A Power of Attorney is Essential
Many of us have looked up to our fathers for guidance at some point in our lives, but because of diminishing cognitive ability that aging can bring, we must plan for the time when father no longer knows best. Planning ahead is critical because once an individual’s mental capacity slips below certain legal thresholds, the options for legal planning to address incapacity becomes more limited and the steps that need to be taken more complex.
A power of attorney is one powerful tool available to individuals that have the legal capacity to sign it. This document helps ensure that an individual’s needs will be met even if he loses capacity later in life. It can enable an adult child to pay bills or handle assets for a parent who can no longer manage finances. It can make both a parent and child’s life easier by providing the adult child with the authority to access bank accounts, pay bills for the parent, and speak with financial institutions.
To sign a power of attorney, an individual must understand that he is giving authority over his financial affairs to another individual or individuals who will serve as his agent. Clearly, selecting an agent or co-agents is a hefty decision, and whether an individual has the mental capability to understand the power that he is granting another is an issue the legal community takes very seriously.
The legal capacity required to sign a power of attorney is actually higher than the capacity required to sign a Will, which simply requires knowledge of one’s assets and beneficiaries. Some jurisdictions hold that to sign a power of attorney, an individual must be knowledgeable of his financial holdings and also understand the significance of the document that he is signing.
Attorneys routinely assess clients’ capacity before allowing them to sign legal documents, such as a power of attorney. Sometimes determining an individual’s capacity to sign documents is challenging, however, because an individual’s abilities can vary from day to day and throughout the course of a day. Nevertheless, this determination is critical because an attorney confirming an individual’s ability to sign a power of attorney can help defend the validity of the document if it is ever challenged in court.
A power of attorney can be made effective immediately upon signing or it can lay dormant and become effective only if the principal is disabled and can no longer manage his or her own affairs. Authorizing the agent to act immediately upon signing can be a great help to parents who are not necessarily disabled, but are overwhelmed by the day to day tasks of paying bills and managing bank accounts or investment accounts. If a child needs to take action urgently on a parent’s behalf, he can immediately step in and assume the authority granted over his parent’s assets.
The alternative to a power of attorney that is immediately effective is a “springing” power of attorney that only becomes effective if the individual signing it becomes incapacitated. Many legal forms require two doctors to certify the incapacity of the individual before the power takes effective. While this “springing” structure may reassure individuals that they are not granting broad authority over their assets before such authority is absolutely necessary, it does create more red tape for the agent to address prior to acting or accessing account information.
Powers of attorney are generally designed today to be “durable,” meaning that they continue to be effective in the event that the individual granting the authority becomes incapacitated.
A power of attorney can be limited in scope or broad enough that it enables the agent to virtually step into the shoes of the individual for financial and legal transactions. A limited power of attorney may only grant the agent power to act on an individual’s behalf at a real estate closing, for example. A general power of attorney may have provisions that include enabling the agent to handle all of the mail for the individual granting the power, address taxation issues, deal with retirement accounts, invest assets, make decisions concerning life insurance policies, sign legal contracts such as nursing home admission agreements, conduct banking transactions and deal with government agencies, such as the Division of Motor Vehicles.
When establishing a power of attorney, individuals should also give thought to whether the agent should have limited discretion or broad authority to make gifts from the assets that he is managing. Granting broad authority to gift can be advantageous if estate tax planning or asset protection planning for long-term care expenses is to be done in the future.
Since gifting can trigger periods of ineligibility for Medicaid, which pays for long-term care, and also can have estate and gift tax implications, an agent under a power of attorney should seek the advice of a qualified attorney to help him or her with any gifting. The gifting power, as with the long list of other powers that may be included in a power of attorney, must be carefully crafted to suit the family’s goals.
This Father’s Day, while honoring the many ways in which our fathers have helped us over the years, we must think of ways to help them as we move forward. Encouraging Dad to sign a Power of Attorney is a good start.