At Carolina Family Estate Planning, we review prospective clients' prior Durable Powers of Attorney on a regular basis. Unfortunately, we find many of them to be lacking key provisions that could help you and your family in a time of crisis.
A durable power of attorney document legally entrusts an individual (your “agent”) to make decisions on your behalf, should you become incapacitated. For example, if you suffered an accident that rendered you comatose, your agent can make decisions regarding your health care and finances. The power of attorney agreement specifies how far the agent’s power extends – you can give the agent the power to pay your bills, mortgage, etc. but withhold the power to manage your 401k or other retirement accounts.
When designing a North Carolina power of attorney, you will need to determine the appropriate amount of power to give your agent, based on your personal circumstances. It is reasonable to feel apprehensive about giving your agent unfettered power to gift or sell your property, or close your financial accounts. Consider this example, though:
You are left with brain damage after a severe car accident, without long-term care insurance, and your family is forced to foot the medical bills. You’ve designated your brother to act as your agent, but your durable power of attorney only entrusts him to use your money to pay your mortgage, your car payment and other monthly expenses. If the power of attorney granted your brother the power to sell or gift your home on behalf of your health care needs, your home could have been sold to pay for the medical expenses. Without these expressed powers, however, your brother would be unauthorized to take such action. Situations like this, while unfortunate, illustrate why it is important for your power of attorney to vest your agent with enough power to effectively make decisions in your absence.
How Do I Make Sure My Power of Attorney Gives My Agent Enough Power?
The key to ensuring that your agent will be effective is to work with a lawyer to prepare a power of attorney document that is specific to the needs of you and your family. Generic durable power of attorney documents found on the Internet are easier to obtain, but they will often not be effective in a court of law. These documents use general clauses that state that your agent can ‘act in my name in any way which I could act for myself.’ Courts are traditionally adverse to these generic clauses because they put absolutely no limitations on the agent. Instead, the courts will typically interpret such a clause to mean that the power of attorney can act in any way that you, the principal, have a personal history of acting. This can create numerous roadblocks for your agent. After all, how many of us have already sold enough houses to pay for medical bills to have established a pattern?
What Specific Powers Should I Grant My Agent?
Gifting & Transferring Assets
Your power of attorney gives your agent the power to gift your real property, personal property or other financial assets to another individual. This is often done to avoid estate tax liability, pay for medical expenses, or simply to ensure that valuable pieces of property remain within the control of the family. For some, this unfettered power could seem dangerous; you may fear that your agent will act out of their own self-interest and gift items to themselves, or you may fear that they will gift substantial pieces of property (such as your house) to someone you would not have wished to have it. You can mitigate these concerns by placing limits on your agent’s ability to gift such as requiring your agent to get the approval of two other family members (your sibling or child) before any gift can be made.
It is necessary for your agent to have a substantial amount of power to deal with your real property (such as your house, or your land). They may need to transfer the property to another sibling to avoid probate, or they might need to sell the property to pay for your medical expenses. Whatever the case may be, it is crucial that you write a specific clause into your power of attorney document that grants the agent the power to buy, sell, transfer or gift real property on your behalf.
The same concerns surrounding real property also apply to your retirement assets (such as your IRAs, 401(k)s, and pensions). Most banks and financial institutions will not allow your agent to make withdrawals or investment decisions regarding your retirement accounts without specific language in the durable power of attorney authorizing such action. Surprisingly, many power of attorney documents are missing this critical language. For example, imagine a husband and wife that have been married for decades. The husband wored outside of the home while the wife spent a majority of the marriage as homemaker. A significant portion of their savings is in the husband's Individual Retirement Account (IRA). The husband suffers a severe stroke and can no longer manage financial matters. The wife needs to access the IRA so she can pay the household expenses. Imagine her surprise when the bank tells her that her husband's power of attorney doesn't give her authority to access his IRA! Unfortunately, this is incredibly common.
There are many types of trusts and they may be used to accomplish different goals. You can use a trust to avoid probate upon your death. Other types of trusts may be used to reduce or eliminate estate taxes upon your death or to help mitigate nursing home and long-term care expenses. However, you can also use a trust to ensure that your property and assets are used and passed down according to your wishes. In the majority of states, including North Carolina, the power of attorney document must specifically lay out what your agent can do with your assets in regard to a trust. For example, if you are fine with allowing an agent to use your assets to establish a trust, you must specifically state this in your power of attorney agreement.
Long-Term Care Planning
Long-term care costs are one of the biggest financial threats during retirement. A comprehensive durable power of attorney prepared by an elder law attorney should consider future potential long-term care costs and legal transactions or planning measures that may be recommended to help you and your family develop a plan for paying for long-term care and arranging for such care. Failure to have the appropriate language authorizing your agent to conduct long-term care planning on your behalf can potentially cost tens of thousands in lost government assistance benefits, dollars spent on time-consuming guardianship proceedings and more.
Asset Protection Planning and Tax Planning
Estate planning is not just about how you want to divide your estate when you're gone. Modern estate planning also typically involves asset protection planning to help you preserve the wealth that you've accumulated and tax planning to minimize your exposure to income, capital gains, estate, and gift taxes. Since asset protection laws and tax laws may change over time, it's important that your durable power of attorney provides the authority needed for your agent to conduct such planning on your behalf or update any planning you may have already established.
Do You Have Additional Questions?
If you have any additional questions about how to create a power of attorney, attend one of our free seminars or call our office at (919) 443-3035 to talk with a Client Welcome Specialist. At the end of the call, you’ll know the next step and at a minimum, we’ll point you in the direction of resources that can help you. Our goal is for you and your loved ones to have peace of mind and a pleasant ongoing journey.
Related Links: Series on Durable Power of Attorney, Incapacity, & Adult Guardianship