I just read a great article about the potential dangers of the Durable Power of Attorney, written by Sandra Block of USA Today. You can read the article in its entirety right here.
Ms. Block's point is that the durable power of attorney is a powerful document, giving your Agent, the person acting on your behalf, unfettered access to your bank accounts and records, and must be planned for very carefully.
Financial disability planning, that is, the practice of taking care of your finances in the event of your incapacity, is one of the most important components of your estate plan. Statistically, you are 6 times more likely to become incapacitated than die in any given year. Your Durable Power of Attorney plays an integral part in Disability Planning.
But you should understand exactly what is controlled and what is not controlled by your Durable Power of Attorney. Not all your assets will be managed by your Durable Power of Attorney Agent. In California, most clients elect to use a Revocable Living Trust as the foundation of an estate plan. This is done in an effort to avoid expensive probate fees. All assets owned by the Revocable Living Trust, and thus avoiding probate, will be managed by the client's trustee named in the Revocable Living Trust, rather than the Durable Power of Attorney.
So if assets owned by the trust are managed by the Disability Trustee named in the Revocable Living Trust, do you even need a Durable Power of Attorney? The answer is yes, because not all assets will be owned by your Revocable Living Trust. For instance, Qualified Retirement Plans, such as IRAs and 401Ks, cannot be transferred to a Revocable Living Trust without triggering adverse tax consequences. Since some assets are not transferred to your trust, you must have a Durable Power of Attorney to deal with these assets.
Universally, your Durable Power of Attorney Agents should be the same as your Disability Trustees. This allows the same person to manage all assets in the event of your incapacity. However, as Ms. Block writes in her article, you must be extremely cautious about selecting your Agent for your Durable Power of Attorney. In addition, you (and your estate planning attorney) must be extremely diligent to make sure there are provisions in your Revocable Living Trust and Durable Power of Attorney to make the persons taking care of you financially in the event of your disability accountable.
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