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August 17, 2020

What Is a Power of Attorney and Why Do I Need One?

A power of attorney (POA) is one essential document in a comprehensive estate plan that addresses who’ll act on behalf of a person who becomes incapacitated, disabled, or unable to manage their own affairs. The person creating a POA is known as the principal, and the person who’ll act on the principal’s behalf is known as the agent. In addition to appointing an agent, a POA governs what the agent can do and, if included, how the agent will act. For example, a POA may provide your agent temporary or permanent authority to act on your behalf.

Additionally, the power may become effective immediately or only upon the occurrence of a future event, usually disability or incapacitation, which is known as a “springing” POA. A principal can revoke a POA at any time, but in a majority of states, you must provide written notice to your agent that you’ve revoked the POA. With that said, a POA automatically terminates upon the principal’s death, at which point other estate planning documents assume control. 

A POA has a two-fold benefit to a principal. First, a POA allows the agent to “step into the shoes” of the principal and perform various duties when the individual is unable to do so. Second, a POA allows a principal to direct the agent on how to handle the principal’s affairs so the agent acts in accordance with the principal’s wishes when the principal couldn’t otherwise control what happens.

A POA is a flexible document in that it can include broad or narrow powers by providing broad discretion to exercise the powers granted or by giving specific instructions on how an agent can act in a given circumstance. For example, if granted authority, an agent can engage in banking and business transactions or obtain and dispose of tangible personal property, stocks, bonds, investments, digital assets, insurance claims, governmental benefits, filing tax returns, and a variety of other tasks on the principal’s behalf. Often, an agent must present the original document to invoke the power.

Additionally, POAs allow the principal to eliminate, supplement, or direct that the agent have specific powers or carry out those powers in specific ways. One area where principals frequently give specific directives involves gifts. If a principal wishes for their agent to make gifts beyond a “de minimis” amount (i.e., $500 yearly), the principal can execute the statutory gift rider (SGR) section on the POA, which allows the agent to give gifts to others exceeding $500 per year in the aggregate. 

In these uncertain times, POAs have become increasingly valuable. Here are a few situations where, without a POA, you might be vulnerable to unintended financial consequences because no one can act on your behalf: 

Case #1

John owns stocks within an investment account that’s solely in his name. Without a 
POA, if John becomes incapacitated, the value of the securities is greatly depleted due to the 
damaging economic consequences of COVID-19. With a POA, however, the 
agent can reallocate the investments to mitigate losses and preserve the investment.

Case #2

Nancy has wanted to establish a revocable trust to avoid probate, but she hasn’t gotten
around to getting it set up. She unexpectedly falls ill from COVID-19, leaving
her incapacitated and unable to execute the revocable trust. Without a POA, no one can 
effectuate her wishes. Had Nancy executed a POA with an SGR, the agent could make her
wishes a reality and transfer her assets into the revocable trust. 
    
Case #3    

Tom executed a POA 20 years ago designating a friend as his agent. Tom and his friend 
have since become estranged. Tom became incapacitated and his friend used his role as agent in 
a nefarious manner, making financial decisions that didn’t reflect Tom’s wishes.
Had Tom updated his POA, he could be confident that the agent would be someone 
trustworthy who would act in accordance with his intentions. 

In order for a POA to become effective, the principal’s signature must be notarized. Additionally, if the POA includes an SGR, two disinterested people must witness the principal’s signature. As a result of social distancing and the closure of non-essential businesses, executive orders effective in New York State have temporarily allowed the witnessing and notarization of a POA to be accomplished by utilizing remote methods. These executive orders allow clients to maintain an up-to-date POA as part of their estate plan during the pandemic to help facilitate signing ceremonies that keep all parties involved safe and well.

If you have any questions regarding the content of this blog post, please contact Meghan Reap, associate, at mreap@barclaydamon.com; Jessie Root, associate, at jroot@barclaydamon.com; or Lisa Zaccagnino, law clerk, at lzaccagnino@barclaydamon.com.

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