Durable Powers of Attorney

A power of attorney is a legal instrument in which the “principal” authorizes an “attorney-in-fact” (or “agent”) to affect legal relationships between the principal and third parties. Stated differently, the agent has power to obligate the principal and to act as the principal would act. The power granted can either be “general” or “limited.”

Within the context of the typical estate plan, the powers bestowed on the agent or attorney-in-fact often include the power to handle the following types of common transactions: Real estate; tangible personal property; business operations; banking; stocks, bonds, and commodities; insurance; gifts; taxes; and family maintenance.

A power of attorney can be made “durable” so that it can survive even though the principal is incapacitated. It is important to note that in order to create a durable power of attorney it is not enough just to call it a durable power of attorney. The document must contain specific language allowing it to endure the subsequent incapacity of the principal.

"Springing" and "Immediate" Powers of Attorney

There are two ways that the powers granted to the agent can go into effect. They can be immediate or springing.

An immediate power is the easiest to understand – it takes effect once the document is executed. Once executed, the agent will immediately be able to act on behalf of the principal. His power is in tact until the principal dies, or until/if the principal revokes the agency relationship.

A springing power, however, “springs” into effect upon the principal’s incapacity. Here, the agent only gets the power to act on behalf of the principal when and if the principal becomes incapacitated (rather than when the document is signed).

You’re probably wondering why you wouldn’t always want to use a springing power. Well, it makes sense that most people would only want others to manage their affairs when they cannot; however, using a springing power can be problematic for several reasons:

First, there are problems with determining when someone is officially incapacitated. Most often the principal will have to be examined by one or more medical physicians to make this determination. This can cause delays and extra expense…exactly what you are trying to avoid.

Family members may disagree to what extent the principal is incapacitated.

Third parties such as banks may be reluctant to accept the authority of an agent. They may also require periodic demonstrations of the principal’s incapacity.

Some states do not expressly permit the springing power

All in all, it may be preferable to use the immediate powers; however, if you do not feel comfortable giving someone powers over your affairs while you are still competent, the springing power is a viable option.

Statutory Short Forms

All 50 states and the District of Columbia have adopted a statutory short form power of attorney document which is meant to get around the third party problem (financial institutions not accepting the agent’s authority to act on behalf of the principal). It is meant to be used in whole, and should not be modified. For this reason, the document is assumed to be presumptively valid and third parties in the state who do not honor the agency relationship may be held liable for losses incurred due to their failure to accept the document.

Most statutory short forms take effect immediately and do not allow for springing powers. These are state specific forms that can be found in your state’s statutes.

Why Statutory Short Forms May Not Be Enough

Why not always use the statutory short form power of attorney? Well, there are several problems with using the statutory short form in every instance. Here are just a few:

Specificity: Most statutory short forms have broad general language; this may not be specific enough for your client’s needs or wishes. Remember that you cannot change the short form – you are essentially stuck with the verbiage provided. If the language is changed, the document no longer withstands its presumptive validity in the eyes of the State.

Incorporation issues: Most statutory short forms only require that institutions in the state comply with the document. Many banks and financial institutions incorporated elsewhere (most of the big ones) are not required to accept the document, and often don’t.

Gifting Limitations: Most states limit the amount an agent can make in gifts per person per year. Some may also limit the ability for the agent to make gifts to himself. Although this is meant to avoid abuse, this may be problematic if the agent is making gifts with the intention of saving the principal income or taxes.

Comprehensive General Durable Power of Attorney

To augment the statutory short form powers of attorney, it is often advisable to create a more Comprehensive General Durable Power of Attorney under your state’s common law.

We have found in our practice that the inclusion of these broader and more detailed powers of attorney enable us to do a great deal more in the event of incapacity. Specifically, we often grant the agent enumerated detailed powers to:

Make significantly larger gifts to family and/or charity
Create and fund trusts
Appoint successor fiduciaries
Specifically deal with qualified retirement accounts
Operate businesses
Act in a partnership
Collect governmental benefits
Authorize changes in insurance policies
Provide for recreation, travel, companionship, religious and spiritual needs, and family pets.

Some of these powers may be “implied” in the statutory powers, but many may not. The specific enumeration and detail contained in the Comprehensive General Durable Power of Attorney should add to its acceptance by third parties.

It is important to note, however, that whenever an agent is named to hold these broad powers, there is a risk of abuse. Consequently, extreme care must be taken to ensure that the chosen agent or attorney-in-fact can be trusted implicitly by the principal.

Selecting the Right Agent – Risk of Abuse

It is imperative to stress the importance of choosing the right agent. Because this person will essentially be able to walk in the shoes of your client, there is a tremendous risk for abuse. Not surprisingly, these abuses most frequently occur once the person has become incapacitated.

Here are some examples of the types of abuses that we are talking about:

Making unauthorized gifts
Changing beneficiaries on accounts to benefit the agent
Withdrawing funds from accounts to benefit the agent or favor a beneficiary
Taking items from the principal’s safe deposit box

Although there are no formal requirements for being an agent, your client should be encouraged to select someone who is competent, trustworthy, and has an honest dedication to your client and his wishes. If possible this person would have some prior experience with managing the affairs of another. However, if he doesn’t, this person should feel comfortable asking for help if he gets in over his head.

Most often your clients will choose a family member who they believe will fulfill their duties and will not abuse the power. More often than not, your client will be happy with the person that he selects; however, there may be times when your client will want to change agents. You must advise your client that although he may change the agent designation while he is competent, it will become very difficult to do so when he becomes incompetent.