With over 35 million people age 65 and older, more and more families are grappling with the needs of their elderly parents. Care-giving arrangements may be necessary, involving some difficult choices and emotional upheaval.
For children with parents of substantial means, there may be concerns that extend beyond a parent’s physical and emotional well-being. Several important questions may need to be addressed: What happens when your parent no longer is capable of managing his or her finances? And, of course, who will assume the financial reins?
The benefits of a durable power of attorney
A durable power of attorney offers some answers to those questions. This legal document, when executed by your parent, permits you to assume and retain control over his or her financial life when your parent becomes mentally incompetent. (Unlike a traditional power of attorney which is automatically revoked at the time that the creator becomes incompetent, the durable power survives incompetency.)
What should the power of attorney document include? Your duties and responsibilities should be clearly outlined, as broad or as limited as desired. Of course, the more specific the language is, the better. Typical powers include: conducting banking transactions; paying bills; managing investments; borrowing funds; preparing and filing tax returns; purchasing insurance; funding trusts; and making retirement plan elections. The authority to make gifts—often used as a long-term strategy to reduce federal estate tax—should be specifically spelled out in the document. The document even may include the name of an alternate person to serve as your parent’s agent, in the event that you become unable to do so.
A durable power permits a smooth transition of control from parent to child. Without it, or any other planning, matters can become extremely complicated. When your parent is no longer considered legally capable, it will take a trip to court in order for you, or anyone else, to be appointed guardian of his or her finances. The process can be time consuming and, perhaps, costly. The proceedings are a matter of public record, there for anyone to scrutinize.
When should the power become effective?
Generally, a durable power is effective as of the day that it is signed. Thus, even it your parent is not incompetent, legally you have the authority to act on his or her behalf. Is that fact a potentially “touchy” issue for a parent who wants to remain completely independent? Who may not, psychologically, be willing for anyone else to look over his or her shoulder?
A springing durable power of attorney may be an appealing alternative. A springing power operates just like a durable power but only becomes effective at a later time, usually when your parent becomes mentally incompetent. (Springing powers, however, are not authorized in every state.)
A springing power needs to include a method for determining whether your parent has become incompetent, so that a third party with whom you deal can rely upon your authority to act as your parent’s agent. The durable power should spell out who will make that determination.
Easy to use, easy to abuse
Distance or other circumstances may require appointing someone as your parent’s agent under a durable power. Because the power is easy to use, so is it easy to abuse. You may feel completely confident when another family member can step in. Or maybe not: A study by the Albany Law School in New York concluded that family members and relatives commit 83% of the fraud against the vulnerable elderly.
Is there any way to protect a parent when the financial reins pass under a durable power? One suggestion is to place certain limitations on the agent’s power. Depending upon the agent chosen, and your degree of trust in that agent, Attorney Charles Sabatino of the American Bar Association’s Commission on Legal Problems of the Elderly recommends considering some of the following limitations:
• Require the signature of an additional party for checks or money transfers above a certain amount.
• Include explicit language that requires an annual accounting of money spent and invested.
• Place a maximum on the size of gifts that can be made by the agent
• Give someone the right to remove the agent, spelling out the reasons for removal in the document.
Standard durable power of attorney forms don’t include these kinds of provisions. Therefore, the durable power should be drawn up under the supervision of an attorney.
Alternate suggestion: a durable power plus a living trust
The durable power solution isn’t perfect. There may be pitfalls along the way. Some financial and government institutions have their own special forms. They could ask that the power be reexecuted to their specifications—possible if your parent is still competent, impossible otherwise. Sometimes, because certain property isn’t specifically mentioned in the document, the power won’t be honored with regard to that property. Powers of attorney are especially tricky in real estate transactions.
If your parent has substantial assets, coupling a durable power with a living trust may be a good strategy—especially if you don’t want to be an investment manager yourself. Your parent continues in complete control of his or her finances and investments but executes a durable power in your favor. The durable power directs that, if your parent becomes incompetent (as determined by a third party), all of his or her assets pour over into a trust that your parent has created for that purpose.
When your parent names a bank or trust company to act as trustee (or cotrustee, along with you), he or she is assured of professional asset management. At your parent’s death the trust will distribute its assets as he or she has instructed in the trust agreement, much as in a will. There is an added benefit, however—the trust assets will escape probate.
Some people are clear-eyed and openminded enough to discuss these issues, and able to do so with a minimum of emotion. Others may find discussions and planning in this context difficult. But not planning should not be an option.
A good first step is to sit down with your parent in order to gauge everyone’s comfort levels, followed by a general discussion of the choices available and which approach would be best in your family’s circumstances. Then consult the necessary professionals. As a part of that strategy, we would be glad to discuss how a living trust might fit within your parent’s options.