Durable Power of Attorney
People sometimes become incapacitated or the disappear. In such cases, someone has to act in their interest. For such purposes, states have statutes that allow people to delegate important decisions to others, especially if they become incapacitated or for any reason are unable or are unwilling to perform their duties. Such a delegation is referred to as a power of attorney. A power of attorney is established through a written document enabling an individual, the principal, to designate another person or persons to act on the principal's behalf, as an attorney-in-fact. The power can be limited to specific tasks or be all-encompassing, allowing the agent to do just about anything that the principal could do. A general power gives the agent all the powers held by the principal to the extent allowed by law. A limited power restricts the agent to perform only specifically listed actions, such as running a business. There can also be more than one person with a power of attorney who may have specific duties because of their experience or expertise.
A power of attorney ends with the disability or incapacity of the principal. By contrast, a durable power of attorney endures until specifically terminated by the principal, by law, or by the death of the principal. All states recognize a durable power of attorney, having enacted the power of attorney provisions of the Uniform Probate Code (UPC) or other statutes that conform to the Uniform Power of Attorney Act.
Because only the durable power of attorney is useful in cases of mental incapacity, and is the primary reason for setting up a power of attorney, the Uniform Power of Attorney Act specifies that unless stated otherwise, all powers of attorney shall be durable.
The durable power of attorney negates the need to petition the local court to appoint a guardian or conservator, thereby saving both time and money. Although it has higher costs, a conservator is supervised by the court, which may make it less likely that decisions will be based on self-interest.
However, if the court appoints a guardian for the principal then the guardian has the right to terminate the power of attorney.
Sometimes a living revocable trust can perform some of the objectives of the durable power of attorney, but it is more expensive to set up, and there would be a need to retitle the assets to the trust. Nonetheless, the power of attorney will still be necessary for property held outside of the trust and for other matters, such as health issues.
There may be multiple agents or successive agents, where one agent acts for the principal if the previous agent is unable to serve or decides not to serve.
Delegated powers, with respect to the principal's property and well-being, can include:
- to buy, sell, or lease assets
- to sue on the principal's behalf
- to deal with creditors
- operate the principal's business
- change provisions in a living trust
- to make gifts or disclaimers
- to create living trusts for the benefit of the principal, spouse, and heirs
- to transfer property to a living trust
- allowing the attorney-in-fact along with the competent spouse to sign joint income tax and gift tax returns
- to admit the principal to a nursing home
- provide consent for surgical operations; and
- to exercise special powers of appointment
However, the power to execute and revoke a will cannot be given to anyone other than the principal. Additionally, any powers regarding real property may need to be recorded.
Giving someone a power of attorney, especially a durable power, should be considered carefully, since it may have grave ramifications for both the principal and financial institutions and healthcare providers who would otherwise be dealing directly with the principal. The attorney-in-fact has a fiduciary duty to the principal, meaning that the attorney-in-fact must act in the principal's best interest. The law provides penalties for self-dealing and seeks to minimize conflicts of interest, which are often present because the attorney-in-fact is often a close family member. Given the importance of this document, the power of attorney must conform to state law, but will usually have the following minimum requirements:
- The principal must be of legal age and competent when the powers are given.
- The document must be signed by the principal, or if the principal is incapable of signing, then it may be signed by someone else while the principal is watching. Signing in the presence of a notary public will also strengthen the evidence that the power of attorney has in fact been created.
- States may also have other requirements, and may include a statutory form for the power of attorney.
- The attorney-in-fact, who is the one receiving the power, must be of legal age when the power is exercised.
There is no requirement that the document specifically use the words "power of attorney", as long as that is what is intended.
Often, an attorney-in-fact is used to allow gift giving to reduce the taxable estate. However, either the document must specifically allow gifting or it must be specifically allowed by state statute; otherwise, the IRS may treat the power of attorney as a general power of appointment under federal tax law, subjecting all the property to the estate tax. If the power is not exercised, then it may be construed as a release of a power of appointment, treating the released property as a taxable gift. Interpreting a durable power of attorney as a general power of appointment can be avoided if funds are only provided specifically for health, education, maintenance, or support.
A regular power of attorney usually terminates upon the disability of the principal, while a durable power of attorney is not so terminated. Nonetheless, both powers are terminated upon the death of the principal, since it no longer has a purpose. Even without a durable power, actions by the attorney-in-fact will continue to be binding upon the principal, even if the principal has died beforehand, at least until the attorney-in-fact becomes aware of the death.
Although a durable power of attorney persists until it is revoked by the principal or by the principal's death, many financial institutions may not respect the power if it is more than 6 months old. However, most states and the Uniform Power of Attorney Act requires that properly executed powers of attorney must be accepted by financial and other institutions or be subjected to civil penalties if they refuse. This is necessary because if the principal is incapacitated then the power of attorney cannot be renewed by the principal.
Springing Power of Attorney
Because of the risk, most people do not want to give other people a power of attorney, especially while they are mentally competent. Therefore, most power of attorney documents are drafted with a springing power, where some specified condition, often referred to as a contingency, effects the power of attorney, thereby springing it into action. The springing power of attorney becomes effective when a specified event occurs, such as physical or mental incapacity, or disappearance. However, the springing power is not recognized by some states.
Some states require that the contingencies be specified, while other states define the contingencies by statute. The document must also specify who is to determine whether the contingency has occurred. Usually, such a person will be someone who has the expertise to determine incapacity, usually a doctor.
Many states specify that a durable power of attorney for healthcare must originate in a separate document from that of a power of attorney over property, since it may be more important. There may be greater requirements in the execution of a durable power of attorney for healthcare because of its importance. Some states allow the 2 powers to originate from the same document. Some states may not allow an attorney-in-fact to terminate treatment or life support if the principal is in a vegetative state, even when there is little hope of recovery.