Find the Higher ‘Power’

Find the Higher ‘Power’

What will happen if you are suddenly unable to handle your financial affairs? It can cause a big mess if you have not made any provisions for this possibility.

Include a Power of Attorney in your estate plan. This legal document appoints someone – called the “attorney-in-fact” or “agent” – to act on your behalf. Generally, you are better off with a “durable” power of attorney than a “nondurable” one.

A run-of-the-mill Power of Attorney is nondurable. This means that it no longer applies if you lose your capacity to make decisions. But a Durable Power of Attorney remains in effect in the event you are incapacitated. Thus, the attorney-in-fact can file your tax returns and handle other critical tax matters like maximizing the marital dedication and estate tax exemptions under current law. Similarly, this designated agent can elect to take retirement distributions, disclaim an inheritance and so on.

But it’s not as simple as just inking your name on a piece of paper. There are two key considerations.

1) You must name someone you trust as the attorney-in-fact. Frequently, it is a spouse, child, sibling, or close family friend. Alternatively, you may choose a professional who is familiar with your financial matters. If you are leery about giving one person such a wide berth, you might name co-agents who have to make decisions jointly.
2) Have the Power of Attorney drafted by an attorney experienced in estate planning. Do not follow a random form you found somewhere on the internet. A mistake in the document or one that is not clear can end up costing your estate.

Of course, you might not want to give up control over assets while you still have all your faculties and no change is expected in the near future. As a result, investigate a “Springing Power of Attorney,” which is available in many states. This power does not become effective until a specified event takes place such as incompetency certified by a physician or entry into a nursing home.

If your state does not recognize springing powers, you might be able to achieve the same basic result with a durable power of attorney that states that the power takes effect upon the happening of certain events. Finally, see if the financial institution requires you to use its own power of attorney forms.

Don’t just shove the document into a safe deposit box. Have it reviewed periodically by your attorney and updated when necessary.

Small Business Tax Strategies
July 2020