When undertaking estate planning, many rightly focus on the importance of preserving their legacy and protecting their loved ones after death. While these are important concerns when creating an estate plan, the lifetime component should not be overlooked. When preparing for crisis of health or incapacity, a crucial document that should be part of every estate plan is the Power of Attorney.
A Power of Attorney is a document by which you (the “Principal”) authorize another person (the “Agent’ or “Attorney-in-Fact”) to make decisions on your behalf during your lifetime. The scope of decision-making can be broad, encompassing all manners of financial transactions, from bill payments to investment management to business decision making. The Power of Attorney offers convenience, protection, and continuity when its most needed, but carries with it inherent risks.
The most common form of Power of Attorney created through an estate plan is the Durable Power of Attorney. “Durable” refers to the fact that the Power of Attorney will be effective even if the Principal becomes incapacitated. This ongoing authority allows continuity with respect to asset management and control, as the designated Agent under the Power of Attorney can step in and manage the affairs of the Principal immediately without court intervention. This avoids the scenario where family members must petition a court to approve financial decision-making on behalf of an incapacitated individual. It should be noted that, unless specifically indicated otherwise in the document, once signed, the Durable Power of Attorney is effective immediately, meaning incapacity is not required for the Durable Power of Attorney to make decisions on the Principal’s behalf.
As with any estate planning decision, careful consideration should go into choice of Agent for a Power of Attorney. The document typically grants broad sweeping financial powers to another, with limited oversight. This limited oversight means there are very few checks on the authority of an Agent, so special care must be taken to ensure that your choice of Agent under your Power of Attorney is someone who will not abuse their position. The private nature of the authority granted under a Power of Attorney, while allowing the Agent to act quickly on behalf of the Principal, leaves open the risk of misuse which may not be discovered until long after the damage has been done.
For these reasons, the Agent must be a trusted individual who is capable of sound financial decision-making. That person must be organized and willing to accept the responsibility vested in them to act in the best interests of the Principal.
If you have concerns over the scope of the powers that may be granted under the Power of Attorney, decisions may be made to limit the Agent’s powers in certain respects. Such limitations, however, come at the risk of reducing the effectiveness of the document in the future, and in a situation where action is required outside the scope of the powers granted, the Agent may have to petition a court for authority, with the resulting expense and delay. For these reasons, decisions to limit the scope of the Power of Attorney should only be undertaken after careful deliberation, balancing potential limitations against the benefit of flexibility when handling the many aspects of financial decision-making.
Beyond the considerations mentioned above, naming multiple Agents under a Power of Attorney in succession to each other or to serve together is often preferred as this allows for continuity in a scenario where the first named Agent either declines to serve or is unable to serve.
The Power of Attorney is an essential component of your estate plan. However, the authority granted by this document is a double-edged sword. In the right hands, an Agent under a Power of Attorney will act quickly and decisively when the moment calls for it, allowing for seamless continuity in the event of illness or incapacity. In the wrong hands, the powers granted to an Agent under a Power of Attorney carry the risk of unchecked misuse and abuse. For these reasons, tread carefully when naming a Power of Attorney, otherwise it can be a source of vulnerability at the very moment when protection is most needed.
Justin McCarthy is an Estate Planning attorney at the Boston-based law firm Conn Kavanaugh Rosenthal Peisch & Ford, LLP.
He can be reached at jmccarthy@connkavanaugh.com
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