Common Questions About Powers of Attorney

Is a power of attorney what you really need?

One of the most important and frequently neglected areas of personal and estate planning is in protecting yourself legally and financially in the event of a disability. While the majority of consumers buy life insurance to protect their family or other loved ones in the event of death, a far more likely dilemma of a short or long term disability is too often ignored. Your agent can, for example, sign checks to pay for your medical care if you are hospitalized unexpectedly.

EXAMPLE A widower had his attorney prepare a power of attorney, but he never signed it. He suffered an unexpected and severe heart attack and was hospitalized for an extended duration. Complications disabled him so that he no longer had the capacity to legally sign a power of attorney. The family could not access his savings, and they didn't have sufficient funds to meet the expenses of maintaining his home and paying medical bills. The family was forced to commence expensive proceedings to have the court appoint a guardian so as to access their father's funds to pay for his care and other expenses.

Where Can I Get a Form for a Power of Attorney?

This is really a three- part answer. Following all three steps will give you the most protection. At minimum, you should immediately implement the first two steps.

The first and simplest step is to call your bank and the brokerage houses where you have your primary accounts and ask for their standard forms. These are often simple 3 x 5 cards on which you fill in the account name, account number, and the name of the person you want to be your agent. You will sign it at the bank or in front of a notary. This is an excellent step to take. If the bank has a power of attorney on file, it is likely to readily accept that agent's signature without question. Just be certain that you implicitly trust the person you are naming in this capacity because the benefit of the "springing" power is not available in these instances. The other big advantage is that there is no cost to doing this.

The second step in providing maximum power of attorney protection is to get a standard form used in your state. Most states have one or perhaps two companies that print forms that lawyers, banks, and other financial institutions most commonly use in that state. Obtaining access to one of these forms (commonly, they can be purchased for a few dollars in an office supply store or legal supply house) can enable you to put in place a simple, basic level of protection. The powers of attorney in almost all instances must be notarized, and in many instances a separate person should witness your signature as well. These forms are typically one to four pages, relatively simple, and widely accepted and recognized by all institutions and attorneys in the state. The key advantage that these have is that they are short, simple, inexpensive, and readily accepted. However, and this is an important caution, be certain to review the provisions of such powers with an attorney.

The final step in obtaining maximum protection is to have an attorney draft a comprehensive durable power of attorney form for you. This is important because the standard forms can lack many important provisions. Before retaining an attorney, make sure he is a specialist in the estate planning area. You should inquire whether the attorney understands the special provisions that should be in a comprehensive power of attorney and which provisions the standard forms lack. These special provisions include the right to make gifts, the right to deal with the IRS, and more comprehensive power provisions. The right to make gifts is essential. Without specifically providing for the agent's right to make a gift, the IRS under the laws of many states will not accept the agent's gifts as binding upon it for tax purposes. This can be very important because starting and continuing an aggressive gift program is an essential estate planning tool. The ability to continue this plan or program in the event of your disability could be essential to saving tens of thousands of estate tax dollars for your heirs.

Specific and detailed authority to deal with the IRS is important. In the event of an IRS lien, whether mistakenly or appropriately placed on one of your accounts, it is essential that authority be given to the agent to deal with the IRS. Standard forms do not include such language, and this can be very difficult in the event of a disability.

Finally, most comprehensive power of attorney forms prepared by attorneys are lengthy and contain broad detailed powers that grant the agent specific authority to deal with various types of situations. These include funding a revocable living trust to minimize or avoid probate and dealing with business matters that the standard forms or your state's law may not address.

Do I Need a Power of Attorney and a Living Trust?

A living trust is not a substitute for a power of attorney. A living trust is more expensive and involved to prepare and implement and should not be used unless there are other compelling reasons to do so. Even if you already have a living trust, you should still prepare and sign powers of attorney. Your living trust will have only the assets you transferred to it by the necessary legal steps. A power of attorney, if broadly written, can give your agent access to all of your assets. However, it can never be considered a substitute for a will or trust arrangement, because even a durable power of attorney immediately terminates on your death.

How Does a Power of Attorney Fit into Planning for the Risks of My Disability?

Your disability planning should begin with a review of the disability insurance coverage available through your employer, or your own policies, to be certain that they are up to date and the most beneficial riders and policy limits are in place. In addition to disability insurance, the next most important step is to make a list of critical emergency information for family, friends, loved ones, or others on whom you will rely during an extended illness. This list can be quite simple and informal but don't let the simplicity detract from its vital importance. The names, addresses, and telephone numbers of all your key advisers, including the accountant, attorney, insurance agent, stock broker, dentist, doctors, key family members, and friends, are critical.

For your key bank and brokerage accounts, be certain to list account numbers and types of accounts. You do not need to disclose very personal information, such as account balances, but, in the event of an emergency, the people you will rely on have to know which advisers to call and where the primary and available funds are in order to help you, your family, or other loved ones.

The final step to plan for a disability is a durable power of attorney. In the event you are disabled, someone will often have to sign checks, pay bills, transfer funds, deal with the IRS, and handle other legal and financial matters. You must explicitly give this authority to someone. Even your spouse must have power of attorney to act. The correct legal means to give this authority is to sign a durable power of attorney. A durable power of attorney names this person as your agent and gives the agent the authority to take charge of certain financial and other legal matters as indicated on the form when you cannot handle the matters on your own.

If you are in the hospital for six weeks due to an accident or other mishap and do not have a joint checking account with your spouse, who will pay your mortgage and utility bills to avoid adverse consequences from the utility company and the lender on your home? A durable power of attorney will protect you in this situation.

Are There Tax Benefits to Having a Power of Attorney?

If you are disabled, a power of attorney can authorize your agent to make gifts and take other actions to minimize your estate tax.

EXAMPLE Father began a regular gift program where each year he and his wife join in making gifts of stock to each of their four children, their children's spouses, and their ten grandchildren. The value of each gift is $20,000, the maximum amount that can be given away each year without any gift tax being due, for a total of $360,000. Father falls ill in December and is unable to sign the necessary documents to make a transfer for the year so the couple makes no gifts in that year. The couple could incur an unnecessary additional estate tax cost of as much as $180,000 because this gift was not made. Had Father prepared an appropriate power of attorney, his agent may have been able to handle the paperwork necessary to make the gifts and eliminate this unnecessary estate tax burden.