A good way to protect property during incapacitation is with a power of attorney (POA). A POA is a document by which one person or party, the principal, appoints and authorizes another, the attorney-in-fact, to act on the principal's behalf. An attorney-in-fact does not need to be a lawyer.
If a principal becomes mentally incapacitated and cannot manage financial accounts, nobody will be able to access them without a power of attorney. Even with a power of attorney, if the document more than a few years old it may not contain the precise language that would allow the attorney-in-fact access. Trusts can protect big investments but do not cover day-to-day decisions, which an attorney-in-fact can cover when the principal cannot. If not managed properly, however, issues can arise.
Types of Power of Attorney Documents
The broadest is a durable power of attorney, which takes effect immediately following execution of the document to give the attorney-in-fact the power to act independently in making decisions on all financial affairs with or without the principal's knowledge or consent. Of most concern in this appointment is the trustworthiness of the person the principal appoints.
A limited power of attorney is useful for representation in specific transactions. For example, a principal who buys and sells houses at the same time in different states may need a limited power of attorney for an agent in the remote location to execute simultaneous transactions. A limited power of attorney specifies when it is in effect and the transactions it authorizes.
A springing power of attorney does not go into effect until the principal becomes incapacitated. But if there is disagreement among care providers as to whether the principal is in fact disabled, the question may wind up in litigation.
A health care power of attorney is an affidavit that gives the attorney-in-fact the authority to make health-care decisions for the grantor, up to and including terminating care and life support. A health care power of attorney may also be referred to as a "health care proxy" and, as such, the two terms are sometimes used interchangeably.
How Does It Affect Retirement Plans?
The primary purpose of a power of attorney is to meet ongoing obligations by paying bills, making deposits, and completing administrative tasks that the document should describe along with other presumable powers that may not be obvious but would need coverage:
- Internal Revenue Service and other tax matters
- Management of retirement accounts
- Management of trusts
- Compensation for the attorney-in-fact
- Gifts from the principal's estate
A principal with investments in an individual retirement account, a tax-deferred plan under Internal Revenue Code Section 401k, or an annuity but without a power of attorney should consult an estate planning attorney to put one in place, so an attorney-in-fact can manage the retirement accounts if the principal becomes mentally incapacitated. A principal who already has a power of attorney-in-place, should ask an estate planning attorney to confirm that it remains in full legal force and effect so the attorney-in-fact faces no legal impediment to the execution of its duties. It also may be wise to see whether any corporate custodian of retirement accounts has its own proprietary power of attorney form and, if so, to keep it with the principal's general power of attorney.
Because of the effects various powers of attorney might have on a principal's ability to control financial and property management, it is best to have professional legal counsel when implementing them.
