Why should I have a power of attorney?

Powers of attorney are flexible and useful estate planning tools.  A power of attorney is a written document in which one person appoints another person to do certain acts or transact certain business on his or her behalf.  The person granting the power is referred to as the “principal,” and the person who is given the power is referred to as the “attorney-in-fact,” or “agent.”  The primary focus of powers of attorney is to convince third parties that the attorney-in-fact has authority to act for the principal just as if they were dealing directly with the principal.

Originally, the attorney-in-fact could only act for the principal while the principal was alive and competent.  Thus, if an attorney-in-fact had authority to sell the principal’s real estate, that authority would cease if the principal became incompetent or died.  But in 1974, the Washington State legislature adopted a durable power of attorney statute.  Under that statute, principals can specifically authorize their attorneys-in-fact to act even if the principal later becomes incompetent or disabled.  A durable power of attorney must contain specific language which clearly states that it is not affected by the disability of the principal or that it shall become effective upon the disability of the principal.

Powers of attorney can be further broken down into “special” powers of attorney, which give the attorney-in-fact authority to do only certain acts (such as complete a certain real estate transaction or deal with a particular bank account), and “general” powers of attorney, which purport to give the attorney-in-­fact authority to conduct any business affairs on behalf of the principal which the principal could do if actually present.  Even so, there are some powers that cannot be conducted by an attorney-in-fact under a general power of attorney unless these acts are specified.  Here are 6 examples of these types of specific powers: 

1.   The authority to consent to medical treatment on behalf of the principal;
2.   The authority to make gifts from the principal’s assets;
3.   The authority to change life insurance and retirement plan beneficiary designations;
4.   The authority to disclaim assets on behalf of the principal;
5.    The authority to establish trusts or convey property to trusts unless the trust is for the principal’s benefit and does not change the ultimate distribution of the principal’s assets; and
6.   The authority to nominate the person who shall serve as guardian for the principal’s person or estate if that is determined to be necessary by an appropriate court.

Additionally, more recent amendments to Washington law allow parents to designate persons who can make care and treatment decisions for their minor children if the parents are incapacitated or unavailable, and to nominate a guardian for that minor child, if such becomes necessary.

Notwithstanding all the things that an attorney-in-fact can do for the principal, powers of attorney still terminate upon the death of the principal unless an earlier date is specified in the power of attorney.  There still remain certain things that cannot be done by an attorney-in-fact.  For example, it is unlikely that an attorney-in-fact can prepare a will on behalf of a principal, even if that authority is specifically granted by the power.  Certain contracts which can only be performed by the principal cannot be fulfilled by the attorney-in-fact.

Durable powers of attorney are usually inexpensive to prepare and are widely accepted throughout the United States.  In fact, all 50 states have durable power of attorney statutes.  Powers of attorney can be held in reserve to be used upon the disability of the principal or they can be drafted to take effect only upon that disability.  In fact, the principal can specify with great particularity how any determination of disability is to be made.

Because no specific conveyance of assets is required, the cost of setting up and administering a durable power may be significantly less than a living trust.  Generally, no court proceeding is required to initiate a durable power of attorney and by providing effective management of the principal’s assets, a good durable power of attorney can avoid the necessity of costly guardianship proceedings.

Even so, durable powers of attorney may not be sufficient in every situation.  They do not offer the same degree of accountability as living trusts and guardianships.  Since the attorney-in-fact is more difficult to supervise, the principal must have a considerable degree of confidence in the ability and trustworthiness of the attorney-in-fact.  Unlike a living trust, since the durable power of attorney terminates upon the principal’s death, it cannot be used to avoid probate.  In addition, the effectiveness of a power of attorney depends upon the willingness of third parties to accept the agent’s authority.  Though most individuals and financial institutions accept a well drafted durable power of attorney, it is a good idea to check with them while the principal is still legally competent to make sure they will honor the power.  Finally, keep in mind that even though a durable power of attorney can provide for the management of a principal’s assets during disability, it will not be valid unless signed before the principal becomes disabled.

In recent years, there has been increased awareness of those that prey upon or take advantage of vulnerable adults.  Durable powers of attorney can certainly serve as a tool for those who abuse the elderly, by giving them the authority to access the victim’s assets.  Even though efforts have increased to prosecute elder abusers, many elders find their financial assets cleaned out by persons they trusted; sometimes, the worst financial abusers are the victim’s own children or family members.  So it is exceedingly important that a person who is considering granting a power of attorney be absolutely certain of the trustworthiness of the person to whom they are giving that power, and that adequate provision be made within the power of attorney to assure that the person to whom the power is granted will be accountable to someone in addition to the person who gives the power.