Apr 11, 2009
This is the first in a series of Blogs on Estate Planning Tools. Estate Planning is a process. The documents we lawyers prepare for clients are the “tools” used to ensure that the process works. Some are basic tools that every client needs as part of their plan. Some are more sophisticated and reflect the clients’ needs, desires, and special circumstances.
Everyone Should have a General Durable Power of Attorney
The General Durable Power of Attorney is one of the basic tools that should be in every estate plan. This document, correctly drafted, will give the client the flexibility needed to respond to almost any variation in circumstances, whether specifically addressed in the estate plan or not. The Power of Attorney will allow surrogate decision makers to act in your best interest and in furtherance of your estate plan, even when you cannot.
Stuff You Probably Didn’t Want to Know. There are some fundamental components that must be included in a good Durable Power of Attorney document. To well understand these components, it is useful to have a basic familiarity with the law which is the foundation of the Durable Power of Attorney. As you read on, hopefully you will remember the adage, “do not shoot the messenger.”
My father the engineer was fond of saying that the best, most trouble-free, and lasting designs were based on simplicity. Unfortunately, what could perhaps be the simplest of all estate planning concepts is necessarily complicated by the law which governs it.
Common Law vs. Statutory Law. Since before the United States was settled, our ancestors have relied on something known as “Common Law.” Common law developed based on a series of court decisions over many years, starting with English courts, and carrying over into most of the United States.
When the legislature (congress at the federal level) of a state thinks common law is insufficient to cover certain issues, or needs to be changed, it enacts written laws, known as “statutes.” One of the quirks of statutory law is that when it changes or goes against traditional common law, our courts interpret it very narrowly. Why am I telling you this? What does this have to do with Estate Planning and Durable Powers of Attorney?
Agency Law. The common law of Agency governs Durable Powers of Attorney. They are very similar to an employment document (employment law is also originally based on Agency law).When you grant someone a Power of Attorney, they become your Agent (and you are known as the Principal). Under the common law rules, Agency was automatically terminated when the Principal become incapacitated.
Obviously, as an Estate Planning tool, that type of instrument is of very limited usefulness. Recognizing this limitation, the Michigan Legislature (as have the legislatures of every other state), enacted a statutory provision which allowed a Durable Power of Attorney to provide in its terms that it would continue to be effective, even in the event of the incapacity of the principal. As noted above, this goes against (or is “in derogation of) traditional common law rules of Agency. And because of the quirk of narrow interpretation noted above, this means that unless the Durable Power of Attorney specifically and precisely enumerates detailed powers granted to the Agent, the courts (and more importantly, third parties your agent may be dealing with) are likely to consider it useless.
Thus, our legal system requires us to take what could be a very simple document (what is more clear than “my Agent may do anything that I could do”?) and make it a necessarily long and complex document with many, detailed, enumerated powers.
If you have an existing Durable Power of Attorney that is only a page or two, it is likely not going to be as effective as it could or should be.
What Should Your Durable Power of Attorney Say? A well written Durable Power of Attorney Document will have a number of detailed provisions generally dealing with the “business” of everyday life. It will generally be necessary for the document to cover at least the following areas:
• Financial Powers, including power to deposit, withdraw from, open and close bank and brokerage accounts, vote stock, and make dividend elections.
• Power to pay and/incur debt, and to contract, negotiate, sue and defend.
• Power to engage in Real Estate transactions (this will require that the Power of Attorney be in recordable form, so it can be recorded in the county register of deeds office if necessary).
• Tax Powers, including the power to file tax returns and make tax elections.
• Powers to deal with Social Security, Medicare, Medicaid and other governmental agencies.
• Power to deal with Qualified Retirement Plans, Pensions, and IRA’s, including power to make elections.
• Powers to deal with Insurance and Annuities (including making elections and beneficiary changes).
• Power to make adjustments to existing Estate Planning Documents.
• Power to make or continue gifts.
• Personal powers like establishing residency, making funeral arrangements, and entering into personal care contracts.
The foregoing is by no means an exhaustive list, but is meant to illustrate the level of detail that is necessary in order for these documents to be useful as intended.
Who Should Your Agent Be? Considering some of the powers enumerated above might cause you to ask whether you really want to give an Agent such broad and far-reaching powers.
The focus should not be on what the document says, but who we give the power to.
The “tool” analogy really does work here. If I want to build a house, I hire a skilled, experienced builder. In the hands of an unskilled or careless person a sophisticated power tool with very sharp blades can cut off limbs and do serious injury in an instant. In the hands of a skilled user who exercises common sense, that same tool makes the process better and easier. And, as a matter of fact, in the hands of an unqualified person, a crude hand tool can still do plenty of damage.
The question you should be focusing on is whether the person being give any power is trustworthy, dependable, and capable of exercising good judgment. If that is the case, I believe we want to give them the most capable tool to accomplish the assignment they have been given.
I am not saying, necessarily, that the person you appoint must be a lawyer, accountant, or financial person. Those persons can be hired. They need to be able to use good judgment and common sense in the process. Indeed, in most cases, I believe a trusted family member is best solution for this.
When Should The Power Be Effective? A Durable Power of Attorney may be immediately effective, or may be drafted to become effective only upon a finding of incapacity (sometimes referred to as a “Springing” power). Clients sometimes express a concern over a power being immediately effective and believe that they would prefer the “springing” power.
While there is no “right or wrong” answer to this question, I have a bias toward the power being immediately effective. My view is based on the same reasoning used in the “sharp power tool” analogy above. If the person you have chosen is trustworthy and capable of good judgment, you shouldn’t need to worry about abuse of the power. If they aren’t, you should be very seriously questioning appointing them under any circumstances.
My bias stems from a practical viewpoint. If we make the power “springing,” it must be conditioned upon an event -- typically, “incapacity,” How is incapacity defined? Who makes that determination? How do we prove that to third parties?
In my view, by making the Durable Power of Attorney conditioned on an event, we set up “road blocks” to its practical usefulness. We find ourselves having to figuratively “jump through hoops” to validate it. It seems to me that such “roadblocks” defeat one of its most useful purposes: flexibility and ease of use by the Agent, when that use is most needed.
Of course, there will always be exceptional circumstances and none of the conditions are insurmountable. It is possible to create a definition and designate a decision-maker. But on balance, I would prefer the ease of use of an immediately effective document.
I believe the Durable Power of Attorney is the single most important Estate Planning Tool for most clients’ Estate Planning Need. While others are equally advisable (as upcoming Blog entries will illustrate), if I could only choose one Estate Planning component, the Durable Power of Attorney would be the one.