The Durable Power of Attorney: Your Most Important Estate Planning Document

For most people, the durable power of attorney is the most important estate planning instrument available — even more useful than a will. A power of attorney allows a person you appoint — your “attorney-in-fact” or “agent” — to act in place of you – the “principal” — for financial purposes when and if you ever become incapacitated.

In that case, the person you choose will be able to step in and take care of your financial affairs. Without a durable power of attorney, no one can represent you unless a court appoints a conservator or guardian. That court process takes time, costs money, and the judge may not choose the person you would prefer. In addition, under a guardianship or conservatorship, your representative may have to seek court permission to take planning steps that she could implement immediately under a simple durable power of attorney.

A power of attorney may be limited or general. A limited power of attorney may give someone the right to sign a deed to property on a day when you are out of town. Or it may allow someone to sign checks for you. A general power is comprehensive and gives your attorney-in-fact all the powers and rights that you have yourself.

A power of attorney may also be either current or “springing.” Most powers of attorney take effect immediately upon their execution, even if the understanding is that they will not be used until and unless the grantor becomes incapacitated. However, the document can also be written so that it does not become effective until such incapacity occurs. In such cases, it is very important that the standard for determining incapacity and triggering the power of attorney be clearly laid out in the document itself.

However, attorneys report that their clients are experiencing increasing difficulty in getting banks or other financial institutions to recognize the authority of an agent under a durable power of attorney. A certain amount of caution on the part of financial institutions is understandable: When someone steps forward claiming to represent the account holder, the financial institution wants to verify that the attorney-in-fact indeed has the authority to act for the principal. Still, some institutions go overboard, for example requiring that the attorney-in-fact indemnify them against any loss. Many banks or other financial institutions have their own standard power of attorney forms. To avoid problems, you may want to execute such forms offered by the institutions with which you have accounts. In addition, many attorneys counsel their clients to create living trusts in part to avoid this sort of problem with powers of attorney.

While you should seriously consider executing a durable power of attorney, if you do not have someone you trust to appoint it may be more appropriate to have the probate court looking over the shoulder of the person who is handling your affairs through a guardianship or conservatorship. In that case, you may execute a limited durable power of attorney simply nominating the person you want to serve as your conservator or guardian. Most states require the court to respect your nomination “except for good cause or disqualification.”

 

Married Couples Need an Estate Plan

Don’t assume your estate will automatically go to your spouse when you die. If you don’t have an estate plan, your spouse may have to share your estate with other family members.

If you die without an estate plan, the state will decide where your assets go. Each state has laws that determine what will happen to your estate if you don’t have a will. If you are married, most states award one-third to one-half of your estate to your spouse, with the rest divided among your children or, if you don’t have children, to other living relatives such as your parents or siblings.

In addition, without an estate plan, you need to worry about what could happen if you become incapacitated. While your spouse may be able to access your joint bank accounts and make health care decisions for you, what happens if something happens to your spouse? It is important to have back-up plans. And even if your spouse is fine, depending on how your finances are set up, your spouse may not be able to access everything without a power of attorney authorizing it.

To avoid this, it is important to make sure you have estate planning documents in place. The most basic estate planning document is a will. If you do not have a will directing who will inherit your assets, your estate will be distributed according to state law, which, as noted, gives only a portion of your estate to your spouse. If you have children, a will is also where you can name a guardian for your children.

You may also want a trust to be a part of your estate plan.  It permits you to name someone to manage your financial affairs. You can name one or more people to serve as co-trustee with you so that you can work together on your finances. This allows them to seamlessly take over in the event of your incapacity. Trusts have many options for how they can be structured and what happens with your property after your death. There are several different reasons for setting up a trust. The most common one is to avoid probate. If you establish a revocable living trust that terminates when you die, any property in the trust passes immediately to the beneficiaries. This can save your beneficiaries time and money. Certain trusts can also result in tax advantages both for the donor and the beneficiary. These could be “credit shelter” or “life insurance” trusts. Other trusts may be used to protect property from creditors or to help the donor qualify for Medicaid.

The next most important document is a durable power of attorney. A power of attorney allows a person you appoint — your “attorney-in-fact” or “agent” — to act in your place for financial purposes if and when you ever become incapacitated. Without it, if you become disabled or even unable to manage your affairs for a period of time, your finances could become disordered and your bills not paid, and this would place a greater burden on your family. They might have to go to court to seek the appointment of a conservator, which takes time and money, all of which can be avoided through a simple document.

