Powers of Attorney 2.0

A few posts ago we addressed how the “here” portion of estate planning allows people to appoint others to make decisions on their behalf if they become incapacitated due to illness or accident. The Power of Attorney is the legal document allowing a person to designate who will make legal and financial decisions for them in the event of incapacity.  While many are aware of a Power of Attorney in the event of incapacity, it is also worth noting that not all Powers of Attorney serve the same purpose and if not properly drafted a Power of Attorney may prove useless in the case of emergency.

In its most basic form, a Power of Attorney is a declaration that someone (the Designee) can act on behalf of another person (the Principal). This power can be very specific, such as, “Bob appoints Frank on a particular dated, to sign Closing documents on the purchase of a specific house”. In this example, Bob cannot attend the Closing so he authorizes Frank to sign the documents in his place. Bob is not incapacitated but Frank is still allowed to act in his stead. This is a Limited Power of Attorney.

As with many legal documents, it is possible to achieve a wide range of results with a Power of Attorney. Expanding on the first example, if Bob were out of the country and needed Frank to handle additional aspects of his home purchase, Bob could sign a more expansive Power of Attorney that gives Frank the authority to act on Bob’s behalf with respect to “any action related to the purchase and furnishing of a residence.” This broader authority, likely backed up with more specific language authorizing particular actions, would allow Frank to retain a Realtor, sign Purchase Agreements, purchase furniture, and even deal with movers, all on Bob’s behalf.  The flexibility of a Power of Attorney makes it a powerful tool in planning.

In the previous two examples the Principal is not incapacitated, Bob just needs Frank to act in a situation where he is unavailable. In the context of estate planning, we expand upon this concept to create the General Power of Attorney. This document provides the Designee with broad authority to act on behalf of the Principal. The document, containing many specific authorizations to affirm to those following the Designee’s instructions that the Designee is authorized to act, allows the Designee to act on the Principal’s behalf with respect to many of the common and uncommon decisions that a person must make every day. This “General” power is not without limits, the most important of which is the Designee’s “Fiduciary Duty” to act only in the Principal’s best interest. It is also important to recognize that the law places limitations on the actions a Designee may take on the Principal’s behalf, though some of those limitations can be superseded by specific language in the document.

Drafting is important when it comes to Powers of Attorney because under Michigan law a Power of Attorney must specifically indicate when it functions. This means that in order for a Power of Attorney to be useful in protecting a person during incapacity the document must indicate that it is a “Durable” Power of Attorney. The term Durable simply indicates that even if the Principal is incapacitated (but still alive), the Power of Attorney is intended to continue to function.

One final note on the varieties of Powers of Attorney, from the examples above you can see that Power of Attorney can function even when a Principal is not incapacitated. A Power of Attorney that allows action upon execution is commonly termed an Immediate Power of Attorney. An Immediate Power of Attorney is useful in estate planning as certain actions become more cumbersome to a Principal. It will allow a Designee, such as a trusted child to act on a parent’s behalf even when the parent could handle a task on their own. More commonly used is a “Springing” Power of Attorney that automatically takes effect upon a particular condition, such as incapacity, affecting the Principal.

We hope that this explanation helps you appreciate the benefits and complexity of the Power of Attorney. From a Limited Power of Attorney that functions only for a number of hours to a General Durable Power of Attorney that springs into effect upon incapacity, the Power of Attorney is a complex but important part of an estate plan. With proper drafting, it can allow trusted Designees to easily manage the Principal’s affairs during an unexpected emergency, making sure that such times need not be more difficult than necessary. Due to the complexity and expansive power that a Power of Attorney can give to another person we recommend that you always consult with a trusted attorney, experienced in estate planning, before signing anything that gives someone else authority to act on your behalf.

Matt and Al