When do you need a Power of Attorney?
To explain power of attorney, let’s use an example of a hypothetical gentleman we will call Mike Vonn. He is a person in his middle sixties who is very healthy. He manages his own business, owns various real estate, and has a considerable investment portfolio, which with the aid of a financial advisor, he handles. He wants his four children to inherit his property equally when he dies, but there is no sign of him slowing down at this time.
This is not untypical of many people approaching their elderly years. Michael Vonn should start planning for disability, however. He should prepare an estate plan or at the very least create a power of attorney.
When discussing power of attorney, certain terms are used. The principle is the person who makes the power of attorney. In our example it would be Michael Vonn. The attorney-in-fact is the person who will receive the power to act for the principle. The power of attorney is the document, or instrument, that the principal signs granting certain powers to the attorney-in-fact to act on the principal’s behalf.
The power of attorney can be very broad, allowing the attorney-in-fact to do almost everything on the principle’s behalf, or it can be very narrow, allowing only one or two functions. It can be used in the purchase and sale of real estate, selling or giving away personal property such as boats, cars and furniture.
It can also be used in trading commodities, stocks and bonds and for banking transactions. It can be used to operate a business, purchase insurance, or handle litigation. It can also be used for the preparation of documents, records, or statements for various forms of personal and family responsibilities.
Michael Vonn could execute more than one power of attorney – to be used if he became disabled. Perhaps he would give a power of attorney to one or more of his children, allowing them to perform certain functions on his behalf. Perhaps another would be given to a friend or professional associate or a financial advisor to perform other functions. He can restrict powers or give powers particularly suitable to the attorney-in-fact’s abilities and skills. On the other hand, he could give all of the powers to one person.
The power of attorney ends upon the principle’s death. After his death, Michael Vonn’s property would pass to his heirs either through a Will or a Trust. If he prepared neither of these, then the State would dictate who gets his property and how it passes, not usually a good thing.
What happens if Michael Vonn does not execute a power of attorney and he becomes mentally incapacitated? His estate, including his business and personal assets, cannot be managed by anyone else without first obtaining a guardianship or conservatorship from the court.
In addition to court costs, guardianships and conservatorships usually require the use of attorneys, accountants, and others to manage the disabled person’s business and personal affairs. The power of attorney would have circumvented these kinds of expenses and allowed a trusted friend, relative or professional chosen by Michael Vonn, rather than the Court, to run his affairs while he was disabled.
The power of attorney can be created to go into effect only upon the event of disability or other serious illness. Each individual situation should be examined by an attorney to determine what powers might be required and who should be appointed as attorney-in-fact. Before executing a power of attorney the family, friends and legal counsel should be consulted to determine who would best be qualified to absorb these duties and on what terms and conditions. There are some instances where it might not be appropriate to grant powers of attorney given that the attorney-in-fact is not accountable to the court for his or her actions and operates strictly on trust.
A disadvantage to granting a power of attorney is that if an unskilled business person or a financial spendthrift becomes the attorney-in-fact, that person could conceivably misappropriate or deplete the assets.
In most instances, where there is a trusted family member or friend, a power of attorney can be successfully used by people who want protection for their estate should they become incapacitated. It is generally less expensive than a court supervised guardianship or conservatorship and is an inexpensive tool to use in estate planning. If you are dealing with these issues, consider using us to help advise you.