Q: My friends and I were recently discussing our estate plans, and the subject of powers of attorney came up. It seems that we have different understandings as to what they look like and how they can be used. Can you provide me with a short lesson which I can share with my friends?
A. Sure. Powers of attorney are very important legal documents. In their basic structure you (the principal) delegate to someone whom you trust (your agent or “attorney-in-fact”) the power to engage in financial transactions in your name, using your assets, with the same legal effect as if you had signed the transaction documents yourself. But all powers of attorney (“POA”) are not the same. Here is a short list of some variations:
Is It Durable?
Unless the document expressly so provides, a POA expires when the principal loses mental capacity. However, this feature may be overcome if the document provides that it is “durable,” meaning that it survives the principal’s incapacity. In almost every case, you will want a power of attorney to recite that it is durable, as that is usually when it is needed most.
Is It a “Springing” Power?
A POA can either be immediately effective or it can be effective only upon the occurrence of a future event, such as incapacity. If triggered by a future event, we refer to this as a “springing power,” because it does not spring into life until the occurrence of that future event. Many POA’s are designed to only spring into life when a physician certifies that the principal has lost mental capacity.
Is It Limited Or General?
A POA can either be limited in scope (e.g. authorizing an agent to sign a deed and other documents to close a specific sale escrow) or be limited in time with a fixed expiration date, or it can be very general and comprehensive in nature.
Does It Permit Modification of Trust?
If you have complete confidence in your agent, you may wish to authorize your agent to make future modifications to your “Living Trust” in order to address changes in family circumstances, changes in tax law and/or to engage in public benefits planning on your behalf. But in order for these powers to be effective, there must also be reciprocal provisions in your trust, a legal requirement often overlooked. However, your agent may not make a Will for you.
Does it Permit Gifting and/or Long Term Care Benefits Planning?
By California law, an agent cannot use the principal’s assets to make gifts, unless that power is expressly granted in the POA. Further, even if this power is expressly granted, the agent cannot make gifts to himself unless the right to “Self Deal” is also expressly stated. Sometimes the power to make gifts can be very important, such as for tax planning or planning for government benefits under the Medi-Cal or Veterans Pension programs to help with long term care expenses. Example: sometimes a home transfer within the family is necessary to protect the home from Medi-Cal estate recovery. Unfortunately, we find that very few POA’s contain these important powers or impose limits upon exercise which reduce the planning opportunities available to the agent.
In every case, the POA can only be created when the principal has mental capacity to understand what he or she is signing and all expire upon the death of the principal. Lastly, a POA for financial matters cannot authorize health care decisions: for that another document is necessary, called an Advance Healthcare Directive.