Durable Power of Attorney
What is a Durable Power of Attorney?
A Power of Attorney (POA) is an estate planning device by which you (the "Principal") appoint someone else (an "Agent") to handle your business and financial affairs for you. The powers given to an agent under a POA can be limited to very specific matters if you wish, but for reasons explained in more detail below, the powers granted by a POA are usually quite broad. Examples of powers often granted to an Agent include:
- Collecting money owed to you by other people
- Investing on your behalf
- Entering into contracts on your behalf
- Signing checks, deeds, mortgages, and other documents for you
- Hiring attorneys, accountants, property managers, and other professionals
- Buying or selling assets on your behalf
- Opening and closing bank accounts for you
- Making or altering beneficiary designations
- Applying for government benefits to which you may be entitled
- Preparing and filing your tax returns
- Purchasing, canceling or modifying insurance coverage
- Accessing the contents of your safe deposit box
- Controlling litigation necessary to protect your rights
What's so special about a "Durable" Power of Attorney?
An ordinary POA will become ineffective if you become incapacitated (substantially unable to provide food, clothing, or shelter for yourself, to care for your physical health, or to manage your financial affairs.) Unfortunately, this is precisely the time when you are most likely to need a POA. By including special language, however, the POA becomes "durable," meaning that it will continue in effect even after you are incapacitated.
Note, though, that all POA's, whether durable or not, will terminate on your death. The reason is that the POA authorizes the Agent to do what you yourself could do; when you are dead, you are unable to take any further action.
My spouse can sign on my bank account. Do I need a Durable Power of Attorney?
In most cases, yes. Look again at the list above of powers that can be granted to an Agent. While being a signatory on your bank account will allow your spouse to access those funds, your spouse will not have the authority to take out a home equity loan on your community homestead or sell jointly-owned real estate or vehicles. Your spouse will also likely need a POA to represent you in insurance transactions, applying for various benefits, and other financial matters. You should also consider the possibility that your spouse might die or become incapacitated. With a POA, you can name alternate Agents to serve as "backups" in case your primary Agent cannot or will not act.
What happens if I don't have a Durable Power of Attorney?
If you are incapacitated, someone will have to take over your financial affairs. There are two ways a person can acquire this authority: through a POA, or by a court proceeding called a "guardianship."
A guardianship is a special kind of lawsuit designed to determine whether a person is incapacitated and, if so, what measures should be taken to protect his or her interests. Guardianships are among the most time-consuming, costly, and emotionally-devastating legal proceedings. Most guardianships involve greater expense because several lawyers are involved and multiple court hearings are required. In addition, it may be necessary to pay your physician to come to court to testify as to your mental state. If the court finds you are incapacitated, it will appoint a guardian to handle your financial affairs for you, even if you do not approve of the person selected. The guardian will incur substantial expenses in caring for you because the guardian will be required to post a bond, and will likely need ongoing assistance from a lawyer to file the necessary reports and to get permission from the court to perform various actions on your behalf. Many of these expenses will be reimbursed from your estate, thus reducing the amount that can be passed to your heirs at your death. In addition, the guardianship will be highly invasive of your personal privacy, resulting in the filing of detailed descriptions of your assets and medical condition among public court records.
As you can see, guardianship is a process to be avoided at almost any cost. Although there are multiple ways to avoid guardianship, in most cases the simplest and least expensive method is via a POA. When you designate an Agent under your POA, that person will have the authority to do all the things that a guardian would otherwise be empowered to do. In addition, you have the freedom to choose whom you wish to serve as your Agent, and your financial affairs remain a confidential matter between yourself and your Agent. Finally, because no court proceedings are required the costs and time involved in managing your affairs are drastically reduced.
Will a Durable Power of Attorney ensure that no guardianship is necessary?
