A Power of Attorney is a legal document where you the “Principle” name another person as your “Agent” to speak on your behalf with third parties. For example, let’s assume Tom and Cindy Client are moving to another city. Tom is out of the country on business and Cindy is the one handling the buying and selling of the houses. Tom knows that he will not be available to sign the closing documents, so he names Cindy as his agent. Therefore, Cindy is able to sign for Tom in his absence and complete the transactions. It is important to note that Tom is not giving up his ability to act for himself, is just letting others know that Cindy can act for him in his absence.
General or Limited Purposes
A Power of Attorney can be for “general” or “limited” purposes. If Tom wants Cindy to handle all necessary matters for him while he is out of town, he can appoint her as his agent for “General” purposes. If this is the case, the actual document will need some specific language to indicate that Cindy can handle a wide range of situations. Most likely, Tom’s Power of Attorney document will actually list what types of things Cindy can handle for him in his absence. For example, a General Power of Attorney will likely list some of the following transactions: Real estate; tangible personal property; business operations; banking; stocks, bonds and commodities; insurance; gifts; taxes; and family maintenance.
On the other hand, if Tom only wants Cindy to handle real estate transactions then he will have a limited Power of Attorney. This document would say that Cindy is only able to handle these types of transactions and nothing else.
Immediate and Springing
Tom can also choose to make his Power of Attorney come into effect right away or immediately. This means that as soon as he signs it, Cindy has the authority to handle the types of transactions listed in the document.
On the other hand, if Tom only wants Cindy to have that authority upon his incapacity, then he can make it “spring” into effect at that time. This can be problematic however for the following reasons:
- There can be problems with determining when someone is officially incapacitated. Normally a medical doctor will have to make this determination.
- Family members may disagree to what extent the Principle is incapacitated; and
- Third parties such as banks may be reluctant to accept the authority of an agent.
Advantages and Disadvantages
A Power of Attorney is a great document and should be a part of everyone’s Estate Planning portfolio. However, there are some downsides to a Power of Attorney:
- Some institutions are reluctant to accept them if they are beyond a certain age. For example, a bank will be more likely to accept a Power of Attorney signed in the last year than if it was signed 10 years ago. If it is too old it is considered “stale”;
- A Power of Attorney only gives the Agent the authority to act, it does not tell them how you want them to act. If you want to give your agent instructions, it is best to name them as a successor trustee under your Revocable Living Trust; and
- An Agent acting under a Power of Attorney does not have as much authority as a Successor Trustee under a Trust.
Have a Great Day,