Similar to a durable power of attorney, a health care proxy appoints an agent to make health care decisions for you when you can’t do so for yourself, whether permanently or temporarily. Again, without this document in place, your family members might be forced to go to court to be appointed guardian. Include a medical directive to guide your agent in making decisions that best match your wishes.

Do not assume your spouse is automatically protected when you die. Consult with your attorney to make sure you have all the estate planning documents you need.

Moving to a New State? Be Sure to Update Your Estate Plan

While legally you may not need all-new estate planning documents if you move to a different state, you should have your documents reviewed by a local attorney in your new home.

The Constitution of the United States requires that states give “full faith and credit” to the laws of other states. This means that your will, trust, durable power of attorney, and health care proxy executed in one state should be honored in every other state. While that’s the law, the practical realties are different and depend on the document.

Your will should still be valid in the new state, but there may be differences in the new state’s laws that make certain provisions of the will invalid. The same is true of revocable trusts.

This is less true of durable powers of attorney and health care directives. While they should be honored from state to state, sometimes banks, medical professionals, and financial and health care institutions don’t accept documents and forms with which they are not familiar. In addition, the execution requirements may be different depending on the state. Some states require witnesses on durable powers of attorney and others don’t. A state requiring witnesses may not allow a power of attorney without them to be used to convey real estate even though the document is perfectly valid in the state in which it was executed. In the case of health care proxies, other states may use different terms for the document, such as “durable power of attorney for health care” or “advance directive.” (And the people reviewing your power of attorney or health care proxy may not be well versed in constitutional law.)

Moving is a good excuse to consult an attorney to make sure your estate plan in general is up to date. Other changes in circumstances such as a change in income or marital status can also affect your estate plan. In addition, there may be practical changes you will want to make. For example, you may want to change your trustee or agent under a power of attorney based on which family members are closer in proximity.

For all these reasons, when moving out of state it’s wise to have an attorney in the new state review your estate planning documents.`

Your Medical Directive

Any complete estate plan should include a medical directive. This term may encompass a number of different documents, including a health care proxy, a durable power of attorney for health care, a living will, and medical instructions. The exact document or documents will depend on your state’s laws and the choices you make.

Both a health care proxy and a durable power of attorney for health care designate someone you choose to make health care decisions for you if you are unable to do so yourself. A living will instructs your health care provider to withdraw life support if you are terminally ill or in a vegetative state. A broader medical directive may include the terms of a living will, but will also provide instructions if you are in a less serious state of health, but are still unable to direct your health care yourself.

 

The Ins and Outs of Guardianship and Conservatorship

Every adult is assumed to be capable of making his or her own decisions unless a court determines otherwise. If an adult becomes incapable of making responsible decisions, the court will appoint a substitute decision maker, usually called a “guardian,” but called a “conservator” or another term in some states.

Guardianship is a legal relationship between a competent adult (the “guardian”) and a person who because of incapacity is no longer able to take care of his or her own affairs (the “ward”). The guardian can be authorized to make legal, financial, and health care decisions for the ward. Depending on the terms of the guardianship and state practices, the guardian may or may not have to seek court approval for various decisions. In many states, a person appointed only to handle finances is called a “conservator.”

Some incapacitated individuals can make responsible decisions in some areas of their lives but not others. In such cases, the court may give the guardian decision making power over only those areas in which the incapacitated person is unable to make responsible decisions (a so-called “limited guardianship”). In other words, the guardian may exercise only those rights that have been removed from the ward and delegated to the guardian.

Incapacity

The standard under which a person is deemed to require a guardian differs from state to state. In some states the standards are different, depending on whether a complete guardianship or a conservatorship over finances only is being sought. Generally, a person is judged to be in need of guardianship when he or she shows a lack of capacity to make responsible decisions. A person cannot be declared incompetent simply because he or she makes irresponsible or foolish decisions, but only if the person is shown to lack the capacity to make sound decisions. For example, a person may not be declared incompetent simply because he spends money in ways that seem odd to someone else. Also, a developmental disability or mental illness is not, by itself, enough to declare a person incompetent.

Process

In most states, anyone interested in the proposed ward’s well-being can request a guardianship. An attorney is usually retained to file a petition for a hearing in the probate court in the proposed ward’s county of residence. Protections for the proposed ward vary greatly from state to state, with some simply requiring that notice of the proceeding be provided and others requiring the proposed ward’s presence at the hearing. The proposed ward is usually entitled to legal representation at the hearing, and the court will appoint an attorney if the allegedly incapacitated person cannot afford a lawyer.

At the hearing, the court attempts to determine if the proposed ward is incapacitated and, if so, to what extent the individual requires assistance. If the court determines that the proposed ward is indeed incapacitated, the court then decides if the person seeking the role of guardian will be a responsible guardian.

