You may have seen or heard the phrases “durable” and “nondurable” power of attorney. A “nondurable” power of attorney is a short legal form obtainable from office supply stores. This type of power of attorney is used to grant authority to someone else (the “agent”) to make property, legal and business decisions on a person’s (the “principal’s”) behalf.
A power of attorney can be “general” (giving an agent broad authority to handle virtually all legal transactions on a principal’s behalf) or “specific” (giving the agent the power to perform only specific functions on the principal’s behalf, such as closing on a house or business deal). A nondurable power of attorney limits how the agent can act on the principal’s behalf (provided the principal has legal capacity).
Someone fearing future incapacity due to advanced age, physical disability or illness often wants an agent to act even after the principal has become incapacitated. This type of principal might execute a “durable” power of attorney, permitting the agent to act even if the principal is no longer mentally competent or physically able to make decisions. A durable power of attorney remains effective until the principal revokes it or dies.
Estate Planning Uses
While a durable power of attorney allows for continuity of management and safeguarding the principal’s assets in the event of incapacity, it can also be particularly useful for estate and other tax planning purposes. Properly drafted, a durable power of attorney permits an agent to carry out many of the principal’s critical planning goals, by granting the agent powers (such as the power to file income and gift tax returns, make gifts, disclaim property and make IRA elections). Two critical issues in executing a durable power of attorney are agent selection and powers granted.
Choosing An Agent
A broadly drafted durable power of attorney is like a blank check. Individuals should be careful—chose a trusted family member, a close friend or a professional with a strong reputation to serve as the agent. Agents are fiduciaries subject to strict standards of care and honesty; however, often there is no official or government body monitoring the agent’s actions. A principal must be confident in the selection and should insist that the agent keep good records of all transactions conducted.
The durable power of attorney is an important and powerful legal tool; the various options that a principal should include in such an instrument are not always apparent.
However, failure to stipulate a specific power in the durable power of attorney document can be disastrous. A court may conclude that a power was not granted, even if the document were drafted broadly as a “general” power of attorney. For example, an agent’s making of gifts, if not specifically granted in the power of attorney, can trigger the gifts’ value being pulled back into the principal’s estate. Many states have laws that require detailed specifications in a general durable power of attorney. A principal should consider all the powers that he or she wishes to convey and list them in detail in the durable power of attorney.