A Pennsylvania durable power of attorney is a fundamental document in any estate plan. Along with a will and a healthcare power of attorney/ living will, a Pennsylvania durable power of attorney make up the “protective documents” that many Pennsylvania residents rely upon to provide safety, security, and peace of mind.
In this article we will be talking about a financial power of attorney.
What is a Power of Attorney?
A power of attorney is a legal document that creates a relationship between the principal and the agent. The principal is the person creating the power of attorney document. The agent is the person that the principal chooses to act and make decisions for them.
The power of attorney document forms an agency relationship between principal and agent. This means that the agent has the legal authority to act for the principal. The agent, sometimes called the attorney-in-fact, can act for the principal as if he were the principal himself.
You can see that a power of attorney document grants considerable power to the agent. Depending on how the document is drafted, these powers can be more or less limited. But a general power of attorney can be drafted to give the agent nearly unlimited authority to make decisions. This is one reason why speaking with an attorney before executing a power of attorney document is critical. Fill-in-the-blank forms may end up giving your agent too much or not enough authority to act for you.
What does durable mean?
The plain language definition for durable is “able to withstand wear, pressure, or damage” or “staying strong and in good condition over a long period of time.”
The law, however, uses ‘terms of art’. A term of art is a specialized legal meaning or definition for a common word or phrase. In the context of a Pennsylvania durable power of attorney document, durable means that the power of attorney is not “affected by the disability or incapacity of the principal.”
This is very important.
A Pennsylvania durable power of attorney document is executed when the principal is not incapacitated. Often, the principal is perfectly capable of responsibly handling all their financial affairs. Most people create a power of attorney document to prepare for possible disability or incapacity. If the power of attorney document is no longer valid in those circumstances, then the document would be useless.
In 1992 the Pennsylvania legislature made all POA documents durable unless otherwise stated. Because other states may still require the durable language, including durability in the power of attorney document may be wise.
Why would you want a Pennsylvania durable power of attorney?
People are healthy and independent well into their golden years. Nonetheless, disability, memory loss, and incapacity are still realities. A financial power of attorney document can ensure that someone you trust is making decisions for you. A trusted agent will carry out your wishes and help execute your estate planning goals.
It is very important to speak with your agent about your goals and overall estate plan. Communicating with this person makes it more likely that your wishes are carried out. Your agent should not be left to guess or speculate about what you would have wanted financially. As much as possible, clear expectations should be conveyed before the power of attorney document is finalized.
Talking to an attorney can be useful for multiple reasons. Firstly, an attorney can help you understand what financial issues and options could be relevant in the future. Most people, for example, do not want to spend their entire savings on healthcare or lose the family home. Speaking with an attorney about options for preserving wealth may be the first step in leaving a sizable inheritance for your beneficiaries.
Secondly, an attorney will draft a Pennsylvania durable power of attorney document that is capable of realizing your estate planning goals. The statute governing Pennsylvania power of attorney documents has changed. Understanding what powers need to be specifically provided for in the document is crucial to realizing wealth and asset preservation.
Even if you are not overly concerned with rising healthcare costs and leaving an estate for your heirs, practical concerns call for a power of attorney document. You may want or need help paying bills. Perhaps you want a child to have access to banking information without making them a joint account owner. These are all excellent reasons to make a financial power of attorney.
Are the alternatives to a financial power of attorney flawed?
Yes. Alternatives to a financial power of attorney have serious limitations.
If you haven’t executed a power of attorney and you need someone to make decisions for you, a guardianship may be necessary. Guardianship have many drawbacks. Guardianship’s take time. But if you need a financial decision made immediately, guardianship may not be an option. Guardianship’s can also be costly and invasive.
A revocable living trust is a will substitute and can also serve as a sort of financial power of attorney. But a revocable living trust may be expensive. They are usually long, confusing documents. Importantly, the provisions of the trust that allow for your successor trustee to make financial decisions for you may not be broad or specific enough to accomplish your goals.
