Using Powers of Attorney in Estate Planning
Introduction
Power of attorney documents allow you to appoint someone (an agent) to make decisions concerning your property and finances or your healthcare. The standard and default power-of-attorney is the durable power of attorney. Durable powers of attorney allow your agent to make decisions even if you become incapacitated. Powers of attorney should be part of a basic estate plan.
Why do you need a power of attorney?
Powers of attorney help to prevent the need for someone to go into court to have a guardian or conservator appointed to make decisions on your behalf. Your agent can act immediately to begin making decisions for you. If you don’t have a power of attorney, someone will need to go into court to have a guardian and/or conservator appointed to make decisions for you if you become incapacitated. This can be costly and time-consuming. Moreover, the court proceedings are generally public. And, having to go to court can create conflicts among loved ones who don’t agree about the decisions that should be made on your behalf. By preparing powers of attorney ahead of time, you decide who you want to make decisions on your behalf rather than having it fought over in court.
Types of Power of Attorneys
There are two primary types of powers of attorney:
- financial
- healthcare
A financial power of attorney provides your agent with the power to make decisions concerning your property and finances. The powers are generally broad and can include things such as:
- paying your bills
- trading stock
- cashing checks
- signing contracts (such as a contract to sell real estate or putting you into a nursing home)
Financial powers of attorney can be drafted narrowly, however. They can specify what your agent can do and exclude things you don’t want your agent to do. Note, however, that if a need arises requiring making a decision for something that you excluded (such as selling your home), the courts will need to appoint someone to make that decision for you.
Additionally, there are some powers that must be specifically stated in the power of attorney in order for your agent to act on your behalf with regards to those powers.
A healthcare power of attorney provides your agent the power to make decisions about your healthcare. Like the financial power of attorney, the powers, unless narrowed, are broad and can include:
- deciding surgery
- deciding treatments
- deciding nursing home care
A healthcare directive should be executed at the same time a power of attorney is selected. As with a financial power of attorney, the powers can be narrowed or broadened. Narrowing the powers will prevent your agent from making decisions that you would prefer your agent not make. But, should a decision need to be made on something you omitted, the courts will need to appoint a guardian to make that decision on your behalf.
Choosing a Representative
As you can see, a power of attorney is a powerful document. Thus, you will want to choose an agent wisely. The power of attorney can be anyone over the age of 18. However, you will likely want to select someone who knows you well, who understands what decisions you would make if you were able, and who will generally care for your well-being. Because the power can be abused, it’s best to try to appoint someone you trust.
People commonly choose their spouse, a sibling, an adult child, or a close friend. You can choose professional fiduciaries, which usually results in a charge. It may be a good idea to choose a successor power of attorney even if your primary representative agrees to act on your behalf. Your primary beneficiary could change his or her mind or become unable to act as your agent later in time. You should ask the person (or people) you would like to appoint as your agent or successor agent ahead of time to make sure they are willing to act as your agent. It’s best not to appoint two primary agents (although you can do that). You never know when the tow individuals can’t agree on making decisions on your behalf.
Your agent is required to follow the powers he or she is granted in the document you sign. But, where the powers are broad, or if there is any ambiguity, you will want someone who knows you well to make decisions for you. Even though the agent owes you fiduciary duties, if they don’t know you well they may not make the best decision for you.
Execution of a Power of Attorney
A power of attorney can be prepared at any time. Ideally, once you prepare the power of attorney, you will sign it and have it notarized. (Notarization is not required but is generally a good idea). It’s preferable to have separate financial and healthcare powers of attorney. Any adult can execute a power of attorney. You must have capacity, however, when it is executed. As with any contract, if you don’t have capacity your signature can be found invalid and the document will not have effect. Once you have signed the power of attorney, give your agent the original and keep a copy of the document for yourself. You may also want to provide banks, doctors or financial advisors copies as well. If you have an attorney prepare the power of attorney for you, he or she may also keep a copy.
You can revoke or modify your power of attorney at any time. To revoke a power of attorney, you merely send a letter notifying the agent. You should also send a letter notifying any financial institutions, doctors or anyone else you may have sent a notice of the power of attorney. State law will automatically revoke your power of attorney if your spouse is your agent and you get divorced, unless you have specified otherwise.
When does it take effect?
When the power of attorney will take effect will depend on the document you sign. It can be drafted to take effect only upon your incapacity. This is referred to as a springing power of attorney. At least one physician will need to make a determination that you are incapacitated before the document takes effect. If you return to having capacity, your agent will no longer have authority to make decisions on your behalf.
On the other hand, a power of attorney can take effect immediately or at a time you specify in the document. For the purposes of a basic estate plan, most people sign a springing power of attorney.
Paying Your Agent
You can provide to compensate your agent, although not everyone does. It is not required to compensate your power of attorney. Regardless, your agent at the minimum may be reimbursed for reasonable expenses of carrying out your power of attorney.
When does a power of attorney terminate?
A power of attorney terminates when:
- you die (and your agent has knowledge of the death);
- you become incapacitated, if the power of attorney is not durable (Colorado powers of attorney are durable unless you specify otherwise)
- you revoke the power of attorney
- the power of attorney provides a set date or event that causes it to terminate
- the express purpose of the power of attorney is accomplished
- your agent dies, becomes incapacitated, or resigns, and the power of attorney does not provide for another agent to act under the power of attorney
- an action is filed for the dissolution or annulment of the agent’s marriage to you or for their legal separation, unless the power of attorney otherwise provides
Termination of an agent’s authority is not effective until the agent has actual knowledge of the termination.