The simplest estate planning document can be the most significant.
A Power of Attorney may be the most important legal document you do not have. There is tremendous confusion and misinformation about this document which this post seeks to clarify. By understanding its power and scope, you can make better, more informed decisions about your planning, and maybe save some time and legal fees!
First, let’s get on the same page about terminology. This writer and the legal profession at large regularly refer to the legal document as a “POA”. The person who signs the POA is the “Principal”, and the person named to act on the Principal’s behalf is the “Agent”. The POA is “durable” if it continues to have power when the Principal becomes incapacitated. Third parties (banks, etc.) do not join in the agreement, and have historically declined to honor a POA if they considered it risky. If you use the correct form (and complete it properly), the POA is enforceable with third parties in Maryland.
Through the POA, the Principal authorizes the Agent to use the Principal’s property (i.e., write checks). In legal terms, “property” is broadly construed to mean anything that you possess that has economic value, and includes: real estate, personal property, financial assets and your right to pursue a legal claim. This authorization is conditional; any action taken by the Agent with the Principal’s property must be for the Principal and in the Principal’s best interest. The Agent is held to a high standard of conduct called a “fiduciary” standard. If the Agent violates the standard, the Agent may be personally liable.
Married people generally name their spouse as their primary Agent. If the Principal were, for example, to have a car accident or major health event and unable to handle finances, the spouse could step in. Because spouses often own assets (including bank accounts) jointly, the POA often isn’t necessary for day-to-day matters if both spouses are still living; however, the POA is necessary to sell a jointly-owned asset, such as a home or a car.
It is important to name a back-up agent. If one spouse dies and the surviving spouse later becomes incapacitated and no back-up Agent is named under the POA, then a guardianship may be required. Guardianships are expensive to obtain and maintain, involving multiple lawyers and court proceedings, as compared to the simple POA. Furthermore, a guardianship leaves the Principal/Ward vulnerable because it legally removes their right to act on their own behalf.
Who should you name as a back-up agent or as primary agent if you are unmarried? Criteria to consider are: trustworthiness, reliability, administrative skills, accessibility. Many people think that their eldest child or a sibling is a good back-up agent, but consider if that person pays their own bills on time, or if they are too busy to take on the financial affairs of another person. Geographic proximity to the Principal is a consideration, but one that can be managed through online banking.
A common objection to POAs is that a Principal wants to maintain his sole access to financial affairs unless absolutely necessary. To address that concern the POA can be drafted to have effect only upon a finding by a physician that the Principal is incapacitated. We call these “springing” POAs.
It is important to remember that the Agent’s authority dies with the Principal. At that time, the authority to act is with the Personal Representative, who is named under the Last Will and Testament.
It is somewhat paradoxical that a document that is so simple to prepare covers an enormous landscape of legal issues. For that reason, it is a key component of your estate plan.