Microsoft Word - EstatePlanning_web


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Microsoft Word - EstatePlanning_web

  1. 1. -24- 6. Legal Planning for Incapacity: The Durable Power of Attorney We are all living longer, thanks to improved medical knowledge and technology. But with increasing longevity comes an increasing threat that we will live through a period when we will not be able to manage our own financial or personal affairs. Yet many people still fail to plan for this threat of incapacity, despite evidence that most people in the future will experience at least temporary (and some even lengthy) periods during which they will be unable to manage their financial affairs. It is important to realize that well thought out plans fro property management contained in your Will are useless during periods of incapacity because the Will takes effect only at death. The Court Appointed Guardian If you should become incapacitated without having planned for it, friends and family members may still be able to manage your property. However, more likely, it will be necessary for the court to appoint someone as your guardian to manage your property. Selling stocks or bonds, listing a house for sale and transferring its title at closing, withdrawing money from a bank account to pay bills, and applying for insurance benefits are just some of the actions that may require a guardian to be appointed to act on your behalf.
  2. 2. Guardianship proceedings are frequently undesirable because they involve considerable expense. The law requires that a guardian prepare (and file with the court) periodic accountings and that all actions of the guardian receive court approval. Also, many families do not like the fact that the guardianship records are open to the public. You can avoid a guardianship if proper planning is done while you are healthy and alert. -25- Durable Power of Attorney: An Alternative to Guardianship Most people who plan for incapacity use a simple document known as a “durable power of attorney.” In contrast to a guardianship, a power of attorney typically costs little and involves no court supervision and no public proceedings. A durable power of attorney is a document in which one person, the “principal,” authorizes an “agent” to act for him or her with respect to certain legal matters. The “agent” is often a family member and is sometimes referred to as an “attorney-in-fact” (in contrast to an “attorney-at-law”). Before 1974, Washington did not allow a power of attorney to be used in planning for incapacity. Thanks to legislation in 1974, however, a power of attorney may now include language that specifically authorizes the agent to act while the principal is incapacitated. A power of attorney that survives the principal’s incapacity is called a “durable” power of attorney. Since the durable power of attorney is a relatively new legal concept, it is dangerous to assume that an existing power of attorney is, in fact, a durable power. In
  3. 3. order to be durable and to be useful during incapacity, the power must explicitly include language such as “this power shall not be affected by incapacity of the principal” or “this power of attorney shall become effective upon the incapacity of the principal.” Caution. The creation of a durable power of attorney and the powers given to an agent is a serious undertaking and the individuals chosen and the powers given must be considered carefully. Two Kinds of Durable Powers of Attorney Available: Immediate and Postponed An “immediate” power permits the agent to act now and to continue acting during incapacity. The unspoken assumption is that the agent will not use the power unless the principal is unavailable or incapacitated. A “postponed” power, the second type, does not become effective until the principal actually becomes incapacitated. -26- One benefit of the “immediate” power is that the agent may act if, for example, the principal is competent but is temporarily out of town. Another benefit is that there is no need to determine when incapacity occurs. The drawback, however, is that technically the agent can deal with the principal’s property, without the principal’s knowledge, even though the principal is fully competent. For example, in times of marital disharmony, a spouse who has been designated as the agent could try to use the power unfairly.
  4. 4. Determining Incapacity Under the “postponed” type of power, the principal does not give any authority to the agent unless incapacity actually occurs. To simplify the determination of incapacity, many such powers designate a “committee” to make the determination. The committee usually consists of the principal’s physician and one or more named friends or family members. A third party may require proof that the principal is incapacitated before that third party is willing to rely on a “postponed” type of power. This may result in delays before the agent can act for the principal. Special Considerations Without specific authorization to the contrary, granting a durable power of attorney does not allow an attorney-in-fact to make or change the principal’s estate planning documents or to make gifts or transfers of the principal’s property. Therefore, if desired, specific provisions may be included in a durable power of attorney that allow the attorney-in-fact to engage in gifting or to make or change estate planning documents if such actions are necessary to qualify the principal for medical assistance. In 2000 the Washington Legislature authorized streamlined court proceedings to obtain court supervision of certain attorney-in-fact actions, for example, to obtain a court order to require a financial institution to recognize the durable power of attorney or to approve an accounting by the attorney-in-fact. These court proceedings can be requested by the attorney-in-fact or certain close family member. If the principal does not intend a family member to be able to start such a court proceeding, the principal must make a specific statement in the durable power of attorney.
  5. 5. -27- Broad Scope of Powers (Including Consent for Health Care) Although the authority granted by a durable power of attorney can be limited, powers created to provide for incapacity are usually extremely broad. They enable the agent to do almost anything that the principal could do in dealing with the principal’s real estate, personal property, safe deposit box, etc. The power can even authorize the giving of informed medical consent, allowing the agent to make decisions about medical and surgical procedures for the principal. Given the scope of such power, it is imperative that the agent be someone in whom the principal has complete confidence. Special Forms for IRS and SSA A durable power of attorney, even when it provides for very broad powers, will not automatically be honored by the Internal Revenue Service or the Social Security Administration. To give someone the power to sign tax returns, to receive notices or refund checks, or to represent you in communications with the IRS, you should either use specific language or execute Internal Revenue Service Form 2848, Power of Attorney and Declaration of Representative. The Social Security Administration requires a person who wishes to act on behalf of a recipient of Social Security benefits to complete an application to be designated “Representative Payee.” A Representative Payee is then authorized to receive the Social Security checks of the person entitled to benefits and to spend them for that person’s “personal care and well-being.” Delivery and Revocation of Powers of Attorney After you have signed the durable power of attorney, you should deliver it to the agent or should tell the agent that the durable power of attorney has been executed. Otherwise, your family and friends may assume that there is no alternative but to pursue the more expensive and less flexible guardianship. Also, while the power of attorney is being drafted, you should consider the conditions under which the power of attorney will be revoked automatically (such as dissolution of marriage) under the document.
  6. 6. -28- Executing a Durable Power of Attorney Though there is no statutory requirement that the principal’s signature be notarized, a notarized durable power of attorney is needed before real property can be transferred. In addition, third parties are more likely to deal with an attorney-in-fact if the durable power of attorney is notarized. Therefore, it is a good idea to notarize the principal’s signature. In addition, if the durable power of attorney will be used to transfer real property, the document must meet county recording formatting requirements. Alternative to Durable Power of Attorney: Trust Before durable powers of attorney were available, people frequently established “revocable living trusts” to provide for the management of their affairs during any periods of incapacity. Although a living trust entails more expense and complexity than a durable power of attorney, it is sometimes preferable. Your lawyer can advise you about the advantages and disadvantages of the trust versus the power of attorney and can assist you in implementing the choice that best meets your needs. For additional information, see the discussion of revocable living trusts in the chapters entitled “Trusts: an Introduction” and “Living Trusts and Other Transfers of Property that Avoid Probate.”