A guardian can be any competent adult — the ward’s spouse, another family member, a friend, a neighbor, or a professional guardian (an unrelated person who has received special training). A competent individual may nominate a proposed guardian through a durable power of attorney in case she ever needs a guardian.

The guardian need not be a person at all — it can be a non-profit agency or a public or private corporation. If a person is found to be incapacitated and a suitable guardian cannot be found, courts in many states can appoint a public guardian, a publicly financed agency that serves this purpose. In naming someone to serve as a guardian, courts give first consideration to those who play a significant role in the ward’s life — people who are both aware of and sensitive to the ward’s needs and preferences. If two individuals wish to share guardianship duties, courts can name co-guardians.

Reporting Requirements

Courts often give guardians broad authority to manage the ward’s affairs. In addition to lacking the power to decide how money is spent or managed, where to live and what medical care he or she should receive, wards also may not have the right to vote, marry or divorce, or carry a driver’s license. Guardians are expected to act in the best interests of the ward, but given the guardian’s often broad authority, there is the potential for abuse. For this reason, courts hold guardians accountable for their actions to ensure that they don’t take advantage of or neglect the ward.

The guardian of the property inventories the ward’s property, invests the ward’s funds so that they can be used for the ward’s support, and files regular, detailed reports with the court. A guardian of the property also must obtain court approval for certain financial transactions. Guardians must file an annual account of how they have handled the ward’s finances. In some states guardians must also give an annual report on the ward’s status. Guardians must offer proof that they made adequate residential arrangements for the ward, that they provided sufficient health care and treatment services, and that they made available educational and training programs, as needed. Guardians who cannot prove that they have adequately cared for the ward may be removed and replaced by another guardian.

Alternatives to Guardianship

Because guardianship involves a profound loss of freedom and dignity, state laws require that guardianship be imposed only when less restrictive alternatives have been tried and proven to be ineffective. Less restrictive alternatives that should be considered before pursuing guardianship include:

  • Power of AttorneyA power of attorney is the grant of legal rights and powers by a person (the principal) to another (the agent or attorney-in-fact). The attorney-in-fact, in effect, stands in the shoes of the principal and acts for him or her on financial, business or other matters. In most cases, even when the power of attorney is immediately effective, the principal does not intend for it to be used unless and until he or she becomes incapacitated.
  • Representative or Protective Payee. This is a person appointed to manage Social Security, Veterans’ Administration, Railroad Retirement, welfare or other state or federal benefits or entitlement program payments on behalf of an individual.
  • Conservatorship. In some states this proceeding can be voluntary, where the person needing assistance with finances petitions the probate court to appoint a specific person (the conservator) to manage his or her financial affairs. The court must determine that the conservatee is unable to manage his or her own financial affairs, but nevertheless has the capacity to make the decision to have a conservator appointed to handle his or her affairs.
  • Revocable trust. A revocable or “living” trust can be set up to hold an older person’s assets, with a relative, friend or financial institution serving as trustee. Alternatively, the older person can be a co-trustee of the trust with another individual who will take over the duties of trustee should the older person become incapacitated.

Contact your attorney to discuss ways to protect against a guardianship.

Make Sure Your Power of Attorney Complies with Federal Privacy Law

A power of attorney (POA) and a health care proxy are two of the most important estate planning documents you can have, but in some instances they may be useless if they don’t comply with the federal privacy law.

A POA allows someone you designate (your “agent” or “attorney-in-fact”) to make decisions for you if you become incapacitated. A health care proxy specifies who will make medical decisions for you. For these documents to be effective, your agents may need to be able to access your medical information. However, medical information is private. The Health Insurance Portability and Accountability Act (HIPAA) protects health care privacy and prevents disclosure of health care information to unauthorized people. HIPAA authorizes the release of medical information only to a patient’s “personal representative.”

HIPAA can be a problem especially if you have a “springing” power of attorney. A springing POA doesn’t go into effect until you become incapacitated. This means your agent doesn’t have any authority until you are declared incompetent, but, under HIPAA, the agent won’t be able to get the medical information necessary to determine incompetence until the agent has authority.

To make sure your agent doesn’t get caught in this “Catch-22,” your POA and health care proxy should contain a HIPAA clause that explains that the agent is also the personal representative for the purposes of health care disclosures under HIPAA. You should also sign separate HIPAA release forms that explain what medical information can be disclosed, who can make the disclosure, and to whom the disclosure can be made.

