Why clients think they don't need a power of attorney. And why they really do!
Many clients and prospective clients ask why they need to have a power of attorney as part of their estate plan. This article will cover the most common reasons clients give me for not needing a power of attorney, and my response to those reasons. The person creating a power of attorney is called the principal, and the person who receives the power to act on behalf of the principal is called the agent.
“My wife and I are listed on all the accounts together, so she can already sign for me if she needs to.”
That could not be further from the truth. Merely being “on” an account together, even as spouses, does not grant one person the right to speak, sign or act for the other. In the same vein, being married does not mean you have the right to act on behalf of your spouse. In order to manage the financial affairs and/or health affairs of a spouse who is living but incapacitated, the other spouse needs to have legal authority to act as an agent for the incapacitated person (“the principal”). This means more than withdrawing money from a joint account; it means having the legal authority to open and close accounts, to buy and sell assets to accomplish necessary financial goals, to arrange for long term care and home health services, or to apply for public benefits such as Medicaid or VA benefits on the principal’s behalf. Without an existing power of attorney, an incapacitated person’s spouse (or other family) frequently must resort to going before a judge to seek a conservatorship or guardianship to convey the legal authority that a power of attorney would have granted.
“We’re married, so my spouse can legally do everything for me already.”
Again, this is simply not true. Marriage does not convey an automatic right to control the finances or health care decisions of a spouse. Each spouse is still a separate person with the right to control their assets, health care decisions, and planning choices. Through a power of attorney, each person designates the agent whom they wish to act on their behalf, should they become incapable of making their own decisions. The agent is frequently the spouse, but at least one successive agent should be designated, in case both spouses are incapacitated.
“I live in a community property state, so everything goes to my spouse anyway.”
Community property is one of the most misunderstood concepts I encounter. While property purchased by a married couple in a community property state is assumed to be the property of the marital community, that does not mean that one spouse can unilaterally sell or encumber the property without the other’s spouse’s approval. Should a spouse be unable to give their approval due to incapacity, there arises a problem for the remaining spouse because they can’t move forward with a sale or mortgaging of the property, unless a power of attorney is in place that designates an agent. The agent can give approval for the incapacitated spouse.
Also, powers of attorney do not direct the disposition of assets at death. Trusts and wills are the vehicles by which a person dictates “who gets what” upon their death. Even in a community property state like California, the surviving spouse does not always “get everything” if their partner died without an estate plan. If there are children from a previous marriage, for example, then the surviving spouse receives a percentage of the deceased person’s property. Probate rules are complex and the probate process is generally tedious and much more expensive than the cost to create an estate plan with an attorney.
“I’m not giving up control, I can do that later when I start to lose it.”
Executing a power of attorney to designate an agent does not take control away from the principal, unless the principal wants to relinquish control at that time. This is very rare, and occurs only by the principal’s express wishes. Most powers of attorney effectively lie dormant until the principal is deemed to be incapable of making their own decisions any longer. Typically, one or two physicians must make a written determination that the person has diminished capacity before the power of attorney will enable the agent to act on behalf of the principal. While the principal has capacity, the principal is firmly in charge of their own affairs, without interference from the agent.
Further, a power of attorney must be executed while the principal is in possession of their faculties, that is to say while that person has the capacity to understand what powers they are designating to their agent and the ability to select their agent. If a person is already suffering from dementia or other mental health issues, is in a coma or has suffered other traumatic brain injury to the extent that they are not fully aware of what is going on around them, then the likelihood that they can execute a valid power of attorney is seriously diminished.
“I don’t want them to be able to do everything, I only trust them with xyz.”
Powers of attorney are wonderfully flexible tools that can grant the agent broad powers or very limited power, depending on the principal’s wishes. In addition to limiting the scope of power designated to a particular agent, a power of attorney can limit the time frame as well. For example, many clients who plan on taking a vacation for a week or two will reach out to me to draft a short power of attorney designating a particular caregiver for their children and confer the power to authorize emergency medical treatment for their children during the time the parents are on vacation. The power of attorney is limited only to medical authorizations needed during the vacation period, and automatically lapses at the end of the stated time frame. The agent’s authority to care for the children in the event of an emergency is secure during the vacation, but does not extend beyond that.
The same idea applies in other areas as well. A principal can execute multiple powers of attorney, each conferring a different scope of authority, for a different time frame, to a different agent. A client could execute one power of attorney to allow a child to make decisions related to long term health care such as hospice or home care, while executing another power of attorney to allow a trusted friend to make other financial decisions.
“My kids can deal with that when I’m gone.”
Powers of attorney are effective during the life of the principal. When the principal dies, such powers generally cease because the agent is only authorized to act on behalf of the principal, not the estate of the principal. Other estate planning instruments come into effect at death, including revocable trusts and wills. The trustees and executors will administer the estate of the deceased in accordance with the terms of the trust and/or will of the person who passed away. In short, a power of attorney is for the living.
“I might change my mind later.”
As with all estate planning documents, the person making the plan is the person in charge until they pass away or lack the mental capacity to make their own decisions. Powers of attorney, along with trusts, wills, advance care directives and final burial instructions can be created, amended and revoked during life. In fact, good estate planning is an ongoing process that requires periodic check-ups to keep pace with changes in family circumstances, the birth of a child, the death of a beneficiary or prospective agent, marriage or divorce, and significant changes to financial circumstances. A power of attorney can be revoked and a new one created, so long as the principal has the capacity to do so.
If you would like to discuss your estate planning needs, please contact Holmes Christian LLP for a free consultation.
The information contained in this article is not intended to constitute legal advice or tax advice. Estate planning instruments, including powers of attorney, are flexible and fact dependent. What is appropriate for someone else may not be the best choice for you.