Estate Planning and Business Planning - Disability Planning via Powers of Attorney

Estate Planning / Business Planning / Improve The Odds

Disability Planning through Powers of Attorney

The estate planning exercise focuses principally on solutions to death-related problems. Problems which arise as a consequence of disability seem to attract far less attention and effort and, generally speaking, attempts to circumvent or solve those problems have been very much a "step-child" in the estate planning family.

1. What is a Power. The legal device which is most frequently employed to solve disability-related planning problems is a document known as a Power of Attorney (hereinafter "Power").

The law governing the creation of, the use of, and the reliance upon, a Power, is a subset of the Law of Agency, which incorporates some of the most ancient and well established principles of our body of law. Simply stated, a Power is a document by which one party, called a "Principal", authorizes and empowers another party or parties, called an "Agent", to act on the Principal's behalf with regard to the matters or types of matters described in the Power.

2. Four Specific Types. While Powers can cover all sorts of matters and transactions, they commonly fall into about four specific types, which I will briefly describe here, more or less in descending order of their frequency of use:

A. General Power - This type of document empowers the Agent to manage business and financial matters for the Principal; it is the most common and traditional form of Power and probably the only one which most people have.

Typically, although perhaps not always wisely, they are very broad and comprehensive in scope, perhaps on the theory that, since most Powers are not used until the Principal has lost the ability to act for himself, it is better to have been granted a specific authority and not need than to find that you need it and not have it.

B. Health Care Power - This type of document empowers the Agent to make medical decisions for the Principal if the Principal is unable to make and communicate such decisions himself to his health care providers.

This type of Power is rapidly becoming more widely used, chiefly in response to the ability of modern medicine to prolong biological life long past the point at which the patient has any reasonable quality of life, as most people instinctively seem to shrink from the notion that they should be kept alive indefinitely when they no longer have the ability to think and communicate.

C. Gift Power - This type of document is relatively unusual. It is specifically designed to circumvent the legal restraint that makes it unlawful for an Agent to make gifts of his Principal's property unless the Agent is expressly authorized and empowered to do so.

Because of the existence of the gift tax annual exclusion, and certain other features of both Federal and State tax law which can make lifetime gifts somewhat more tax-efficient than gifts taking effect at death, it can be highly desirable, from a tax planning standpoint, to preserve the opportunity to give away a portion of an incompetent Principal's assets prior to his death, and the Gift Power is designed to enable such transfers to be carried out.

D. Personal Care Power - This is also a fairly unusual type of document, and is designed to serve as an alternative to a formal "Guardianship of the Person" of the Principal.

It empowers the Agent to make personal and domestic decisions on behalf of the Principal, and is most useful where there may be disagreements within the Principal's family as to how he should be cared for, or if a person other than a spouse or child of the Principal is to be given the power to make these decisions.

3. Standard or Custom? There is no such thing as an "official" or "standard" form of any of these types of Power. Although most clients simply sign whatever their advisors put in front of them, there is no reason that the Power cannot be custom tailored to the client's specific needs and reasonable wishes.

I would encourage anyone to carefully review all proposed documents which may be presented to them, with a view to seeing whether they could be improved upon in light of, and/or made more responsive to, the Principal's own specific requirements.

4. Two Special Types. In addition to the four basic types of Power described above, there are also a couple of other specialized types.

"One-shot" Powers are designed to authorize an Agent to undertake a specifically described or identified transaction. Limited duration Powers can be used to cover a Principal's absence on a specific journey or during some other predicted period of unavailability. These two types of Powers are typically prepared with a specific need in view, are limited as to subject matter and/or duration, and require custom tailoring to fit the exact need which is being addressed.

5. Who Should be Agent. One of the most important issues is the question of who should be appointed to serve as Agent. Ideally, the person chosen for this role should be someone who is completely trust-worthy and serious minded, with a stable personality and sound business and human judgment.

It should also be someone who, by reason of age, can be presumed to be available when needed, and, in an ideal world, would also be someone whose views on important matters are substantially similar to the Principal's.

It is not necessary that the same person(s) serve as Agent under a Principal's several different types of Power; different persons may well be appropriate for the different roles. It would seem essential, however, that the appointees know and respect each other and could be expected to coordinate and cooperate with each other where their respective spheres of responsibility overlap or touch.

6. Effective Date Issues. The question of the effective date of a Power is one which deserves some consideration. Most Powers are prepared in such a way that they will take effect immediately upon being executed. This is the near-inevitable result unless you express a concern about placing such broad authority in your Agent's hands prior to there being a present need for it.

There are two alternatives. One is to have the Power define a "triggering event" (e.g. the onset of disability), the occurrence of which will activate the Power. The other is to place the document in the hands of an independent custodian who will hold it until he is satisfied that a need exists and only then to deliver it to the Agent for use.

The chief problems with the former are in (a) defining the triggering event accurately and in a workable manner, and (b) persuading persons who are being asked to rely on the Power that such event has really occurred. The problem with the latter is that you are simply relying on another person (the custodian) to determine the existence of the need, which reliance may prove to be misplaced for any number of possible reasons.