Contact your attorney to make sure your POA and health care proxy do not conflict with HIPAA.

Three Changes You May Want to Make to Your Estate Plan Now Due to the Pandemic

You may need to reevaluate some elements of your estate plan in light of the coronavirus pandemic. There are unique aspects of this crisis that your current estate planning documents may not be suited to handle.

The language in some estate planning documents that is fine under normal conditions may cause additional problems for you and your loved ones if you fall ill during the pandemic. Look over the following documents to see if they may need updating in order to fulfill your wishes:

  • Living will. A living will is a document that you can use to give instructions regarding treatment if you become terminally ill or are in a persistent vegetative state and unable to communicate your instructions. The living will states under what conditions life-sustaining treatment should be terminated. Many living wills contain a prohibition on intubation, which can be used to prolong life, even in a vegetative state. However, in the case of Covid-19, intubation and placement on a ventilator can actually save a patient’s life (although many patients who are intubated still die). If your living will contains a blanket prohibition on intubation, you may want to rethink that.
  • Durable Power of Attorney. A power of attorney (POA) allows you to appoint an agent to act in your place with regard to financial matters. A POA can be either current or springing. A current POA takes effect immediately, usually with the understanding that it will not be used until and unless you become incapacitated. A “springing” POA only takes affect when you become incapacitated. The problem is that springing powers of attorney create a hurdle for the agent to get over to use the document. When presented with a springing power of attorney, a financial institution will require proof that the incapacity has occurred, often in the form of a letter from a doctor. In the current chaotic environment of the coronavirus pandemic, getting a letter from a doctor will be difficult, if not impossible. Requiring your agent under a power of attorney to seek out a doctor to get a certification of incapacity will only add to their tasks and delay their ability to act on your behalf.  Consider changing the POA so that it can take effect immediately if needed.
  • Health Care Proxy. A health care proxy allows you to appoint someone else to act as your agent for medical decisions. It will ensure that your medical treatment instructions are carried out. Without a health care proxy, your doctor may be required to provide you with medical treatment that you would have refused if you were able to do so. Usually, the person who is appointed to act as your agent would confer with the doctors in person. That will likely be impossible during the coronavirus pandemic because family members often are not allowed in the hospital with sick patients. You need to make sure your health care proxy contains a provision that expressly authorizes electronic communication with your agent.

Consult with your attorney to make sure these documents and your other estate planning documents express your wishes during this time.

Estate Planning Is Essential for Unmarried Couples

While estate planning is important for married couples, it is arguably even more necessary for couples that live together without getting married. Without an estate plan unmarried couples won’t be able to make end-of-life decisions or inherit from each other.

Estate planning serves two main functions: determining who can make decisions for you if you become incapacitated and who gets your assets when you die.  There are laws in place to protect spouses in couples that have failed to plan by governing the distribution of property in the event of death. If you do not have a will, property will pass to your spouse and children, or to parents if you die without a spouse or children.

But there are no laws in place to protect unmarried partners. Without a solid estate plan, your partner may be shut out of the decision making and the inheritance. The following are the essential estate planning steps that can help unmarried couples:

  • Joint Ownership. One way to make sure property passes to an unmarried partner is to own the property jointly, with right of survivorship. If one joint tenant dies, his or her interest immediately ceases to exist and the remaining joint tenants own the entire property. This is also a good way to avoid probate.
  • Beneficiary Designations. Make sure to review the beneficiary designations on bank accounts, retirement funds, and life insurance to make sure your partner is named as the beneficiary (if that is what you want). Your partner will not have access to any of those accounts without a specific beneficiary designation.
  • Durable Power of Attorney. This appoints one or more people to act for you on financial and legal matters in the event of your incapacity. Without it, if you become disabled or even unable to manage your affairs for a period of time, your finances could become disordered and your bills not paid, and this would place a greater burden on your partner. Your partner might have to go to court to seek the appointment of a conservator, which takes time and money, all of which can be avoided through a simple document.
  • Health Care Proxy. Similar to a durable power of attorney, a health care proxy appoints an agent to make health care decisions for you when you can’t do so for yourself, whether permanently or temporarily. Again, without this document in place, your partner might be shut out by other family members or forced to go to court to be appointed guardian. If it is important for all of your family members to be able to communicate with health care providers, a broad HIPAA release — named for the Health Insurance Portability and Accountability Act (HIPAA) of 1996 — will permit medical personnel to share information with anyone and everyone you name, not limiting this function to your health care agent.
  • Will. Your will says who will get your property after your death. However, it’s increasingly irrelevant for this purpose as most property passes outside of probate through joint ownership, beneficiary designations, and trusts. Yet your will is still important for two other reasons. First, if you have minor children, it permits you to name their guardians in the event you are not there to continue your parental role. Second, it allows you to pick your personal representative (also called an executor or executrix) to take care of everything having to do with your estate, including distributing your possessions, paying your final bills, filing your final tax return, and closing out your accounts. It’s best that you choose who serves in this role.
  • Revocable Trust. A revocable trust can be especially important for unmarried couples. It permits the person or people you name to manage your financial affairs for you as well as to avoid probate. You can name one or more people to serve as co-trustee with you so that you can work together on your finances. This allows them to seamlessly take over in the event of your incapacity.

