A power of attorney document is an extremely important part of estate planning yet one of the most misunderstood.
Everyone has been told that it is important to have a will, but for many older people, the most important documents are powers of attorney. They are, quite frankly, the neglected step-children of estate planning, yet in my practice; they serve to be more important that wills.
Many people confuse the power of attorney (POA) with a will, but these documents are two very different things and have two very different functions. A will goes into effect on the day you die. A POA applies during your lifetime and ceases to apply when you die. So you actually need both a POA and a will as they complement, and do not overlap, each other.
To add a twist to the subject, there are two types of POA:
one for finances and legal matters, and one for health care. These two types are completely separate. They deal with different areas of your life and both are required for effective estate planning.
Power of Attorney for Finances and Legal Matters
A POA for property gives the designated “attorney” – the person you name on the POA document as your decision maker – legal control over all your property. “Property” refers to both real property (real estate) and personal property (all other assets including stocks IRA’s, and bank accounts).
The purpose of a POA is to make it easy for your designated attorney to access your finances and, in that way, take care of your property.
The language in the document controls anything the agent can do. As such, it must be carefully drafted according to your desire. Most POA’s allow a wide-range of things, including: paying bills, selling your home, managing investment accounts and IRA’s, dealing with the IRS (including signing tax returns)
Although a POA for property may be used to help you when you can no longer help yourself, it usually goes into effect the day it is signed. It’s therefore essential that you have great confidence in your designated attorney. They must be someone you can trust, without reservation, to use your property for you and not for themselves, or anyone else.
You can specify in the POA document that you must be mentally incapacitated for the POA to take effect, but this provision is not recommended. That’s because it’s difficult to define and prove “incapacitated” and could mean that your case goes to court in an attempt to determine whether you can make decisions for yourself or not.
Such a lengthy, complicated and expensive legal process defeats the whole purpose of the POA which, as pointed out earlier, is to give your designated attorney fast and easy access to your finances, when necessary.
In all cases, you want to choose someone who is good at managing money to be your POA. Your partner may not be the best choice if you know they have difficulty with money. However, if your partner is trustworthy with money, they may be the perfect choice.
If you don’t have a valid financial POA in place and you become incapable, the person who wants to manage your property would need to apply to the courts for the right to do so through a process called a guardianship. Many people call the guardianship a “living probate”, and it should be avoided at all cost. The process is time consuming and expensive, especially when compared to the costs of putting a POA for property in place. Furthermore, the person who applies for the right to manage your property may not be the person you would have selected. With a POA in place, you can guarantee that a person of your choosing is in charge of your property.
Power of Attorney for Health Care
A POA for personal care gives your designated attorney the power to make decisions on your behalf in relation to medical issues, hospitalization and long-term care when you are no longer capable of making such decisions yourself. In the case of a POA for personal care, it is a doctor who determines whether you are able to make such decisions.
If you have specific wishes for a particular treatment or plan of care, you can write them directly into your POA document. If your wishes are included in the POA document, or if you have expressed your wishes verbally, your attorney is required by law to make decisions based on those wishes. In the absence of any specific wishes, your attorney is left to make decisions based on what they consider to be your best interests.
Once again, you will want to designate someone you trust implicitly to serve as your attorney. They will be making very important decisions for you regarding your health and long-term care.
Everyone needs to designate a power of attorney, no matter what his or her financial or relationship status. POA ensures that a person of your choosing is the one who retains the undisputed right to make key decisions about your life.
Make sure you have created both a both POA’s, in addition to a will.
Drafting a power of attorney is inexpensive, especially when compared to the expense potentially created by not having one in place when the need arises. Cost should not be a reason for you to postpone the process of creating your POA.