Advance Directives – Power of Attorney

Estate planning tools that provide instructions in the event of catastrophic illness or incapacity are called advance directives.

One such directive is a power of attorney, which grants authority to another person (the "attorney in fact" to make legal decisions on one's behalf. The powers granted depend on the desires of the principal (the person granting the power), and can cover such areas as insurance transactions, estate transactions, investment decisions, government benefits, and retirement plan decisions.

Binding and Durable

To set up a power of attorney, the principal must have sufficient mental capacity when the document is drawn up to make it legally binding. This means that he or she must understand the nature and effect of the document, as with other legally binding documents.

If you intend to use the power of attorney in the event of incapacity, the document must be a durable power of attorney—one that remains in force after the principal becomes mentally incapable. (Historically, all powers of attorney terminated upon incapacity; however, all 50 states now have statutes providing for a durable power of attorney.) In most states, a power of attorney is not presumed to be durable unless specific "durable" language is included. The language in the document must state that the powers it grants will not be affected by the principal`s subsequent disability.

States may have other varying requirements: for example, in Florida, the attorney in fact must be a close blood relative. Some states also require that the document be witnessed or notarized. Not all states recognize the springing durable power of attorney (discussed below).

Springing Durable Power of Attorney

A springing durable power of attorney is one that becomes effective only in specific circumstances (e.g., certification by a physician that the principal is no longer capable of managing his or her financial affairs). This assures that the principal does not relinquish important rights while he or she is still able to make independent decisions. The key step in crafting a springing durable power of attorney is to carefully spell out how the triggering event will be determined (e.g., defining mental incapacity).

A durable power of attorney is an essential estate planning tool for all individuals. Without one, court intervention may be necessary to carry out your financial desires if you become incapacitated.