Your attorney can help you determine the estate plan that is right for you and your partner.

Resolving Conflicts Between Co-Agents on a Power of Attorney

Having power of attorney over a family member is a big responsibility and sometimes it makes sense to share that responsibility with someone else. But when two people are named co-agents under a power of attorney, conflicts can arise. Unfortunately, if the conflict can’t be resolved, it may be necessary to get a court involved.

A power of attorney allows a person to appoint someone called an “agent” or “attorney-in-fact” to act in his or her place for financial purposes when and if the person ever becomes incapacitated. A power of attorney can name one agent or it can require two or more agents to act together.

If you are acting as a co-agent under a power of attorney, but you and your fellow agent disagree on a course of action or one party has stopped participating in decision making, what can you do? The first thing is to check the wording of the power of attorney document to see if it sets up a procedure for resolving disputes. If the power of attorney itself doesn’t help, you should contact an attorney. The attorney can tell you if your state’s power of attorney laws offer any guidance. There may be a state statute that deals with disputes.

If the dispute still cannot be resolved, the final step may be to file a petition in probate court to let the court decide it. Or if the court finds that one of the agents is not acting according to the incapacitated person’s best interests, it can revoke the agent’s authority. Unfortunately, taking the matter to court takes time and money.

If you are creating a power of attorney and want more than one agent to share responsibility, but want to minimize conflict, you can name two agents and let the agents act separately. Naming more than two agents can get cumbersome and make communication difficult. An alternative to naming co-agents is for the power of attorney document to name agents in sequence. The first-named agent acts alone, but if he or she cannot serve for some reason, the next person on the list will serve.

Bank Pays Price for Refusing to Honor Request Made Under a Power of Attorney

A durable power of attorney (POA) allows the person creating the POA, called the “principal,” to name a trusted agent who can act on his behalf in almost any situation. But because of the risk of abuse, many banks will scrutinize a POA carefully before allowing the agent to act on the principal’s behalf, and often a bank will refuse to honor a POA. Bank of America rebuffed a Florida agent’s request that funds be withdrawn from the principal’s account. The agent fought back in court and won a $64,000 judgment against the bank.

Clarence Smith, Sr., named his son, Clarence Smith, Jr., as his agent under a POA. When his father no longer wanted to manage his own finances, he asked Clarence Jr. to step in as his agent. Clarence Jr. reviewed his father’s account activity and became suspicious about some withdrawals from a bank account that Clarence Sr. owned jointly with a friend from his retirement community.

Acting as his father’s agent under the POA, Clarence Jr., asked Bank of America to transfer $65,000 from the account into a new account that listed only his father as the owner. Before doing so, Bank of America contacted the other person named on the account. When she told the bank that she did not want the funds withdrawn and also accused Clarence Jr. of stealing his father’s money, Bank of America refused to honor Clarence Jr.’s request. The other account owner then withdrew all of the funds from the account and placed them into her own account, effectively preventing Clarence Sr. from accessing his own money. Clarence Sr. died several weeks later.

Clarence Jr. sued Bank of America under a Florida law that imposes penalties on financial institutions that refuse to honor reasonable requests from agents named in properly executed POAs. A jury returned a verdict against the bank and awarded $64,142 to Clarence Sr.’s estate. The jury found that Bank of America had not acted reasonably when it rejected Clarence Jr.’s request, even though the joint owner of the bank account had not agreed to the release of the funds.

While this case clearly illustrates the conflicts that can arise through the use of a POA, it also raises the issue of the proper use of joint bank accounts in estate planning. Under most state laws, when two or more people own “joint” bank accounts, each of them has the right to the entire account, no matter whose money is actually in the account. While joint accounts can often be useful, sometimes, as in this case, joint owners or their agents can disagree about the use of funds in the accounts. When that happens, the party who makes it to the bank first often wins. Your attorney can explain the pros and cons of joint ownership, draft an effective POA, and assist family members when disputes arise.