General Powers of Attorney Explained
I often explain to clients that a good estate plan does much more than dictate who gets your property after you die. In fact, a good estate plan will give a considerable amount of thought to how your affairs are handled during your lifetime. That’s why a basic set of estate planning documents will include not only a will, but a health care power of attorney, a living will, a HIPAA waiver form, and a general power of attorney, which is the subject of this month’s article.
A general power of attorney (also sometimes called a financial power of attorney or a durable power of attorney) allows a person (known as the “Principal”) to designate another person (known as the “Agent”) to act on the Principal’s behalf. The power given to the Agent is generally quite broad, allowing the Agent to do most things that the Principal could do for him- or herself. This includes the power to, among other things, use the Principal’s funds to pay the Principal’s bills, use the Principal’s funds to support the Principal’s spouse and young children, enter into contracts on behalf of the Principal, buy and sell the Principal’s stocks and bonds, prepare and file the Principal’s income tax returns, deal with the Principal’s government benefits, and operate the Principal’s business. It’s important to note that by signing a general power of attorney, the Principal is not giving up the power to control these aspects of his or her own life. The Principal is only appointing another person who can help out as needed.
General powers of attorney are typically drafted so that they take effect as soon as they are signed by the Principal. That means it is not necessary for the Principal to be incapacitated before the Agent is able to start acting. This allows the Agent to jump into action whenever the Agent’s help may be needed, including times when the Principal is not incapacitated but merely unavailable to act on his or her own behalf. General powers of attorney are also typically drafted so that they remain in effect even after the Principal becomes incapacitated – a feature known as “durability.”
Principals should think carefully about who they select as their Agent, and Principals might consider designating an entity such as their bank to act as Agent if no individuals seem like safe choices. Any Agent named will be expected to act in the Principal’s best interest, in good faith, and only within the scope of the authority granted in the general power of attorney document. Failure to act in this manner will be a breach of fiduciary duty and will subject the Agent to liability.
When a person needs help with their affairs but does not have a general power of attorney in place, the likely alternative is something called guardianship. While guardianship is necessary in some situations, it is usually seen as a last resort for people who did not take the opportunity to execute a general power of attorney while they still had the capacity to do so. Guardianship is a process where a person asks the court to declare someone else legally incompetent. The incompetent person will then lose the ability to make decisions for him- or herself, and will have all of their decisions made for them by a court appointed guardian. While a Principal gets to designate his or her own Agent under a general power of attorney, an incompetent person does not get to control who his or her guardian will be. In addition, guardianship comes with a host of expenses. There are initial fees to file the petition for adjudication of incompetence, the amount the guardian must pay as a bond in order to begin serving as guardian, and annual fees for filing accountings with the court (similar to the accounts filed as part of the administration of a deceased person’s estate). There may also be significant attorney’s fees. If guardianship is unnecessary because a person has a general power of attorney in place, all of these costs can be avoided.
While no one wants to imagine a scenario in which they are incapacitated and no longer able to act on their own behalf, it’s worse to imagine that same scenario where the person has failed to execute a general power of attorney. Thankfully, these documents are easy to come by, as most attorneys include general powers of attorney in their standard estate planning document packages. If you would like to discuss the preparation of your own general power of attorney, please call or email me to schedule a free consultation.
The information contained in this blog post is intended only as general legal information and should not be construed as formal legal advice on any matter, nor should its presentation be construed as intent on the part of The Law Office of Ryan A. Layton, PLLC to form an attorney-client relationship with any user of this website. For more information, please see this disclaimer.