behalf, but terminates upon the principal’s incapacity or death, whereas a durable POA continues even after such an event. Depending on the preferences of the principal, the scope of the agent’s powers can be very broad or quite specific, at the principal’s discretion.
For example, a power of attorney can expire after a certain length of time or at the occurrence of a particular event. Further, POAs can be drafted by an attorney to “spring” into action upon the occurrence of a particular future condition, such as the principal’s incapacitation.
A healthcare power of attorney is a separate legal document from the financial power of attorney discussed above. The healthcare POA (or Advance Healthcare Directive) delineates and confers powers unto the agent for the purposes of making specific healthcare decisions for the principal. It is important to consider the jurisdiction in which you intend to execute the healthcare POA document, as specific permitted powers and procedures may vary by state.
However, it is not necessary for a lawyer to complete a specific healthcare power of attorney. There are templates readily available, or a principal can create his or her own document. The directive must be signed by the principal in the presence of two witnesses other than the named agent. At least one witness must have no interest in the principal’s estate.
FREQUENTLY ASKED QUESTIONS
1. Who should be an agent?
Generally, any adult can act as an agent once appointed as a power of attorney; however, it should be someone the principal trusts since the appointed agent will be making critical legal and financial decisions for the rest of the principal’s life. There is no official monitoring of an agent’s actions under a POA, so any abuse of discretion must be reported to a law enforcement agency or it may never be discovered.
2. What authority does an agent have under a durable POA?
An agent’s authority is as broad or limited as the principal desires. Therefore, it is important to choose an agent wisely, as their authority could include the power to:
- Manage a business
- Provide for the maintenance and support of the principal’s family
- Deal with the IRS to file tax returns or settle tax disputes
- Buy, sell, exchange, or lease tangible personal property or real estate
- Make gifts
- Secure government benefits
- Collect proceeds from insurance
- Appeal or settle legal claims
3. When does the agent’s authority end?
The principal can end the agent’s authority at any time in writing or by termination of the document. An agent’s authority may also end by court order, upon the death of the principal, or upon the occurrence of a certain date or event identified in the POA.
4. Can a principal appoint more than one agent?
Yes, but two or more agents making time-sensitive decisions for the principal may require more careful consideration and the attorney must take care to include special governance language.
First, the POA must address a means for resolving agent stalemates, such as court involvement, mediation or arbitration.
Second, the document may assign sole discretion over certain decisions or responsibilities to one particular agent and not the other.
Third, the POA must discuss how legal and financial documents will be signed and executed by the agents. This requires careful drafting by an attorney. Permitting a single agent to sign any legal or financial document without the other agent’s involvement may provide more flexibility in the administration of the principal’s affairs. However, providing that much discretion may also invite mistakes or, worse, abuse. Although requiring all agents to sign every financial or legal document creates more checks and balances, it also makes the administration of your affairs much more cumbersome and time costly.
Lastly, it is a good idea to name at least one or more successor agents in case a primary agent becomes deceased, disabled, or no longer wishes to act as legal representative of the principal.
5. If a living trust exists, is a durable power of attorney also necessary?
Yes. A POA provides the agent with the authority to manage all assets titled in the principal’s name or held jointly with a third party. The successor trustee of a living trust, on the other hand, will have the authority over all assets titled in the name of the living trust (funded). Even if a living trust is fully funded, certain assets can never be re-titled in the name of a living trust, such as qualified retirement accounts, IRAs or certain annuities.
Many people never re-title any or all of their assets into their living trust, but through a POA an agent can be given the authority to re-title them when necessary. Without a POA, the successor trustee would not be able to administer the assets not owned by the trust.
6. How does the Health Insurance Portability & Accountability Act of 1996 (HIPAA) impact a POA?
HIPAA is a federal law that protects an individual’s privacy by restricting access to the release of protected health information (PHI), and has had a direct impact on the ability for agents to gain access to the principal’s important medical records. A healthcare or durable POA may include language specifically appointing the agent as a “Personal Representative” under the HIPAA Privacy Rules. A clause must therefore be included, granting such authority in writing.
If the terms of the POA do not appoint a HIPAA Personal Representative (PR), then the principal may appoint a PR by executing a separate HIPAA authorization form (readily available), granting the agent with access to the principal’s PHI, rather than amending the POA itself.