Most people are familiar with the concept of a power of attorney, a document that allows someone else to act on your behalf. According to legal definitions, the individual designating the power of attorney is the “principal” and the designated person is the “attorney-in-fact”. There can be multiple attorneys-in-fact, but of course they are making decisions in concert. The scope of the power can be limited or broad, but the purpose is for the attorney-in-fact to make decisions in the best interest of the principal. A broad power of attorney is an attempt by the principal to give their attorney-in-fact the same rights the principal would have if they were able to act on their own behalf.
What Does Adding “Durable” Do to a Power of Attorney?
A power of attorney goes into effect upon signing and terminates if the principal becomes incapacitated. Adding the durable specification means the power of attorney will stay in effect if the principal becomes incapacitated. There is also the option to add a “springing” specification, which means the durable power of attorney does not go into effect upon signing, but springs into effect if the principal becomes incapacitated. This addresses the situation whereby the principal wants to remain in control until they are unable to do so, and only at that point does the attorney-in-fact take over.
While this is efficient, a drawback of the springing specification is there could be disputes over whether or not the incapacity has occurred. In addition to the durable financial power of attorney discussed here (also called a durable power of attorney for finances), there is a durable medical power of attorney (also called a durable power of attorney for healthcare). (For related reading, see: Medical vs. Financial Power of Attorney: Reasons to Separate Them.)
With a durable financial power of attorney, the attorney-in-fact has the right to pay bills, deposit checks, file tax returns, buy and sell real estate, invest in securities, make gifts, and even sue, among other things. As one would expect, with the durable medical power of attorney, the attorney-in-fact has the right to make health care decisions for the principal in the event of incapacity.
The Benefits of Having a Financial Power of Attorney
Due to their different concerns, and even if the attorney-in-fact is the same for both of them, these two documents should be drawn up separately for purposes of privacy and simplicity. Families can benefit from having a durable financial power of attorney in place if there's a significant chance that an older family member will become incapacitated due to disability, illness, or age. A durable financial power of attorney can prevent the family from having to go through the court system to appoint a guardian or conservator to manage the principal’s financial affairs.
Additionally, a durable financial power of attorney can make it easier for a family member to take the helm and avoid conflict with other family members. You don’t have to be older to benefit from having a durable financial power of attorney in place, because you never know if an accident might happen that could lead to your own incapacity and leave financial chaos behind.
For example, it’s common for spouses to have durable financial powers of attorney for one another in case something happens to one of them. In community property states especially, many transactions require the signature of both spouses, so it's prudent for spouses to confer durable financial power of attorney upon one another. Some community property states such as California already provide that if one spouse becomes incapacitated, the other spouse automatically assumes the management of the community property. In this case, to avoid conflict, it is important the other spouse and the attorney-in-fact are the same person.
In your suite of estate planning documents, a durable financial power of attorney could be an essential one to avoid having a court appoint who will take care of your finances when you are no longer able.
(For more from this author, see: Medicare: Understanding the Basics.)