What is a Power of Attorney?
A power of attorney is a document which gives a person legal authority to act on your behalf. The person who is legally designated to transact business and sign financial documents on your behalf is called an "attorney-in-fact".
There are 2 types of powers of attorney:
- Financial Power of Attorney
- Healthcare Power of Attorney
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What is a Financial Power of Attorney?
In a financial power of attorney, you choose an agent (called an "attorney-in-fact") who will take care of financial matters for you. For example, your attorney-in-fact can pay bills, file tax returns, sell or buy real estate or investments, endorse checks, and collect money due to you. This is especially helpful if you become incapacitated and cannot do these things personally.
If I don't have a Financial Power of Attorney and I become incapacitated, who can take care of my financial affairs?
Generally, if you don't have a well drafted, properly signed durable power of attorney and you become incapacitated, the management of your financial affairs comes to a halt. Generally, no one can access your accounts or has legal authority to continue paying your bills unless the court appoints a legal guardian or conservator to handle your finances.
Therefore, a durable financial power of attorney is helpful because it grants someone the power to act on your behalf without the necessity of court intervention to legally appoint someone to take care of your finances. The court process is not only costly, but time consuming. A power of attorney is a relatively simple document which saves time, expense and administrative burdens when compared to getting the court involved to appoint a guardian.
Your power of attorney can be revoked or changed at any time, provided you are not incapacitated at the time of the revocation or change. Unless otherwise specified in the power of attorney, it is effective until your death, at which time it automatically terminates. Of course, you may also specify in the power of attorney the length of time you wish it to be effective (i.e., until the sale of real property is complete, or for a certain number of years).
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Why would I want to have a "durable" power of attorney?
A power of attorney which allows your attorney-in-fact to act on your behalf even if you become mentally incapacitated and are incapable of revoking the power of attorney. If you do not have a "durable" power of attorney, the agent's authority terminates when you become incapacitated, which in many instances defeats the purpose of having a power of attorney. Therefore, in the estate planning area, almost all powers of attorney are "durable".
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When does a power of attorney take effect?
A durable power of attorney can either take effect upon your signing it or at the time or your disability.
What's the difference between a guardian/conservator and an attorney-in-fact?
Once appointed, the actions of a guardian or conservator are subject to court review and supervision. Generally, the guardian/conservator posts a bond and provides an accounting to the court regarding the management of assets. The accountings usually become public record. (The term guardian and conservator are interchangeable and the appropriate title depends upon whether one lives in Virginia, Maryland or the District of Columbia.)
An attorney-in-fact is subject to the provisions of the power of attorney, i.e. the document which grants the attorney-in-fact legal authority. There is no court oversight unless someone asks the court to be involved and there is no statutory requirement for an accounting by the attorney-in-fact unless the power of attorney requires it.
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What are the benefits of having a will?
- Allows you to determine who will receive your property and the manner in which you would like them to receive it. Otherwise, the law of state where you reside at the time of your death controls.
- Allows you to designate a guardian of your minor children if there is no surviving parent.
- Allows you to choose the personal representative or executor of your estate.
- Allows you to provide for the special needs of a beneficiary.
- Facilitates the probate process.
- Enables you to make alternative distribution in the event contingencies occur; e.g. you and your spouse should die simultaneously.
A will provides for the distribution of property which you own at the time of your death in any manner you choose. Wills can be made with varying degrees of complexity and can be utilized to achieve a wide range of family and tax objectives.
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What is an Advance Medical Directive or Advance Health Care Directive?
An "advance medical directive" or an "advance health care directive" is a written or oral statement which expresses your wishes with respect to your future medical care. The directive not only includes a "living will" but also includes a "health care power of attorney."
A living will allows you to choose what life sustaining procedures should be withheld or provided under specific circumstances, if you become unable to communicate those wishes.
The health care power of attorney allows you to designate someone to make health care decisions for you. It ensures that healthcare decisions will stay in the hands of trusted people that you choose to act on your behalf.
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What is a revocable living trust?
A revocable trust, also known as a "living trust," is a fiduciary relationship between a "grantor" who is the creator of the trust, and a "trustee" who is the person willing to manage the grantor's property. The primary purpose of creating a revocable living trust is to (1) streamline the probate process or, in some instances, eliminate the probate process; and (2) facilitate the management of assets in the event of incapacity.
A revocable trust, is a trust created during the lifetime of the grantor which permits the grantor to:
- cause the trust assets to be returned to him or her whenever desired;
- alter or amend the terms of the trust at any time; and
- control the trust assets and its disposition during the grantor's lifetime.
The grantor can be the trustee of his or her own revocable living trust, keeping full control over all property held in trust as long as he or she is mentally competent. The trustee is responsible for managing the property generally for the exclusive benefit of the grantor during his or her lifetime. If the grantor should become incapacitated, the successor trustee would manage the property for the grantor, thereby avoiding the appointment of a guardian for that purpose. Upon the grantor's death, the successor trustee is directed by the trust document to either distribute the trust property to the grantor's beneficiaries, or to continue to hold it and manage it for the benefit of the beneficiaries.
Revocable living trusts are not created to save taxes or protect assets from creditors.
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What are Estate Taxes?
Federal and state estate tax is a type of tax which is assessed on the value of a decedent's assets at the time of his or her death. An estate tax is due only if your estate exceeds a certain "exempt amount" at the time of your death.
If you own a home and some life insurance and are entitled to retirement plan benefits, the total value of your assets, i.e. your "gross estate" may already exceed the threshold at which estate tax liability begins. Your gross also includes your proportionate interest in any jointly held assets.
With proper planning it is possible to minimize estate tax savings. For example, under current law it possible for a husband and wife to avoid federal estate taxes on at least $2 million of their joint gross estates if proper planning is done, thereby preserving their joint estates for the benefit of their children.
Depending on the year of your death, the following is a schedule of the exemption for estate taxes.
Year of Death | Gross Estate
Exempt Amount |
2002-03 | $1 million |
2004-05 | $1.5 million |
2006-08 | $2 million |
2009 | $3.5 million |
2010 | No estate tax |
2011 | $1 million unless Congress extends repeal |
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