Written by Kevin B. O’Donnell, Esq.
A durable financial power of attorney is one of the most valuable estate planning tools when comparing the cost with its potential benefits. For a minimal fee a properly drafted power of attorney can easily save several thousand dollars during incapacity. If a potential client has limited financial resources or is reluctant to invest in creating or updating their entire estate plan, I will always encourage them to at least invest in a durable financial power of attorney.
What is a durable financial power of attorney?
A durable financial power of attorney is an incapacity planning tool involving three parties. The “principal” is the person who creates the durable financial power of attorney. The principal appoints a second person as their “agent” or “attorney-in-fact” and grants their agent legal authority to manage his or her legal and financial affairs during incapacity. The third party involved is usually a bank, financial institution, or other person or entity who must be presented with the durable financial power of attorney and who must accept the agent’s authority for it to be effective.
A durable financial power of attorney generally grants the named agent legal authority to do anything and everything the principal could do if he had capacity. The agent is a fiduciary to the principal, meaning the agent must act in the principal’s best interests and must not take any action that benefits the agent. The agent is permitted, for example, to use the durable financial power of attorney to access the principal’s bank accounts to pay for the principal’s medical expenses. The agent is prohibited, however, from using it to access the principal’s bank account to purchase himself a new car. If the agent breaches his fiduciary duty to the principal, the agent will be held liable and forced to pay monetary damages to make the principal whole.
A durable financial power of attorney may be immediately effective or “springing.” If a durable financial power of attorney is immediately effective, the agent has legal authority to act on the principal’s behalf as soon as it is signed. If a durable financial power of attorney is “springing” the agent’s authority is dormant when it is signed and only springs into effect when the principal is determined to be incapacitated.
Typically, an executed durable financial power of attorney will be placed in a safe or a safe-deposit box and forgotten until the principal becomes incapacitated or directs the agent to take action on his behalf. The agent will then present the durable financial power of attorney to a third party, such as a bank, to demonstrate that he has the authority to act on the principal’s behalf. Most third parties will require clear and explicit language supporting the agent’s proposed actions. If the agent wants to withdraw money from the principal’s bank account, for example, the bank teller will review the durable financial power of attorney for specific language authorizing the action.
Durable financial powers of attorney remain in effect until the principal either revokes the document or passes away. Once the principal passes away, the principal’s will, trust or the laws of intestacy will control the disposition of their estate and the agent will no longer have the authority to take action on the principal’s behalf.
Do I really need a power of attorney?
Everyone needs a power of attorney to plan for potential future incapacity. No one, including a spouse or child, has authority to access an incapacitated person’s bank accounts, to manage the incapacitated person’s real property, or otherwise handle the incapacitated person’s financial and legal affairs without a durable financial power of attorney. To obtain the legal authority in the absence of a power of attorney, someone must file a lawsuit in the local circuit court, prove that the person is incapacitated, and ask for an order granting them the legal authority to manage the incapacitated person’s affairs. This process is known as a guardianship and conservatorship proceeding.
Most people are not fond of guardianship and conservatorship proceedings. First, the incapacitated person has little or no say over who is named as their guardian and conservator. Second, the person named as guardian and conservator is subject to court supervision, must provide a written inventory of the principal’s assets to an attorney known as the Commissioner of Accounts, and must periodically provide a written accounting to the Commissioner of Accounts detailing how money was spent on the principal’s behalf during incapacity. The person appointed as guardian or conservator is also required to purchase an insurance policy to insure against potential mismanagement of the incapacitated person’s assets. The entire process is public, expensive, and can be easily avoided through the use of a durable financial power of attorney.
A durable financial power of attorney accomplishes the same goals of a guardianship and conservatorship proceeding but through much more private and less expensive process. First, it allows a person to retain control over who manages their affairs during incapacity. Second, the agent under a durable financial power of attorney is not subject to court supervision and is not required make annual accountings to the Commissioner of Accounts. The agent may be required to account to the principal’s family but on a less frequent and less formal basis. The agent is also not required to purchase insurance to insure against mismanagement of the incapacitated person’s assets. Most people prefer a durable financial power of attorney over a guardianship and conservatorship proceeding when faced with a choice between the two.
Changes in the Law Governing Durable Financial Powers of Attorney
If you have a durable financial power of attorney that was executed prior to 2010, it is still advisable to have it reviewed and updated by an attorney. The Virginia General Assembly enacted the Virginia Uniform Power of Attorney Act in July of 2010. The change in law does not affect the validity of durable financial powers of attorney executed prior to July 1, 2010 but it does affect how all durable financial powers of attorney are interpreted under Virginia law.
There are also important practical reasons for updating a durable financial power of attorney. Traditionally, powers of attorney were relatively short documents which used broad, sweeping language. Banks and other financial institutions have become increasingly reluctant to accept an agent’s authority absent explicit language supporting the agent’s requested action. As a result, many older durable financial powers of attorney are ineffective despite remaining valid legal documents. An updated power of attorney can provide the comprehensive and explicit language necessary to satisfy financial institutions so that your agent is never unable to act on your behalf during incapacity.
If you have any further questions about durable financial powers of attorney please attend one of our free seminars.