Unfortunately there is no way to be absolutely certain that no guardianship is necessary, although in the vast majority of cases a POA will either eliminate the need for guardianship or at least substantially reduce the difficulty of the guardianship. The most common situations in which a guardianship might still be necessary even if you have a POA are as follows:
- You have failed to give your Agent the authority to perform a necessary action. To avoid this problem, we usually recommend that a POA grant extremely broad powers, basically authorizing your Agent to do anything that you personally could do.
- Someone refuses to deal with your Agent. As currently written, the law does not require anyone to deal with an Agent under a POA. If your bank, insurance company, or anyone else refuses to accept your POA, they have the right to do so. To avoid this problem, we recommend that you take your POA to the various persons and businesses that you think your Agent might have to deal with, and get "pre-approval." That way, if someone indicates that they will not honor your POA, or will require special language to be included, you will have time before your incapacity to take the necessary precautions.
- Your Agent is unable or unwilling to act. People get sick or busy; they move away or they die. If for whatever reason your Agent cannot or will not act, your POA is of no value. For this reason, we recommend that you name at least two or three alternate agents who can take over for your primary Agent if necessary.
- You failed to include your real estate in the POA. In Texas, title companies will not honor a POA for real estate transactions unless the POA contains a specific legal description of the land at issue. (A legal description means the full lot, block and subdivision information from a plat, or field notes from a surveyor. Neither the shorthand description that appears on your tax statement nor the street address will suffice.) Since almost all sales and loan transactions will require title insurance, it is imperative that you include a proper legal description in your POA, and update your POA if you acquire more land in the future.
- There are actually two kinds of guardianship in Texas: a "guardian of the person" and a "guardian of the estate." The first kind of guardianship is concerned with who will have the responsibility for caring for your body (i.e.--making sure you are fed, clothed, sheltered, bathed, etc.); the second kind is concerned with who has the authority to handle your financial affairs. A POA will likely eliminate the need for a guardian of your estate, but it may still be necessary to appoint a guardian of your person. Fortunately, guardianship of a person is usually much less costly and time-consuming than a guardianship of the estate. In addition, you can specify who you would like to act as a guardian of your person with a Declaration of Guardian in Advance of Need.
I don't feel comfortable giving someone else control over my financial affairs.
That's understandable, but you must understand that if you are incapacitated someone else will be handling your affairs for you. The only question is whether you will choose that person and the powers that he or she has, or whether a court will do it for you.
It goes without saying that your Agent should be someone you trust implicitly, because there is a very clear opportunity for that person to defraud you. Ideally, your Agent will be a close family member or friend who is already familiar with your financial affairs. If your Agent is someone local who is known to the people with whom you do business, so much the better. (In today's connected world, though, where financial matters are often handled by fax, email, and electronic signatures, the Agent's location is becoming less of a concern.)
Some of our clients wish to make a POA effective only when they become incapacitated because as long as they can handle their own affairs they do not trust their Agent with so much power. This approach is foolish for two reasons:
- If the POA only becomes effective on your incapacity, who will determine that you are actually incapacitated? In all likelihood, it would take a court order to resolve that issue. If your Agent has to go to court to get such an order, the time and expense involved may not be significantly less than that required for a guardianship.
- If you can't trust your Agent with your finances when you are fully competent, why would you want to give that person full control over your finances when you are no longer mentally able to understand what he is doing with your money? Find someone else to act as your Agent.
If I have a Durable Power of Attorney, do I still need a Medical Power of Attorney?
The Durable Power of Attorney is designed to authorize someone to make financial decisions for you. As the law is currently written, a Durable Power of Attorney does not allow your Agent to make health care or medical treatment decisions for you. A separate instrument, called a Medical Power of Attorney is necessary to grant such powers to another person.
What information do you need to prepare a Power of Attorney?
Please download our Estate Plan Worksheet.
A Durable Power of Attorney is an essential part of almost any estate plan because in the vast majority of cases it is the simplest way to avoid guardianship. A POA is a relatively simple and affordable instrument, especially when compared to the expenses associated with guardianship. Call us today to speak with a Texas estate planning lawyer about whether a POA would benefit you.