Powers of Attorney
A power of attorney is a written, witnessed document between you and another person. In it you give authority to the other person to act for you or to represent you in financial matters. The person granting the power is called the principal. The person exercising the power is the agent. It is very important for you to pick someone you trust and who is capable of helping you with your finances. You must be able to understand what you are doing when you sign a financial power of attorney. Otherwise, the power of attorney is not legal.
There are three types of powers of attorney:
limited or specific, general, and durable. A limited or specific power of attorney can be given for a limited or a single action. For instance, if you are traveling out of the country, you might authorize a family member or friend to sign the closing documents on the refinancing of your investment property. A person who has severe arthritis in her hands might sign a power of attorney specific only to one of her bank accounts so that her sister can write out her monthly bills. Most financial institutions have their own power of attorney documents. A general power of attorney usually gives your agent the right to handle all your financial affairs. Both the specific power of attorney and the general power of attorney become invalid if you lose the ability to make decisions due to an illness or accident. Physicians usually make the decision as to whether you cannot make your own decisions.
A
durable power of attorney permits your agent to continue to make financial decisions for you in case you lose the ability. A durable power of attorney may take effect either at the time it is signed or later with a “springing” clause, which means it takes effect only if you lose the ability to make decisions or at the specific time you want your agent to start having authority.
Advantages
• Powers of attorney are private arrangements.
• You can revoke the power of attorney at any time unless you become unable to make decisions. Then, only a court can change it.
• Guardianship may be avoided.
• You can decide which specific powers to give your agent or you can give your agent generalized authority.
Disadvantages
• Your agent is not supervised by anyone and is not accountable to anyone except you -- and perhaps the court if someone files a request with the court for the court to order an accounting. So you can only use a power of attorney is you have someone you really trust to be your agent.
• It is best to consult an attorney familiar with powers of attorney, to make a document suited to your needs, so there is usually a cost involved.
• Unless specifically stated, powers of attorney do not address decisions about your living circumstances.
• You are not required to tell anyone about your power of attorney. This means that family members or other people who care about you may not know about the power of attorney.
• There is no bonding, which means that if your agent mishandles your assets or uses them for himself, there is no way to reimburse you for the lost assets.
• Banks, other than your own bank, may not honor power of attorney forms.
• Courts can review powers of attorney but they may be handicapped by lack of documentation because there may be no requirement that agents keep records of how they deal with the principal’s assets.
• Few educational materials are currently available for agents that outline their responsibilities and liabilities or guide them in their duties.
• Many third parties, such as title companies, will not honor a durable power of attorney if you have diminished decision-making capacity.
• Many agents, especially family members, do not know that they cannot mix your money with theirs.
• There are no requirements at the time of the execution of the power of attorney to determine if you have full decision-making capacity and are not being unduly influenced.
• It is very easy for an agent to begin using your money for himself or to give gifts to others.
• Your agent can resign at any time which would leave you without someone to handle your affairs.
Trusts
Trusts are written legal agreements that provide for money and property management. An attorney is involved in drawing up trusts. The person who establishes a trust is termed the trustor or the grantor or the settlor. The person or institution that manages the trust is termed the trustee. The person who receives funds from the trust is termed the beneficiary. There are three types of trusts: revocable or inter vivos, testamentary, and special needs. Special needs trusts are created when you are already disabled and there are funds coming to you from a lawsuit or an inheritance. Testamentary trusts take effect upon your death. By far, the most common trust is the revocable or inter vivos trust.
Revocable Living Trust
This is the most common type of trust. Most people name themselves as the trustee at first and at the same time name another person or institution to take over as successor trustee if they lose the ability to make financial decisions. Losing capacity to make decisions may be gradual. Some trusts say when the successor trustee should take over while others say that one or two physicians can evaluate you and decide when your successor trustee should take over. Or, you might resign as the trustee and have your successor trustee takes over. You will need to change the title of ownership on all your assets from your name to the trust. The new owner of all the assets becomes the trust. This is called “funding” the trust. Attorneys also recommend that you have a will that states that all your assets, either current or acquired in the future, are meant to be part of the trust. This is called a “pour over” will.
Advantages
• You can change the trust at any time as long as you still have the ability and understanding to do so.
• These trusts are private and confidential. However, if there is no pour over will and assets that are not in the trust, probate court action may be necessary.
• Having this type of trust shortens or eliminates delay in distributing your property to your heirs upon your death. A successor trustee can usually act more quickly than an executor.
Disadvantages
• This type of trust does not reduce taxes.
• Trusts are usually not useful for small estates
• Sometimes people neglect to “fund” the trust, and then it has no effect.
