One of the most well-known, and frequently used, estate planning tools is a Power of Attorney. When properly drafted and utilized, a Power of Attorney makes a versatile and effective estate planning tool. The problem is that a Power of Attorney can do more harm than good when not properly drafted and used. To help you better understand, a Grand Forks estate planning attorney at German Law | Wealth explains common Power of Attorney mistakes you should avoid making.
What Is a Power of Attorney?
A power of attorney, or POA, is a legal document that allows the creator (referred to as the “Principal”) to grant another person (the “Agent”) the legal authority to act on his/her behalf. The type and extent of the legal authority granted to an Agent depends on the type of POA executed.
General vs. Limited Power of Attorney
A general POA grants an Agent almost unlimited power to act on behalf of the Principal. This means that an Agent may be able to do things such as withdraw funds from the Principal’s financial accounts, sell property and assets owned by the Principal, and even enter into contracts in the name of the Principal while the POA is in effect.
A limited POA only grants an Agent the limited, and specific, authority enumerated in the POA. For example, you might grant an Agent the specific power of attorney to act on your behalf during an upcoming closing for a home you purchased. Parents of minor children frequently make use of a limited POA to grant a caregiver the authority to consent to medical care for a child, should it be needed, while the parents are not unavailable.
What Does It Mean to Make a Power of Attorney Durable?
Historically, a power of attorney automatically terminated upon the death or incapacity of the Principal. The problem with that was that for many people, the entire point of executing a POA was that they wanted a loved one to have the authority to act for them in the event of their incapacity. If, however, the POA automatically terminates upon the incapacity of the Principal, executing the POA will not fulfill that purpose. With that in mind, the concept of a durable power of attorney began to evolve. A “durable” POA is simply a power of attorney that survives the incapacity of the Principal. Both a general and a limited POA can be made durable.
Power of Attorney Mistakes
When a POA works as intended, it can be a powerful estate planning tool. When a POA goes wrong, however, it can wreak havoc on your estate, finances, and personal autonomy. People often execute a general POA, naming someone they trust as their Agent in case of an emergency. If you choose to do that, avoid making these common mistakes:
- Granting too much power. Most people don’t understand how much authority can be granted in a general POA. Without any limiting language, your Agent may be able to sell anything you own, enter into contracts that create debt for you, and (if the POA is durable) make personal decisions for you with which you might not agree. Never use a generic Power of Attorney form if you plan to execute a general POA. Always have an experienced attorney draft the form so that you understand exactly what your Agent can, and cannot, do.
- Failing to address gifts. One of the most common reasons for a POA to be litigated is the issue of gifts. Generic POA forms are frequently silent on gifts, making it unclear whether the Principal intended to grant the Agent that authority or not. When an Agent makes a gift, the validity of that gift will likely be challenged during probate.
- Not updating your POA. The person you trust most in the world today may not be the same person in ten years. If you fail to revoke/update a POA though, the Agent your originally appointed retains his/her authority. That can mean that someone from your past retains the ability to exert power over your estate and potentially even over you. Always review and/or update an existing Power of Attorney every five years.
Contact a Grand Forks Estate Planning Attorney
Please join us for an upcoming FREE seminar. If you have additional questions about a Power of Attorney, contact a Grand Forks estate planning attorney at German Law | Wealth by calling 701-738-0060 to schedule an appointment.
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