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Power of Attorney
Preparing a will is truly a smart move, one of the most effective ways of providing for the proper management and disposition of your estate after death. But what would happen if an illness or injury prevented you from overseeing your financial affairs while you're still alive?
Who's Minding The Store?
In the event you were incapacitated, your family might have to petition a court to appoint a guardian or conservator for you so that your finances continue to be properly managed. Meanwhile, the inevitable delays associated with the court hearings could result in unpaid bills and taxes, mounting legal expenses, and even public disclosure of your disability.
Some married couples think that the spouse who isn't disabled can simply step in and take over for the other, but that's not often the case. Without a properly-drafted durable power of attorney, he or she may not have the legal authority to perform certain acts on behalf of the disabled spouse, even if the property is held in joint tenancy.
It's Durable And Powerful
The good news is that there is a convenient alternative to guardianship. A durable power of attorney is one of the safest, simplest, and cheapest ways of continuing the management of your affairs in the event of your incapacity. It is typically a short legal document prepared by your lawyer stating simply that you (the "principal") grant authority to one or more individuals ( your "attorney(s) - in fact") to manage your financial affairs ( and personal affairs such as health care, if you wish ) on your behalf.
You retain the right to modify or revoke the power at any time, and it terminates automatically on your death. Remember, though, that if you revoke the power without informing third parties (e.g. a bank), they can continue to rely on the directions of your attorney-in-fact without penalty. Keep in mind also that if a guardian ultimately needs to be appointed for you, that guardian can revoke the power just as you could have done.
The power is "durable" because the document creating it specifically states that it remains in force even if you become disabled or incapacitated. This feature is what gives the power its value in ensuring continuity of your financial management.
General And Special Powers
A "general" durable power grants your attorney-in-fact the authority to handle virtually all financial matters you would ordinarily manage yourself. But if you prefer, you can grant a "special" durable power, under which the attorney-in-fact's authority is restricted to one or more specific functions designated by you. Of course, the general power is better designed to avoid the problem of guardianship.
If you're a business owner, you may want to consider executing two durable powers with separate attorneys-in-fact: Your spouse or other close relative could handle your personal affairs, and a business associate or trusted advisor could handle the business. The underlying document could provide that the latter be paid a fee.
Typically, a durable power takes effect when it is created, so that the designated attorney-in-fact can assume responsibility as soon as it becomes necessary. To be sure that control is not assumed prematurely, you may want to give the original copy of the document to your lawyer or accountant for safekeeping, since your attorney-in-fact cannot legally act for you without possession of the document.
Another way of dealing with the problem of premature exercise is through a "springing" durable power, which is worded so that it becomes effective only in the event of the principal's disability. One drawback to the "springing" power, however, is that while all 50 states and the District of Columbia recognize durable powers, the validity of a springing power is unclear in some states and specifically denied in a few others.
Another problem stems from the fact the operation is triggered, or sprung, by disability. In some cases it could be unclear to the attorney-in-fact whether disability has in-fact occurred and that it is safe to begin acting for the principal. Thus, the document must contain a clear definition of disability, such as certification by two designated physicians.
Disability Planning With A Revocable Trust
Like a will, revocable trusts can provide for the management of your assets after death. When you set up a revocable trust, you direct a trustee how to manage and distribute the trust assets legally owned by the trustee. Unlike a will, however, they can also provide an asset management function during your lifetime (e.g. in the event of your disability).
There are various reasons why people establish and fund revocable trusts. But if you otherwise don't feel you need a revocable trust and you're only interested in guarding against disability, you don't have to "fully" fund the trust. You can generally create it with a nominal amount - say, $10 - and that will make it available as a "standby trust." The durable power of attorney can be drafted to direct the power holder to fund the trust with selected assets, or with the principal's entire estate upon becoming incapacitated.
Spread The Word
If a durable power of attorney makes sense for you, it's even more sensible for aged parents and any other older close relatives. These senior citizens should be encouraged to consider a durable power in your favor to relieve you of a significant burden if and when they are unable to shoulder their own responsibilities.
For example, assume your widowed parent suddenly became incapacitated and unable to write checks. Without a durable power in place, you might have to pay bills out of your own pocket, at least temporarily, and you would be powerless to make other important decisions on your parent's behalf
A durable power of attorney can reduce the physical, psychological, and financial burdens that will fall on your family if you become disabled. And durable powers you hold will do the same for older members of your family. Although some form of this financial planning tool is provided throughout the United States, the state laws and required forms are not identical, so consult your legal advisor before proceeding.
Because the materials covered in this article are complicated, this article should not be regarded as offering a complete explanation and should not be used for making decisions. Any suggestion should be reviewed with your personal financial and tax advisor.