When crafting an estate plan, an important component is the Financial Power of Attorney document. In a financial power of attorney [1], you designate a trusted decision maker (agent or attorney-in-fact) to act on your behalf if you become disabled or unable to manage your financial affairs. Depending on the provisions you choose to include, your agent may have some pretty broad powers. These include the power to buy and sell property, the power to invest, and powers regarding your retirement benefits. When you are selecting powers to give your agent, you should carefully consider the following three powers in particular: (1) the power to gift, (2) the power to make or change your estate plan, and (3) the power to prosecute and defend legal actions.
The Power to Gift
Depending on how it is written, the power to gift authorizes your agent to make gifts of your money and property to any person or organization on your behalf. This power by itself is not a bad one.
Pros: On the one hand, this power could be quite beneficial because it can enable your family to accomplish necessary Medicaid and other public benefits eligibility planning after you become incapacitated. It also gives your agent the ability to continue your charitable giving practices such as tithing to your church or donating to your favorite charities or scholarship funds. In addition, if a need arises after you can no longer manage your affairs, it allows your agent flexibility to financially help family members the way you would have.
Cons: On the other hand, you must exercise caution when including the ability to gift, because it may invite financial exploitation by the agent. An agent could be tempted to make substantial gifts to themselves or their loved ones to the detriment of your chosen beneficiaries. Abusing the power to gift can disrupt an entire estate plan. This risk is why it is important to appoint only those people who understand your financial goals and desires, and is someone who you trust completely to abide by your wishes.
Therefore, you may consider limiting the power to gift by specifying gifts may be only made to family members or for certain purposes (charitable giving, education expenses, etc). Another method of creating a check on the agent, consider naming an independent third party to approve any gifts the agent makes.
The Power to Make or Change Your Estate Plan
This power can allow your agent to work with an estate planning attorney to create an estate plan that fits your needs at that time. As with the earlier mentioned power, this can be helpful but can also be a cause for pause.
Pros: Such a power can allow a trusted agent to be able to alter an estate plan in a way and under circumstances that you would have wanted but are now unable to do yourself. For example, if a child develops an addiction after Mom and Dad become incapacitated, this power would allow the agent to alter the estate plan to include provisions that would let the child receive their inheritance with restrictions that would be helpful in treating their addiction and not detrimental in their current situation. Thus, the power to make or change an estate plan could allow a beneficial change for the loved one who is going through a messy divorce, facing bankruptcy, or dealing with an addiction.
Cons: On the other hand, this power is sensitive because it also invites potential exploitation by an agent who could create or alter your estate plan so that they receive all of your property or more than the share you want them to receive.
Again, when including such a power, you may want to consider including limiting language which does not allow your Agent to change the named beneficiaries in your plan, or the amounts those beneficiaries would receive.
The Power to Prosecute and Defend Legal Actions
This power gives your agent the ability to start, settle, defend, intervene in, and appeal a legal action. This power is best illustrated with the following example:
Example: Helen goes to her estate planning lawyer’s office and signs a power of attorney that includes the power to prosecute and defend legal actions. A short time later, Helen goes into a nursing home where she has a fall that causes a stroke. The nursing home staff fails to check on her for more than eighteen hours, which results in brain damage and leaves Helen significantly paralyzed. Helen’s son, who is her agent under her power of attorney, seeks out a medical malpractice lawyer who advises him that Helen has a claim against the nursing home. Because Helen’s power of attorney specifically allows her agent to initiate legal action, the medical malpractice attorney can immediately file a lawsuit against the nursing home. Without that provision, Helen’s agent would have had to first go to court and seek a guardianship. Granting the power to prosecute avoided that delay and additional expense.
The downside to including the power to prosecute and defend legal actions is that an agent could conceivably abuse the power to harass or seek revenge on another person, such as a sibling against whom they have a personal grudge. It may be possible to guard against such abuses by including limiting language that excludes legal actions against family members.
Final Thoughts
Overall, because the powers to gift, to make or change an estate plan, and to prosecute and defend legal actions are such powerful provisions, it makes it so important to carefully discuss their potential pros and cons with your attorney before deciding whether to include or exclude them from your financial power of attorney. If you have questions or would like to discuss other ways we can safeguard you, your loved ones, and your life savings when you can no longer manage your affairs, call us to schedule an appointment. Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, contact us.
[1] Hayes, A. H. (2022, July 4). Power of Attorney (POA).