• Transfer to a trust may have negative consequences on eligibility for public benefits. There are still costs.
• Attorney fees are involved to set up the trust and to distribute the trust after your death. Trustees are entitled to fees for such things as preparing documents, tax returns, transfers of property and other costs involved in running and distributing the assets of trust.
• There is no court supervision unless you specify it in the document.
• There is no bonding requirement, which means that you are not protected if the trustee mishandles the funds or uses them for himself. Recovery of funds will involve attorneys and court costs and may even be impossible if all the assets have been spent.
• Because of the privacy of a trust, no notice is given to family members or other parties that it exists. This can cause confusion in families.
• A durable power of attorney, representative payee or even guardianship may still be needed for such things as final funding of the trust and dealing with special services, Medicare and Medicaid, personal income taxes, health care, medical decision-making, and daily living expenses.
• So-called “trust” mills are increasingly common. Employees of these organizations call people on the telephone promising that they can avoid taxes, costly attorney services, and the probate court process if only they will draw up a trust. The person establishing the trust may never meet an attorney. The “trust advisor” comes to the person’s house with a “one-size fits all” document that may be inappropriate, unnecessary, or poorly crafted. Expensive lawsuits can result from these poorly drawn trusts.
Joint Ownership
Cash assets and real property can be jointly owned with another person. You can put someone else’s name on your home or other property or your bank account. There are several types of joint bank accounts and they are different in each state. Even though the money was yours to start with, once you create a joint bank account, it legally belongs to you and the person whose name is now on your account. Most banks will allow you or the other people to add or withdraw funds from the account without any questions and without contacting the other joint owner.
Advantages
• Joint tenancy allows another person to get your property handled or get your bills paid if you cannot do it.
• There is usually no cost to set it up with a bank.
• Joint tenancy arrangements are best used when there are few assets and when you have someone you totally trust.
• You can discontinue the joint tenancy arrangement at any time.
Disadvantages
• You lose exclusive control over your house and/or your finances.
• The joint owner has the legal right to remove all money from a joint account, even if you are the only person who deposited the money.
• Conflict over the management of your assets may arise.
• Both owners have to pay taxes on bank accounts.
• There is no bonding or insurance available to protect your assets if the other person takes the money or mishandles it.
• Assets that were previously yours are now subject to the other person’s debts including taxes.
• Creating a joint account is considered a gift to the other person by Medicaid, which could make you or the other person ineligible for Medicaid.
Representative Payee
Several federal agencies are authorized to appoint a person, or institution (bank, nursing home) to receive federal benefits on behalf of the recipient. These agencies include:
• Social Security Administration
• Veteran’s Administration
• Department of Defense
• Railroad Retirement Board
• Office of Personnel Management
The person or institution that receives the check is termed a representative payee, or federal fiduciary. This arrangement is meant to assist adults with diminished capacity who are unable to handle their own benefits. Physician statements as well as those by relatives and friends are accepted as evidence that a representative payee may be needed. Federal programs have different rules concerning who can serve as a representative payee.
Social Security has by far the largest representative payment program, with over 7 million beneficiaries.
Advantages
• There is no cost to set up a representative payee arrangement.
• It is a very helpful arrangement if this is the only income you have.
Disadvantages
• Although representative payees are required to give an accounting of your funds to the government agency, the requirement is not rigorously enforced. There is generally little oversight, and it is possible that representative payees may misuse your benefits.
• There is little investigation of proposed representative payees.
• A representative payee arrangement pertains only to benefits from the federal government. If you have other money or property, you will need some other arrangement.
• A doctor’s statement is required.
Single Court Transactions
Some states have laws that permit a judge to make a single financial decision or medical decision for you without a guardianship. if your family members cannot agree or are uncertain what to do for you with a financial matter, family members themselves can officially ask a judge to make the financial decision. In a single court transaction for finances, the circumstances may involve asking a judge to freeze assets if there is evidence someone is draining your bank account or trying to sell your house without your permission. Often the police or adult protective services make these requests of the court.
An attorney may be appointed to represent your wishes depending on your state law. The judge then hears or reads the evidence about your situation including any statements you have made. Your personal history and values, to the extent that they are known, are taken into account. The judge makes the decision.
Advantages
• A judge’s order will settle dispute, at least legally.
• Your side of the story will be acknowledged and taken into account if it is known.
Disadvantages
• Most people are not familiar with courts.
• Court decisions can be seen as taking the power away from you or your loved ones.
• Attorneys are needed, and there is a cost involved.
• There may be delays in court proceedings.