Ethan R. Okura
Hawai‘i Herald Columnist
In my last column, I wrote about the Advance Health-Care Directives that contain a “Power of Attorney for Health Care.” I explained that it is a different document than a Durable Power of Attorney, which is used for financial matters. Every adult should have a Durable Power of Attorney.
A “Power of Attorney” is a legal document in which one person gives another person the power to act for them, including the power to sign papers and documents on their behalf. The person who gives the power is called the “principal.” And the person getting the power is called the “attorney-in-fact” or “agent.”
“Attorney-in-fact” doesn’t mean the person who is getting the power has to be a lawyer. Any adult — such as your husband, wife, son or daughter, brother or sister — can be you’re attorney-in-fact. A “General Power of Attorney” gives broad powers to the attorney-in-fact, such as the power to buy and sell real estate, open and close bank accounts, sign checks, sign contracts, and in general, do anything the principal can do. A “Special Power of Attorney” gives the power to do only one or more specific things, such as the power to buy or sell a certain piece of real estate for the principal.
A “Durable” Power of Attorney is one that will continue to work even if the principal becomes disabled or incapacitated (unable to handle his own financial affairs). To be “durable,” a Power of Attorney must contain these words (or something like it): “This power of attorney shall not be affected by the disability of the principal.” A “Springing” Power of Attorney is one which will start to work only when the principal becomes incapacitated.
Most Powers of Attorney which people have are Durable General Powers of Attorney. That is, they give broad powers to do anything, they can be used while the principal is still healthy, and they can be used even if the principal becomes disabled or incapacitated. However, you cannot tell by the title. Some Durable General Powers of Attorney are called “Durable Power of Attorney.” Others are called “General Power of Attorney.” Still others are called “Power of Attorney.” You have to read the actual words of the document to find out whether a Power of Attorney is “general” or “special,” “durable” or not, and “springing” or not.
A Durable Power of Attorney is an important part of every estate plan. If a person becomes incapacitated, the attorney-in-fact can withdraw money from accounts to pay bills for the principal, open and close bank accounts, sell stocks or mutual fund shares, sell or rent out real estate, and do whatever else is necessary to handle the financial affairs of the principal.
If a person has any assets in his or her own name and does not have a Durable Power of Attorney, there will be a problem if that person becomes incapacitated. The family members will not be able to withdraw money or pay bills for the incapacitated person. One of the family members will have to hire an attorney, go to court and ask the court to appoint a “conservator” of the property of the incapacitated person. (The conservator used to be called a “guardian.”)
After the court officially appoints someone to be the conservator, the appointed conservator will be able to withdraw money, pay bills and handle other financial matters for the incapacitated person. However, the court will order the conservator to keep careful records of every penny that comes to the incapacitated person and every penny that is spent for the incapacitated person. The conservator will have to go back to court every year, or as often as the court orders. Each time the conservator goes back to court, the conservator will have to provide an accounting of all the money that came in and went out since the last accounting. There will be more attorney’s fees and costs each time the conservator goes back to court. The conservatorship hassle and expense can easily be avoided by having a good Durable Power of Attorney, which will allow the Attorney-in-Fact to handle finances for the principal without an exact accounting and without court supervision or attorney’s fees.
Regardless of whether the power of attorney is “durable” and even if it can still be used after the principal becomes incapacitated, all powers of attorney will become invalid upon the death of the principal. Also upon the principal’s death, the agent will no longer have authority to act for the principal, which is why a Last Will and Testament and/or a Revocable Living Trust are also important pieces of every estate plan.
Not all Durable Powers of Attorney are of equal quality. You need a carefully written Durable Power of Attorney containing special wording for estate-planning situations. A Power of Attorney does not give the attorney-in-fact the power to make gifts unless there is special wording permitting the making of gifts. For example, suppose that your husband becomes incapacitated and has to go to a nursing home. When he qualifies for Medicaid to pay the nursing home expenses, the Medicaid office will instruct you that you have 90 days to transfer all except $2,000 of assets from your husband to you. If the Durable Power of Attorney does not contain special wording allowing gifts, you may not have the power to legally transfer your husband’s solely owned assets from your husband to yourself. You may have to hire an attorney to go to court to get permission to transfer the property, even though you have a Durable Power of Attorney! And worse yet, the court might not allow the transfer of the assets from your husband to you!
Also, if you are wealthy, it is very important to have the gifting power worded correctly. I have seen Durable Powers of Attorney written in such a way that they create unexpected estate-tax problems. For example, if father owns substantial assets and son owns nothing, and father gives son a Power of Attorney with the wrong wording in the gifting power, if the son dies with no assets, the son could still be taxed hundreds of thousands or millions of dollars upon his own death because of the assets that his father owns! I have seen this mistake in the Durable Power of Attorney form used by one of Honolulu’s most famous estate-planning attorneys. Apparently, some attorney years ago took out a few important words from a Power of Attorney form, which made it defective. This defective form has been copied by many attorneys, and it is still used by attorneys in Hawai‘i who do not realize the problem it can cause.
Financial institutions seem to feel more comfortable about honoring a recently-written Power of Attorney. Therefore, you may want to consider updating your Power of Attorney from time to time. There is no law on how often this should be done.
If a bank or other financial institution refuses to honor your Power of Attorney, do not give up. Phone the attorney for the bank or the Vice President of operations, or have a lawyer phone them for you. Hopefully, the bank’s attorney or vice president of operations will instruct the local branch to cooperate with you, as long as your Power of Attorney is properly written.
© OKURA & ASSOCIATES, 2020
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Ethan R. Okura received his JD from Columbia University in 2002. He specializes in Estate Planning to protect assets from nursing-home costs, probate, estate taxes, and creditors.
This column is for general information only and is not tax or legal advice. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate-planning specialist.