Understanding Powers of Attorney for Property

Why do I need a power of attorney?

One of the most common misconceptions is that if an individual becomes disabled, if they are married a spouse can act on their behalf to make financial decisions or if they are unmarried, their children can act on their behalf. In most states, including the State of Illinois, a valid Power of Attorney must be in place before anyone has any authority to act.

What is a power of attorney?

A power of attorney is a written instrument by which you appoint another person to perform certain specified acts on your behalf. This document gives power to a designated agent, called an attorney-in-fact – hence the name, “power of attorney.”

There are two basic types of powers of attorney: the general, which grants the agent power to deal with all your assets and to take any action on your behalf; and the special, which allows the agent to perform only certain acts or to control specific property.

Many people believe that a power of attorney may be used only if the person granting the power, who is called the principal, becomes incapacitated. In fact, a traditional power of attorney automatically becomes invalid upon the incapacity or death of the principal. However, in all states both general and special powers of attorney can be made durable; that is, they can be written to remain valid even if the principal becomes incapacitated or incompetent. A power of attorney is durable only when it specifically states that it is to continue upon the legal incapacity of the principal.

When prepared, executed, and used correctly, the durable power of attorney can be an effective financial management instrument and should be part of every estate plan.

What are the risks associated with creating a durable power of attorney?

The risk of granting a durable power of attorney is that the person you name as power holder may either be dishonest or have bad judgment. If the power holder is dishonest, he or she could use the power to gain control of your assets and then abscond with them. If the power holder has bad judgment, he or she could mismanage your assets or make poor decisions. The important point here is that a general power of attorney is only as good as the agent holding the power. Be sure to name honest and responsible people or financial institutions as your power holder.

What are the benefits associated with creating a durable power of attorney?

In terms of being prepared (and that is what estate planning is all about), it is good to have someone who can transact your financial matters for you if you are unable to do so for any reason. Professional advisors may differ on whether it is better to have a general durable power of attorney, which would allow someone to transact any business activity for you, or better to have a special durable power of attorney, which would allow someone to transact only specific business matters for you or would be effective only under certain circumstances, such as your disability. Consequently, you should discuss powers of attorney with your advisors so that you can decide which type is best for you.

When should you sign a durable power of attorney?

You should sign a durable power of attorney when you are healthy, competent, and able to make your own decisions. This will alleviate much of the difficulty that could arise if you should become incapable of making these decisions. You can not sign a power of attorney if you lack competence.

Must third parties honor powers of attorney?

In the absence of a state law to the contrary, there is a little that can be done to force a third party to accept a power of attorney. Some banks will require that you fill out their forms to authorize your agent to write checks on your account. In addition, the IRS generally will not honor a power of attorney if the power does not specify the tax number and tax year or form.

If a parent gives a general, broad durable power of attorney, can an individual make lifetime gifts of their assets after they become incapacitated?

The law indicates that if the giver of the power wants the agent to make gifts, the power of attorney must clearly spell out that authority. Powers of attorney that do not specify this authority are routinely challenged by the IRS, and any gifts made under such circumstances have been included in the deceased power giver’s estate for federal tax purposes.

Can an individual revoke a power of attorney?

Yes, as long as the principal has legal capacity. It is best if the power of attorney states how the power of attorney is revoked. Putting the revocation in writing and sending the document to anyone who has honored the power of attorney is the best protection.