Finally, many people make children joint account owners on bank accounts and other investments. This can certainly be a useful tool. But jointly owned accounts do have potential drawbacks. You may unintentionally disinherit a child or other beneficiary or force them to inadvertently pay more in Pennsylvania inheritance tax when you die.
What powers should I give my agent?
As a general matter, whatever powers you give your agent should be sufficient to accomplish your goals. You do not want your agent to be in a position where she can’t carry out your wishes because the power of attorney doesn’t permit specific powers.
It is necessary to speak with your agent about your goals. You should also speak with an attorney that can guide you through different possible scenarios. If you want your agent to protect the family home and retirement savings from Nursing Home costs, empowering the agent through an appropriate Pennsylvania durable power of attorney is advisable.
In the past, broad language such as “my agent shall have the authority to take any and all actions I would have taken” was sufficient to let the agent make any financial decision necessary to meet the goals of the principal. Changes to Pennsylvania’s Probate, Estates, and Fiduciaries code have curtailed that sort of board language. Statutes now restrict and control the language and powers necessary to create a valid and effective financial power of attorney.
Consider the gifting power. The gifting power is crucial if the principal desires to preserve an estate from medical costs. Federal and state benefits like Aid and Attendance Pension and Medicaid will likely require some type of gifting.
The new language in Chapter 56 of the Probate, Estates and Fiduciaries Code provides for multiple gifting powers. It is important to understand and plan for the limitations and scope of these gifting powers in order to achieve your estate planning and asset protections goals. Carefully spelling out the scope of the gifting power is advisable to ensure that the agent will have the power to take the necessary steps to accomplish your goals.
Other potential landmines exist for the drafter of a Pennsylvania durable power of attorney. If your agent is not a family member as detailed in the Probate, Estates, and Fiduciaries Code, they must be explicitly named in each power he is to benefit from. Neglecting this detail can dramatically alter an estate plan.
What duty does the Agent owe the Principal?
This is a very important and sensitive topic. An agent is likely to have a significant degree of control over a principal’s financial affairs. The agent may be able to sell your home. The agent may have the power to give away your entire net worth. Of course it is critical to choose an agent you trust.
But beyond that important safeguard, what duty does an agent owe the principal?
The agent has a fiduciary duty towards the principal. The agent must exercise the powers granted for your benefit and within the parameters of the PEF code. Unless otherwise stated, the agent cannot use the principal’s funds for his benefit. The agent must practice reasonable caution and prudence. This is particularly important if the agent is investing funds.
The PEF code also specifies non-modifiable duties. These are duties that cannot be waived or changed.
Section 5601.3(a) of the Probate, Estates, and Fiduciaries Code provides three non-modifiable duties: 1) to act in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, in the principal’s best interest; 2) to act in good faith; and 3) to act only within the scope of authority granted in the power of attorney.
In addition to these duties that cannot be waived, several other modifiable duties are listed in the code.
5601 of the PEF code compels a new duty on agents. The agent must try to preserve the estate plan of the principal. Once again, and this can’t be reiterated too many times, you should always speak to your agent in detail about your estate plan and your goals. The agent’s duty only extends to her knowledge of your estate plan. If the agent has no knowledge of the principal’s estate plan, this duty likely does not apply.
Importantly, there is a caveat to the duty that the agent must preserve the estate plan. The estate plan must be consistent with the principal’s best interests, which are determined by any relevant factors, including: 1) the value and nature of property; 2) the principal’s foreseeable obligations and maintenance needs; 3) tax minimization, including income, estate, inheritance, gift, and generation skipping taxes; 4) eligibility for a benefit, program, or assistance under a statute or regulation.
Best practices dictate that everyone should have a financial power of attorney. A financial power of attorney is of supreme importance if you can foresee a time when you will not be able to make financial decisions for yourself.
You must have a financial power of attorney if you want to avoid private paying for Nursing Home and Assisted Living care. A properly drafted Pennsylvania durable power of attorney may enable your agent to preserve your estate – including the family home – from the Nursing Home and the State of Pennsylvania.
Please consider speaking with an attorney about drafting a Pennsylvania durable power of attorney. This document, along with a will and a healthcare power of attorney, are the key elements of an estate plan.