The durable power of attorney is a fairly straightforward and simple document when compared to its more prolific competitors in the legal estate planning realm such as wills, trusts and other contracts.
However, you may have noticed that this simple document also gets a lot of attention. The reason for this is that the power of attorney, true to its name, carries an enormous amount of power for the one that holds it.
Did that sound a bit like something out of Lord of the Rings? Can you blame me for trying to make this dramatic?
This article will reveal the anatomy of the power of attorney and specifically the durable power of attorney as it compares and contrasts with other types of powers of attorney. Under the umbrella of durable powers of attorney there are also some distinctions to understand because they can be used for different purposes.
If this all doesn’t sound super enthralling, let me tempt you to keep reading by suggesting that this simple document, granted imprudently or used wrongly, can destroy an estate plan, leaving kids or spouses desolate and disinherited, contravening your last wishes and leaving your loved ones in squalor. I thought that’d get your attention…
Defining the Durable Power of Attorney
You may or may not know that powers of attorney can be used for all kinds of different purposes.
The durable power of attorney definition is a document that allows you to legally appoint someone to make binding legal decisions on your behalf. The “durability” in a durable power of attorney allows it to withstand the grantor’s disability or incapacity.
Herein lies the danger of the ill conceived grant of a power of attorney. Your appointee can make legal changes that are binding against you and/or your estate.
All powers of attorney operate this way with one important exception. Most powers of attorney terminate and become ineffective in the event that the one who granted the power (the “grantor”) becomes disabled or incapacitated. Thus, the “durability” in a durable power of attorney allows it to withstand the grantor’s disability or incapacity.
While I’ve described this is a relatively simple document, I don’t want to mislead you into believing that this is a one pager without much substance. Simply put, if you come across a one page durable power of attorney, do the right thing and throw it in the trash. Over the years, the various state legislatures have focused on durable powers of attorney due to the potential for abuse. Thus, in most states, the length of a well drafted durable power of attorney has increased dramatically due to new requirements.
The thing to look for is whether it has adequately described all of the various powers that the grantor needs to authorize. Key powers, for example, would include the ability to sell and manage real property OR the ability to manage financial accounts, and MAY even include the ability to amend wills and trusts, although this power should be considered with extreme caution as there are both pros and cons to granting it.
An incomplete or poorly drafted durable power of attorney could lead to rejection by financial institutions, courts or real estate title companies, thus placing your estate in jeopardy.
Durable Powers of Attorney vs. Other Powers of Attorney
Perhaps you’re asking why some powers of attorney are NOT intended to withstand incapacity whereas the durable power of attorney is the opposite. A little bit of legal theory relating to why powers of attorney are used will be helpful to answer this question.
Most of the time, when someone grants a power of attorney that is not durable, known as either a general power of attorney or special power of attorney, they are granting it for a reason other than to make decisions in the event of incapacity.
For example, one might grant a special power of attorney to an real estate agent to handle a specific real estate deal when the grantor is out of the country or otherwise unavailable.
Similarly, that same person might grant a general power of attorney, although this is more risky, to a close friend so the can pay bills and handle a range of business matters while the grantor is out of the country.
Under these circumstances, if the grantor became incapacitated, the law would presume that the circumstances had changed and those powers of attorney should no longer be in force.
Contrast that example with a scenario where a durable power of attorney was granted for the express purposes of empowering the grantee to make decisions in the event of incapacity, and its easy to see why the “type” distinction is critical.
Different Types of Durable Powers of Attorney
Springing Power of Attorney
A springing power of attorney is a specific type of durable power of attorney that has been decreasing in popularity due to the confusion that can be created by these documents. The springing power of attorney, by definition, means that the power “springs from the disability” and thus would not be valid unless the grantor would be deemed incapacitated and unable to make their own decisions.
While these powers perhaps were based upon a good idea…that being they should not be used if the grantor is not incapacitated, in practice they’ve lead to numerous instances of questioning their validity because incapacity can be difficult to prove. This issue placed a lot of financial institutions at risk of liability AND this concern found its way to state legislatures.
As such, springing powers of attorney are no longer allowed in many states, such as Florida, although if you have one that predates 2012 legislative changes, yours may be “grandfathered” in.
Under current law in many other states, immediate powers of attorney are all the rave much to the chagrin of the springing powers. An immediate power of attorney, true to its name, just means that once signed it can be immediately used on behalf of the grantor. This immediate right of use carries an important precaution which is to be careful who you give these to…
Financial Power of Attorney
This is the most common type of durable power of attorney which is intended to allow the grantee to conduct business affairs on behalf of the grantor.
As mentioned above, this would be an immediate power and the specific powers authorized by the grantor to the grantee much be spelled out clearly and each initialed by the grantor.
Remember, that these documents should not just be boilerplate, but carefully considered to make sure that the grantee is equipped with ALL the necessary powers and NOT powers that exceed the intended scope required by the grantor.
So, careful consideration should be given to decisions such as whether to allow the grantee the authority to change an estate plan or alter a business continuity succession plan by changing documents such as a buy-sell agreement.
Another critical area to carefully consider in the durable power of attorney is whether to allow the grantee to change the beneficiary designations on life insurance policies and other financial assets such as IRA and 401(k) accounts. To allow this power is somewhat common because it may provide the estate with needed flexibility to pay estate debts and negotiate issues that arise. However, it is a power that may be abused for obvious reasons.
If the estate plan involves asset protection or other irrevocable trust planning, the durable power of attorney can specify the powers needed to properly administer these assets which are unique to the grantor. For example, if the grantor has the right to remove and replace a trustee, the durable power of attorney may convey this power and thus provide ongoing needed flexibility for managing the estate.
Finally, growing issues such as digital estate planning are fertile ground for mistakes if they are not considered in the durable power of attorney and are separately identified in the estate plan.
Healthcare Power of Attorney
A durable power of attorney may also be used to convey the power to make healthcare decisions, either in the same or separate document from the financial powers discussed above.
In this way, the grantor appoints a grantee to make decisions that relate to healthcare treatment decisions in the event he or she is unable to do due to incapacity.
The financial power of attorney, as a standalone document, is also identified by different names such as advance directive, advance healthcare directive, advance medical directive or any combination thereof.
Usually, healthcare documents are accompanied by some other related documents such as a living will (do not resuscitate) and HIPAA Release document which concerns the release and waiver of privacy and authorizes individuals to receive the grantor’s medical information.
Ideally, the grantee who is designated by the healthcare power of attorney would also be listed on the HIPAA release document to cover all planning bases.
Updating a Old Power of Attorney
In theory, a durable power of attorney (as opposed to other types) should be valid for many years in the same way that other estate planning documents remain valid.
Other types of powers of attorney (general or special powers) will usually operate under a specified time frame and would be invalid upon expiration.
However, in the real world, the older that the durable power of attorney is, the less likely it will be deemed reliable by financial institutions and other parties of concern (i.e. courts and judges). Thus, it is a good idea to have them reviewed along with your other estate planning documents on average every 2-5 years.