By James Philpot, Ph.D.
So, you have a valid last will and testament. Are you also prepared for the possibility that you could be alive, yet unable to manage your assets?
My recent contributions to this column have covered estate planning documents; in this column I will discuss another useful estate planning document, the durable power of attorney for property.
A durable power of attorney for property (POA) is a legal document whereby one person, called an attorney-in-fact, is authorized to act as the agent for another person, called the principal. The agency relationship created via this document allows the attorney-in-fact to buy, sell, and manage property on behalf of the principal. Despite the name, the attorney-in-fact is not required to be a licensed attorney. Most of the time, the attorney-in-fact is a friend, relative, or business partner of the principal.
Durable powers of attorney for property are used to plan for the principal’s incapacity or incapability of managing his or her own affairs. To understand the importance of the POA as an estate planning document, consider this example. Bill and June are married. Bill owns some investments, and his brokerage account lists June as beneficiary (should Bill die before June, she automatically receives the account).
Suppose Bill is seriously injured in a car crash, leaving him alive but incapacitated. Because Bill is still alive, he still owns his investments — they transfer only on Bill’s death — and, not being a co-owner, June has no access to these resources which might be needed for Bill’s care. Had Bill executed a durable POA document when he was capable (the “durable” means the power survives the principal’s incapacity, but not his death), June would have the ability to access his investments without having to resort to a potentially expensive and lengthy legal process.
A POA document will clearly spell out the assets to be controlled by the attorney-in-fact and the powers that the attorney-in-fact has over those assets. The assets in a POA may be limited to specific named assets; for example, a principal might give her business partner POA over the principal’s business assets only. A principal can also define the abilities that an attorney-in-fact has in managing the principal’s assets. A limited power of attorney, as the name implies, places some boundaries on what the attorney-in-fact can do with the POA assets.
Conversely, in a general power of attorney, the principal grants the attorney-in-fact full authority to do anything with the POA assets that the principal could do herself — no limits. This authority can include making gifts of POA assets to third parties or to the attorney-in-fact himself. A general power should be granted only to someone of utmost trustworthiness. Usually general powers are granted to a spouse or adult child.
Another item frequently found in POA documents is a springing provision. The springing provision limits the POA to taking effect only upon the incapacity of the principal. Without the springing provision, the POA takes effect when properly executed and delivered. The springing provision ensures that the POA serves only the purpose of providing for incapacity — defined in the springing provision and usually determined by an attending physician.
When properly discussed with and prepared by a qualified lawyer, the durable power of attorney can solve many problems of incapacity. In future Bears Business Brief columns, I will discuss other key estate planning documents.
This article appeared in the January 17, 2015 issue of the Springfield News-Leader. It is available online here.
James Philpot, Ph.D., is a Certified Financial Planner and associate professor in finance and general business at Missouri State University. Views expressed in this article reflect those of the author, have been distributed for educational and informational use only, and should not be construed as investment advice or a recommendation of any specific security, strategy, or investment product. Email: jamesphilpot@missouristate.edu.