Power of Attorney – Obtaining Power Beyond Your Trust
A “power of attorney” is a powerful legal tool. In fact, when clients hear about a power of attorney, they often question the need for a living revocable trust and a will. They get the impression everything can be covered by a power of attorney. A power of attorney is simply a written statement which transfers control of property to another person. If you are going to leave town and need to sell your car, you could give a power of attorney to someone authorizing them to sell the car in your absence. If you wanted to, you could give someone power of attorney over all of your property. This would be considered a “general” power of attorney.
Power of attorney arrangements are great, but they cannot be used in place of a will or living revocable trust for three main reasons.
First, all powers of attorney fail when the “principal,” i.e., the person who creates the power of attorney, dies. The law says that if the principal is dead, the power of attorney is no longer valid. The law says so, and that is that. No power of attorney can be used to control or distribute property after the principal dies. There are no ifs, ands, or buts about it.
Second, the power of attorney used in most situations becomes void when the “principal” becomes incompetent. When the principal becomes incompetent, the person designated to act under the power of attorney, the “agent,” automatically loses all power to act. The law simply says that the power of attorney is void as soon as the principal becomes incompetent.
Third, when you give an agent power of attorney over your property, the agent is not controlled by the strong “fiduciary relationship” which controls a trustee. The agent has full power to do whatever he or she wants to do with the property, irrespective of whether or not his or her actions are in your best interests. However, a fiduciary (trustee) must perform those acts which are in your (the beneficiary’s) best interest. So, the best protection for you and your family is provided by the trust’s fiduciary restraints on the trustee, not by the sheer, unchecked power given an agent by a power of attorney.
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A special type of power of attorney called a “durable power of attorney” has been created by new laws that have now been passed in every state. The durable power of attorney “endures” the incompetency of the principal, and the agent has power to act even though the principal is incompetent. You should definitely have a durable power of attorney as part of your legal arsenal.
You need a durable power of attorney to support your living revocable trust, but it should be made clear that the durable power of attorney is not a substitute for your will or your living revocable trust.
Property which is owned by your living revocable trust will be under the control of your successor trustee when you become incompetent or die. Property held in your trust will not be controlled by the agent appointed in your durable power of attorney. Only property you “own,” i.e., property not in your trust, will be controlled by your agent when you become incompetent. Your trust should describe the criteria under which you will be considered incompetent. Therefore, when you become incompetent, there shouldn’t be any need to go to court and have you declared incompetent in order to “manage” the property held within your trust. Your trust will automatically transfer power to your successor trustee when the criteria of your incompetency are met, and the successor trustee will have authority to manage all of the trust property for your benefit. How you define those criteria is described in detail in my book Protecting Your Financial Future.
The same type of criteria will be used in your durable power of attorney to describe when you are incompetent. When the criteria are met, the agent you have appointed in the power of attorney will have the power to act. His authority will “spring” into existence. Thus, the lawyers call this transition of power a “springing power.”
In your durable power of attorney, the agent should be given broad authority or power over all of your property which is not held in your trust. In fact, your durable power of attorney could authorize the agent to transfer ownership of your property to your living revocable trust. This will allow the agent to move the property, prior to your death, so that it won’t have to be probated if you die. Just because your agent can move property to your living revocable trust, that is no excuse for not moving the property prior to your incompetency. And who knows, you may just die and skip the whole incompetency thing.
In addition to managing property, your agent must be given power to act on your behalf with the gas company, electric company, your credit card companies, and other companies and agencies you do business with. Have you ever tried to deal with the utility company on behalf of someone else? It is impossible without a power of attorney.
Some of my clients dismiss the need for a durable power of attorney. The facts are that at age 25 you are almost ten times more likely to be incompetent next month than you are to be dead next month. Even at age 65, you are almost five times more likely to be incompetent tomorrow than you are to be dead tomorrow. Over 80% of all people are incompetent and need a durable power of attorney for at least 90 days during their life. You should have a durable power of attorney as a part of your estate planning package, and your trust should be used to the maximum.
You can easily determine whether or not a power of attorney is the common type of power of attorney (a general power of attorney) or a durable power of attorney. If it is a durable power of attorney, it will have a “durability provision” some place in the document. The provision will have language in it which reads something like that shown in the Durability Provision below.