A power of attorney (POA) has nothing to do with delegating power to a lawyer or attorney-at-law. The title of this legal document confuses most people. A POA is a legal document in which we name another person to make legally-binding financial decisions for us. Usually, the person to whom we delegate this authority is a close family member or friend.
The person delegating authority using the POA is known as the principal and the person chosen to make decisions on behalf of the principal is the agent. The principal dictates the scope of the authority which is granted as well as the time when the authority becomes effective. The principal can later withdraw the grant of authority. As with any legally-binding relationship, each party has duties as well as rights. In sum, the POA is a special type of contract.
There are a number of conceptual items to keep in mind when considering the type of authority you would include, and sometimes, choose not to include, in a POA. First and foremost, know that a POA is generally governed by state law. The fifty states, the District of Columbia, Puerto Rico, and the U.S. territories, each have different rules with respect to POAs just as they do with respect to many other legal instruments. There are also specific federal laws and regulations when using POAs to conduct business with federal agencies.
The second concept to keep in mind is durability. To say that a POA is durable, means that it continues to be valid if the principal becomes incapacitated or incompetent. For example, if Mom names Son as the agent under her POA and Mom suffers a disabling stroke, the durability feature means that Son’s authority endures throughout Mom’s period of incapacity. In some states, the durability feature is the default rule and, therefore, it need not be stated in the document. In other jurisdictions, you would include a sentence in the POA to the effect that “this instrument is durable and its viability is not affected by my subsequent incapacity.” Since you cannot predict in which state your POA might be used at some later point in your life, I recommended that the POA contain the durability language so that it is useful in all jurisdictions in the event you become disabled.
Third, there are additional default rules that may have an impact on your POA. You will want to ask your estate planning attorney which powers are automatically included under your state’s law. With respect to any powers you may not want to grant (for example, powers to make gifts of your property to family members or charity, change beneficiaries on your life insurance policies or retirement plans, or amend your revocable trust or your last will and testament), you should itemize them to be sure that you agent does not have them.
A fourth important concept regarding a power of attorney is to indicate in the document when the agent’s authority is to be valid. There are two choices regarding the timing of authority. You might choose an immediate grant of authority or a grant which ripens upon the principal’s future incapacity. Some lawyers refer to the contingent POA as a “springing POA” since it is signed today but the agent’s authority to act is delayed until some triggering event occurs. The advantage of the immediate grant is that the agent can act immediately with no further documentation to support the grant of authority. Others view the unfettered, immediate grant of authority as a risk that should be avoided. Those folks choose to make the grant contingent upon the agent obtaining certification of the principal’s incapacity from one or more medical providers. Some view this extra medical or psychiatric documentation as an important safety feature and others view it as an unnecessary roadblock. In my experience, the immediate grant is chosen about two-thirds of the time and the contingent grant approximately one-third of the time. And, by the way, clients are not the only ones with strong opinions regarding this concept because attorneys’ views differ as to which option makes the most sense.
The fifth concept to keep in mind is that it is the rare agent who is able to use the POA without encountering problems. There has been so much abuse and crime committed by agents under POAs that almost all financial institutions have developed strict rules with respect to POAs. It is more likely than not that your agent will encounter at least some resistance on the part of financial institutions, pension administrators, health insurance companies, the IRS and the Social Security Administration when your agent attempts to act under your POA. To combat abuse and to provide more uniformity, most large institutions have developed their own form POA and some of them refuse to recognize a POA unless it is on their form. This resistance can be frustrating but a good estate planning attorney can usually smooth things over once the agent needs to use the POA.
The sixth and final concept to keep in mind is that the agent’s power to act under a POA dies with the principal. Once the principal passes away, the POA is a complete nullity. All financial transactions on the part of the deceased principal must be taken by a new agent (known as an executor, administrator or personal representative) appointed after the principal’s death by the appropriate court.
Having a good grasp of the foregoing half dozen concepts will enable you to have productive conversations with your attorney and your family members about POAs and lead to signing good documents that address your individual concerns and needs.