Frankly, most people, faced with these decisions, will decide to make the Power effective immediately and simply trust the Agent not to use the Power until it is needed.

7. Termination Issues. The terminating of a Power is probably something that should be mentioned as well. The Principal's death will, of course, instantly and automatically terminate the Agent's authority to act under a Power. The Power should also expressly reserve the Principal's right voluntarily to revoke the Power by some appropriate means.

A further precaution which is sometimes employed is to provide that, if the Agent is the spouse of the Principal, a separation or divorce of the parties will operate to revoke the Power.

8. Alternatives - Good, Bad & Worse. This memorandum would not be complete without an acknowledgment that certain other alternatives to the use of Powers are available. A few have advantages but most have only disadvantages with compared with Powers. Those alternatives are as follows:

A. Guardianships & Revocable Trusts. Two possible acceptable adjuncts or alternatives to a General Power are (a) a "Guardianship of the Property" and (b) a "Revocable Living Trust". The former necessarily involves court supervision, the providing of a bond, and the rendering of formal annual accountings. It is public, in the sense that the Guardianship's transactions become a part of the court records and thus available for public inspection, and the bond premium can be a significant expense.

A Revocable Trust Agreement is generally a much longer and more complex document than a Power of Attorney, and hence more expensive to prepare and probably also somewhat more expensive to administer, as it typically imposes more arduous (and possibly risky) duties on the Trustee than a Power does on the Agent.

It is useful in many instances, however, particularly if it is designed to function as substitute for a Will in addition to serving as a property management device during the Principal's lifetime. A General Power is needed as well, however, because there are almost always a few assets which have not been placed in the Revocable Trust, and the Trustee's authority extends only to those assets which are in the Trust.

B. Guardianships & Living Wills. Two possible acceptable alternatives to a Health Care Power are (a) a "Guardianship of the Person" and (b) a "Living Will" or "Advance Medical Directive". The former also involves court supervision, and some measure of public exposure, and in my judgment would be well to avoid if possible, simply because it is cumbersome.

The Living Will/Advance Medical Directive alternative is, I believe, clearly inferior to the Health Care Power; it is a document whose text is prescribed (or at least very strongly influenced) by State law, is often full of ambiguous and undefined terms, and fails to address many of the issues which can properly be dealt with in the Health Care Power. Its only virtue (if it can be called that) is that it is available as a standard printed form, and that, accordingly, it requires little or no thought or effort to complete. Its primary defect is that it mandates a certain result (e.g. "pull the plug") rather than giving a qualified and trusted Agent the right to make reasoned judgments based on the knowledge available to him at the time.

C. Joint Ownership of Assets. Finally, another alternative to the General Power, which I view as completely unacceptable and inappropriate, is to title some or all of the Principal's assets jointly with another person so that that person can have a measure of control over them if the Principal becomes disabled.

This technique, although widely resorted to, is deeply flawed and has virtually nothing whatsoever to recommend it; it is, unhappily, the source of many family disputes, some of which ripen into litigation, and is simply the product of ignorance, avarice and/or bad advice.

It is both ineffective (or at best only partly effective) and because of certain other characteristics of joint ownership (apart from the desired surrogate access to an asset during the Principal's lifetime) it is far more likely to have unintended and harmful consequences.

9. Custody of Documents. Unless you have decided to place the original Power(s) in the hands of an independent custodian, as discussed above, you should deliver them to the Agent(s) immediately after executing them, or, alternatively, place them for safekeeping in a secure location to which both you and the Agent(s) have access.

Ideally, this would be a safe deposit box standing in your individual name, to which the Agent (and preferably all of them if more than one), has access as your deputy.

In addition, with regard to the Health Care Power, I would most strongly suggest that you send a photocopy of it to your primary physician, with a short letter requesting that such copy be placed in your medical record and that notation of its existence be made in whatever other place your physician thinks appropriate.

Let me caution you, however, that the executed original document should never be unstapled, whether for copying or any other purpose, as doing so will compromise its legal effectiveness.

Finally on the subject of document custody, let me also caution you that the executed original of a Power, of which there is typically only one, may be or become virtually irreplaceable and, accordingly, should never be given, or even loaned, to a bank, brokerage house, etc.; only photocopies should be furnished for that purpose.

The Agent may have to display the original to a person who is being asked to rely on the Power, but should never surrender physical possession of it, except as follows. If the Agent should ever seek to conduct a real estate transaction on your behalf, pursuant to the authority granted in the Power, the executed original document will have to be recorded in the Land Records in the jurisdiction where the property is located; a photocopy will not be acceptable for that purpose.

10. In Closing. Powers of Attorney can provide highly effective and relatively inexpensive solutions to otherwise intractable legal and practical problems arising from a person's subsequent disability. They deserve your careful consideration, as the other available solutions, if they work at all, are either significantly more expensive to implement or potentially more expensive and inflexible to administer or have other collateral shortcomings.

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Law Offices of Thomas J. Keating IV
Centreville, Maryland, USA

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