An often overlooked but critically important cog in the wheel of an effective estate plan is the durable financial power of attorney. I say “overlooked” because the durable financial power of attorney is not typically considered to be one of the big-ticket estate planning items. While it often happens that, after the death of a loved one or just before departing on a trip overseas, a person finds the fleeting motivation to contact an estate planning attorney. Usually it is with an eye toward preparing an Advance Medical Directive (otherwise known as a living will) and a Last Will and Testament. The importance of having a living will and a Last Will and Testament (and other documents in some cases) has been previously discussed in this forum and cannot be emphasized or overstated enough, yet it is also crucial for an individual to make sure that his or her property and finances are properly managed and protected during his or her lifetime. The durable financial power of attorney protects one in the event he or she cannot make financial decisions for him or herself.
What Is a Power of Attorney?
Most of us have executed a variation of a power of attorney at some point in our life and may not have even realized it. For example, a car dealership will often have a customer execute a limited power of attorney authorizing the dealership to act on the customer’s behalf for the purpose of obtaining tags and securing title. Durable financial powers of attorney in the estate planning universe work the same way but satisfy a different – and much more important – objective.
Let’s start with the basics: The maker of the durable financial power of attorney, also known as the “principal,” gives an individual – the “agent” – the authority to make decisions and take actions for the principal relating to the principal’s property and finances. Whereas “limited” powers of attorney can be drafted to allow an agent to perform a single transaction, durable financial powers of attorney are usually broad by design to allow the agent to make wide-ranging decisions and take extensive actions on the principal’s behalf. The “durable” aspect of the financial power of attorney means that the authority given to the agent remains in place even if the principal becomes incapacitated or disabled, making it extremely valuable when planning for unknown and unanticipated circumstances and scenarios.
Why Have One?
Durable financial powers of attorney are important regardless of the size of one’s estate and irrespective of one’s age. There are numerous situations that may arise that highlight the importance of having a properly executed durable financial power of attorney. Although one never plans – or ever anticipates – becoming unable to make financial decisions on his or her own, the reality is that one’s circumstances can unfortunately deteriorate to that point very quickly and unexpectedly.
One common example that illustrates the importance of having a durable financial power of attorney is the case of an elderly parent who becomes unable to pay recurring bills on his or her own. Designating a spouse or a child to act as an agent allows the spouse or child to continue paying those bills in the ordinary course without delays or delinquencies. On the other hand, without a durable financial power of attorney, there is little anyone can do without a court order to assist with managing and protecting the spouse’s or parent’s property and finances. Of course, obtaining a court order requires an investment of time and money that may only add to the stress of an already trying time. There are other factors, such as accounting requirements and having one’s finances a matter of public record, which further illustrate why relying on obtaining a court order is far from ideal.
In 2010, the Maryland legislature codified the “Maryland General and Limited Power of Attorney Act,” which provides the technical requirements to create a valid financial power of attorney and allows a court to review actions taken by an agent. Importantly, the Act also contains the “Maryland Statutory Form Personal Financial Power of Attorney” and includes consequences for financial institutions and other individuals that refuse to accept a validly executed form.
The Maryland Statutory Form Personal Financial Power of Attorney authorizes an agent to take the following actions on behalf of the principal: 1) transact business with banks, including opening and closing bank accounts; 2) deposit checks and pay bills and expenses; 3) buy, sell, and lease real property; 4) buy, sell, and exchange stocks and bonds; 5) handle Medicaid and Medicare payments and reimbursements; 6) enter into contracts; 7) select the form and timing of payments under a retirement plan and withdraw benefits from a plan; 8) prepare, sign, and file federal, state, local, and foreign tax returns; 9) initiate claims on behalf of the principal; and 10) access the principal’s digital assets, such as online accounts, in accordance with the Maryland Fiduciary Access to Digital Assets Act.
As an aside, reliance on a power of attorney to grant an agent access to digital assets may be misplaced since the contract between the principal and the digital provider may not authorize the provider to grant such access to the agent. For that reason, the principal should give special care and attention to making sure an agent has access to the principal’s digital assets through other means, such as providing the agent with log-in credentials and passwords.
More Power of Attorney Facts
Although the Maryland Statutory Form Personal Financial Power of Attorney authorizes an agent to do many things vis-à-vis the principal’s property and finances, it is recommended to execute an additional durable financial power of attorney that includes, and expands upon, the authority granted by the Maryland Statutory Form Personal Financial Power of Attorney.
As mentioned above, durable financial powers of attorney can – and, arguably, should – be broad by design in order to maximize the agent’s authority. A broad durable financial power of attorney gives the agent the flexibility he or she needs to manage and protect the principal’s property without restriction. That said, proceed with caution.
Typically (although this can be changed in the document), a durable financial power of attorney becomes effective immediately upon execution in order to alleviate the need to obtain certification of incapacity from a doctor if and when that time comes. In other words, as soon as the document is signed, the agent can begin making decisions and taking actions on the principal’s behalf even if the principal is perfectly capable of doing the same for him or herself. This, understandably, may be a cause for concern to an individual thinking about executing a durable financial power of attorney and leads to the single most important rule to consider when making a durable financial power of attorney: Select an agent that you really trust. Not “might trust” or “kind of trust” – really trust. A principal should not designate anyone as his or her agent to whom he or she would not freely give a blank check or an ATM card. Depending on the circumstance, it might be a good idea to designate multiple agents and require that they work together in making financial decisions.
Of course, circumstances and relationships frequently change, and someone who was previously designated as an agent may no longer be the right person for the job. Not to worry. Durable financial powers of attorney may be revoked or changed as long as the principal is still competent. In addition to an express revocation, changing a durable financial power of attorney has the effect of revoking previously executed powers of attorney. A principal can also include a specified termination date in the document after which time the agent can no longer act on the principal’s behalf.
People frequently ask if a durable financial power of attorney is effective even after the principal dies. The answer is that durable financial powers of attorney are only valid during the lifetime of the principal. This makes sense since the agent is authorized to act on the principal’s behalf and, as a result, the agent can only do for the principal what the principal can do for himself. Once the principal dies, the Personal Representative or Executor designated in the principal’s Last Will and Testament is in charge of handling the estate’s property and finances in accordance with the provisions of the Last Will and Testament.
In sum, as important as it is to plan for death, it is at least equally important to plan for life. Thus, it is crucial for an individual looking to have his or her estate in order to execute a durable financial power of attorney.
Shlomo Kanner is an estates and trusts attorney at Neuberger, Quinn, Gielen, Rubin & Gibber, P.A. and advises clients in estate and trust planning and administration matters. He may be reached by phone at (410)332-8532 and via email at SK@NQGRG.COM.
