People are living longer today than ever before—thanks in part to amazing advances in healthcare diagnoses, treatments, medications, and technology. For individuals who live to reach at least the age of 65, the Social Security Administration pegs average life expectancy at age 84.3 for men and age 86.6 for women. As people age, they often begin to give thought to how they will manage their financial affairs, especially in the event of incapacity or other cognitive impairments which affect memory and thinking skills or affect daily life, such as Alzheimer’s Disease or advanced dementia.
For individuals who do not wish to transfer their assets to others or to a living trust, or to create joint ownership of property, an instrument known as a Power of Attorney can be an effective and important tool. A financial power of attorney (also called a durable power of attorney) is a legal document which allows a person (known as the principal) to appoint an agent (who is sometimes called an attorney-in-fact) who will then have authority to act on behalf of the principal. The authority granted allows the agent to bind the principal with respect to property or business transactions undertaken by the agent. All agents should be counseled that any and all actions taken on behalf of the principal must either be consistent with the principal’s wishes or be in the principal’s best interest.
In order to execute a power of attorney, the principal must merely have testamentary capacity, which means that at the moment the client is signing the document, he or she understands the nature and extent of the authority being granted to the agent and understands the implications of the power (such as when it becomes effective). Such capacity is typically assessed by the attorney preparing the document. Most attorneys assisting with the preparation of a power of attorney will also take into account other ethical considerations, such as whether the principal seems to be under duress or coercion or undue influence.
Finally, it is important to note that an agent’s power to act is only effective for so long as the principal is alive. Once the principal dies, any authority granted under the power of attorney is null and void. At that point, an estate must be opened and an Executor or an Administrator appointed, who will then have authority to act to wind up the principal’s affairs.
This post is the first in a series of eight articles on this topic. Contact our experienced estate planning section to learn more.