A financial power of attorney is a legal document in which you designate a trusted decision maker (your “agent” or “attorney-in-fact”) to act on your behalf if you become disabled or otherwise unable to manage your financial affairs. Depending on the provisions you choose to include in your power of attorney, your agent may have the power to buy and sell real and personal property, the power to invest your money, and powers regarding your retirement benefits. When deciding which powers to bestow upon your agent, you should carefully consider the following three powerful powers: (1) the power to make gifts; (2) the power to create an estate plan or to change your existing estate plan; and (3) the power to prosecute and defend legal actions.
The Power to Make Gifts
The power to make gifts authorizes your agent to make gifts of your money and property to any person or organization on your behalf. On one hand, this power could be quite beneficial because it can enable your family to accomplish necessary Medicaid and other public benefits eligibility planning should you become incapacitated. It also provides your agent the ability to continue your charitable giving practices, such as tithing to your church or donating to your favorite charities or scholarship funds. In addition, the power to make gifts grants your agent the flexibility to assist family members financially if the need arises – just like you would have done if you were not incapacitated.
On the other hand, giving your agent the power to make gifts could invite financial exploitation by the agent. Your agent could be tempted to make substantial gifts to themselves or their loved ones to the detriment of your chosen beneficiaries. The abuse of the power to make gifts can disrupt an entire estate plan. To address this potential problem, you may consider limiting the power to make gifts by specifying that your agent may not make gifts that disrupt your estate plan’s essential provisions or that your agent can only make gifts to a trust that preserves your estate plan’s main provisions, like a Medicaid Asset Protection Trust. Another solution to the financial exploitation problem is to consider naming an independent third party to approve any gifts the agent makes.
The Power to Create or Change Your Estate Plan
The power to create or change your estate plan is delicate because it also invites potential exploitation by an agent who could create or alter your estate plan so that they receive all your property, or more than the share you want them to receive. The benefit of this power is that your trusted agent has the authority to create or alter an estate plan in a way and under circumstances that you would have wanted, but are now unable to do so yourself. For instance, if your child develops an addiction after you become incapacitated, this power will authorize the agent to revise your estate plan to include provisions that would let the child receive their inheritance with restrictions that would be helpful in treating their addiction and not detrimental to their current situation. Accordingly, this power could allow a beneficial change for the loved one who is dealing with an addiction, going through a messy divorce, or facing bankruptcy.
Again, to address the potential financial exploitation issue, you might consider including limiting language in your power of attorney so that your agent must seek approval from a disinterested third party if they attempt to change your estate plan to improperly benefit themselves.
The Power to Prosecute and Defend Legal Actions
This power gives your agent the ability to start, settle, defend, intervene in, and appeal a legal action. The following example illustrates this power’s benefit:
Example: Mary signs a power of attorney at her estate planning attorney’s office that includes the power to prosecute and defend legal actions. Shortly thereafter, Mary goes into a nursing home where she has a fall that causes a stroke. The nursing home staff fails to check on Mary for more than eighteen hours, which results in brain damage and leaves her significantly paralyzed. Mary’s son, who is her agent under her power of attorney, consults a medical malpractice lawyer who advises him that Mary has a claim against the nursing home. Because Mary’s power of attorney specifically allows her agent to initiate legal action, the medical malpractice attorney can immediately file a lawsuit against the nursing home. Without that critical provision, Mary’s son would have had to go to court first and seek a guardianship order to begin the lawsuit. Because Mary’s power of attorney granted her agent the power to prosecute legal actions, the delay and expense of a guardianship proceeding was avoided.
The disadvantage of including the power to prosecute and defend legal actions in a power of attorney is that an agent could abuse the power to harass or seek revenge on another person, like a sibling against whom they have a personal grudge. Again, it may be possible to guard against such behavior by including limiting language that excludes legal actions against family members.
How MM&C Estate Planning Attorneys Can Help
Since the powers to make gifts, to create or amend an estate plan, and to prosecute and defend legal actions are such powerful provisions, you should carefully discuss their potential pros and cons with our estate planning attorneys before deciding to include them or exclude them from your financial power of attorney.
Schedule a Meeting
Let us help you choose the best course of action to update your estate plan. If you have questions about powers of attorney or would like to discuss other ways we can safeguard you, your loved ones, and your life savings when you can no longer manage your affairs, call us to schedule an appointment.
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David Lucas is an attorney in the Estates & Trusts practice groups at Miller, Miller & Canby, licensed to practice in Maryland and the District of Columbia. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning. Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby’s Estates & Trusts practice click here.