What is a Durable Power of Attorney?

A durable power of attorney (also called a financial power of attorney or a power of attorney for property) document should almost always be included in an estate plan. In this document, the person signing the document (the principal) designates someone else (typically the back-up trustee, referred to as the “attorney in fact”) to control property and to enter into transactions on behalf of the principal under certain circumstances.

The majority of financial powers of attorney do not go into effect until at least one doctor has determined that the principal does not have legal capacity to enter into financial transactions on his/her own behalf. This type of power of attorney is called a “springing” power of attorney. However, powers of attorney are sometimes created to be effective immediately upon signing (rather than waiting for the requirement of a doctor to declare the principal unfit to handle their affairs). This type of power of attorney is referred to as a “non-springing” power of attorney.

A springing power of attorney ensures that the powers granted go into effect only when the principal is incapacitated. No one has control over the principal’s assets until that time. A power of attorney document may explicitly state that the powers are not granted until a doctor (sometimes more than one) declares in writing that the principal is not mentally or physically capable of entering into financial transactions. The benefit of the springing power of attorney is that the principal is not subjecting himself/herself to possible fraud or mismanagement of his/her finances by an attorney in fact while he/she is alive and well. On the other hand, the burden of the springing power of attorney is that going through the process of being declared incompetent to handle one’s own finances is not pleasant, either for the principal or for the attorney in fact, which is often the principal’s spouse, child, or friend.

A non-springing power of attorney goes into effect immediately, which means that the principal, while still well enough to make financial decisions, gives immediate control of his/her assets and financial affairs to someone else. The benefit of the non-springing power of attorney is that the principal can allow a trusted friend or family member to assist him/her with managing his/her finances when he/she becomes overwhelmed with handling finances. The burden of the non-springing power of attorney is that the principal is giving up control when he/she is still capable of managing his/her finances, which can be difficult emotionally and which then subjects the principal to possible fraud or mismanagement of his/her assets by the attorney in fact.

What Happens when a Durable Power of Attorney Goes into Effect?

A power of attorney does not give instructions regarding the distribution or management of assets in terms of how assets will be managed and distributed; rather, it is a means of designating an attorney in fact, who will then have legal authority to sell and manage the principal’s assets on behalf of the principal during his/her lifetime, in the event the principal is ever incapacitated. The attorney in fact will typically have full discretion and authority to manage the assets as he/she sees fit, subject to any specific instructions that may be given in the power of attorney document. Any assets for which a principal desires to give specific management instructions, however, should typically be transferred to a living trust, with the living trust including specific instructions for how those assets are to be managed. Because the attorney in fact and trustee are typically designated to be the same person, that person has the ability to manage 100% of the principal’s financial affairs - the attorney in fact is able to transfer assets to the living trust, make payments on behalf of the principal using trust assets or non-trust assets, etc. If the trustee and attorney in fact are not the same person, then the trustee has authority only over the assets in the trust, and the attorney in fact has authority over only the assets outside of the trust. Designating the trustee and attorney in fact as one and the same allows for streamlining of financial decisions.