Article: Key Questions in Granting a Power of Attorney

June 2005

Key questions in granting a power of attorney

A power of attorney is a simple document that can give rise to complicated, yet avoidable, events

You know the importance of having a valid will. However, as life expectancies increase, planning for disability or incapacity is equally important. A durable power of attorney (POA) is a very useful tool for this. A POA is a simple, relatively inexpensive legal document in which you appoint another person as attorney-in-fact, or agent, to act on your behalf in managing your financial or other affairs.

A POA may be general – granting broad authority to make decisions concerning investments, tax matters, property transactions, and long-term care and health issues – or it may be limited, granting authority only to perform one or more specific duties.

Often, the power is not effective until the individual granting it becomes incapacitated. However, if you do become unable to make decisions, having the POA ensures that your assets will be managed and financial plans and responsibilities will be fulfilled. Without a POA, your family may have to undergo the costly and time-consuming process of court supervision of your affairs.

Although the POA is a relatively simple document, there are many factors you should consider when deciding exactly what powers will be granted, who will be named as agent, and how the POA will become effective.

Powers of the agent. This is your call, but you should define the powers of your agent only after consulting an attorney who is experienced in this area. Before you accept any “boilerplate” language, consider the following questions.

Will you also name a successor agent? If you do, how is the succession determined? This can be tricky, since in many cases the spouse is the primary agent and a child is the successor agent. There should be some independent process for determining when the primary agent is no longer competent to serve and it is time for the successor to step in.
Should your agent be compensated? This can also be tricky. If you appoint one of your adult children to act as your agent, your other children may expect the agent to perform his or her duties free of charge. However, in some cases, an agent’s responsibilities can require significant time and effort. Also, the agent assumes a fiduciary liability to the principal, meaning he or she can be sued if that liability is breached. It may be unfair to ask someone to assume that liability without compensation.
If the POA is not triggered until some future event, how is that event defined? And who will determine if the event has occurred? Your ability to make good decisions may decline gradually as you age. It may be difficult for you or others to recognize when an impairment is so severe that the POA should be triggered. Some POAs require that incapacity be verified in writing by a doctor. If so, you may want to name a doctor who is to make the determination. (See the discussion below regarding issues related to HIPAA.)
If you permit your agent to make gifts on your behalf, are there provisions to ensure equity among family members? If the agent is your child, consider stipulating that any gifts that the agent makes to him- or herself (or to his or her children) must be matched by gifts of equal value to your other children (or their children).

On a related topic, gifts made by your agent aren’t always considered a gift for estate tax purposes. Unless the POA expressly authorizes gift giving, the IRS could argue that the gifts made by the agent were unauthorized revocable transfers that would be included in your gross estate.

HIPAA considerations. As was mentioned earlier, many POAs grant the agent authority to act only if and when the principal becomes incompetent or incapacitated. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) prevents doctors and other health care providers from disclosing health information to anyone other than the patient and to persons authorized by the patient. This presents a problem for POAs that require a medical determination of incapacity before the agent can serve, since the medical information can’t be provided to the agent until he or she is actually serving.

To avoid this problem, specify your POA agent(s) on any HIPAA forms you complete for health care providers. Recently drafted POAs may include provisions (e.g., a waiver of the principal’s HIPAA rights or an express authorization of the agent to obtain medical information on the principal’s behalf) that should get around this issue. If, prior to April 2003, you granted any POAs that are still in effect, consult your attorney regarding the HIPAA privacy rules to make sure they won’t get in the way.

Qualified help. A power of attorney should be drafted by an attorney experienced in this area. We would be glad to discuss this issue with you in more detail or to review your existing POAs.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.