When a parent or other loved one becomes unable to handle his or her affairs, traditionally family members sought the appointment of a guardian to act on behalf of the incapacitated family member. Because the family member no longer has capacity, he or she cannot legally act on his or her behalf as a matter of law. The incapacitated family member cannot enter into contracts with third parties. He or she cannot write checks, buy groceries, pay taxes or even make a gift to his or her church. He or she cannot do anything of a commercial nature, whatsoever. Indeed, any contract entered into by the incapacitated family member and a third is voidable by the incapacitated family member, even if the third party did not know that the family member lacked the capacity necessary to form a binding contract. Thus, once one becomes incapacitated, the family must have someone appointed to act on behalf of the incapacitated family member as the incapacitated family member can no longer engage in any day to day commercial transactions necessary to exist in today’s world.
The problems with seeking the appointment of a guardian are many. Appointment of a guardian can be expensive and the ongoing administrative costs can financially drain already depleted resources. Moreover, the appointment of a guardian essentially deprives an individual of free-will and the right to make his or her own decisions. Instead the guardian is the only one authorized to act on behalf of the incapacitated individual. The appointment of a guardian also divests the incapacitated individual of all of his or her rights in property as the creation of the guardianship transfers the ownership of the incapacitated individual’s property to the guardian. Finally, forcing a loved one through the indignity of being declared “incompetent” by the court can be psychologically devastating and emotionally demeaning for both the family member and you. Given the drastic nature of the appointment of a guardian, it is a process to be avoided if possible.
Fortunately, a guardianship is easily avoided with proper planning. Beginning in 1954, states across the country began enacting statutes that allowed an individual to appoint a third party to act on his or her behalf if he or she lacked the capacity to do so in his or her own stead. While individuals (referred to as the “principal”) have been permitted under the law to appoint another (referred to as an “agent” or an “attorney in fact”) to act on the principal’s behalf for centuries, traditionally the relationship between the principal and agent terminated with principal’s incapacity. Beginning in 1954, however, states began enacting laws that allow individuals to appoint agents to act on behalf of the principal even after the principal’s incapacity. Known as a “durable power of attorney” (because the agency relationship “endures” after the principal’s incapacity), this relatively simple planning technic can avoid many of the pit-falls of a guardianship proceeding provided the principal has a close trusted friend or family member who is both willing to serve and capable of properly and prudently administering the principal’s affairs in the event the principal loses mental capacity. This blog post discusses some of the aspects of and considerations relative to using a durable power of attorney as a substitute for a guardianship under North Carolina law.
North Carolina first authorized durable powers of attorney in 1961. As is the case in other states, a written durable power of attorney executed in conformity with North Carolina law appoints an agent to act on behalf of the principal even after the principal is incapacitated. In order to be effective, the durable power of attorney must be in writing, it must be executed by the principal, and the principal’s signature must be notarized by a notary of the public. In addition, the power of attorney document must include the phrase “this power of attorney shall not be affected by my subsequent incapacity or mental incompetence,” or “this power of attorney shall become effective after I become incapacitated or mentally incompetent,” or similar words showing the principal’s intent to confer authority conferred on his agent under the written power of attorney, even after the principal’s subsequent incapacity or mental incompetence.
Powers of attorney come in two varieties: (1) immediately effective powers of attorney and (2) “springing” powers of attorney. As its name implies, an immediately effective power of attorney becomes operative upon execution. By contrast, a “springing power of attorney” springs into action upon the occurrence of some event, typically the incapacity of the principal. Of course, if the reason for executing a power of attorney is to avoid an incompetency proceeding, then requiring a determination as to incapacity seems counterproductive.[1] In addition, delays in satisfying a third party conditions that are necessary for the power of attorney to “spring” into effect could present problems in a crisis situation and may even prove burdensome in a non-crisis situation. For this reason, at our firm we prefer to use an immediately effective power of attorney. In order to protect the principal from a rogue attorney in fact acting contrary to the principal’s wishes, we have the principal and agent enter into a side agreement. Under this agreement, the agent agrees not to record the power of attorney and exercise the authority granted thereunder unless the principal asks the agent to act pursuant to the authority granted in the document or two physicians licensed to practice medicine in North Carolina certify in writing that they believe that the principal no longer has sufficient capacity to manage his or her affairs or the agent is unable to communicate with the principal for an extended period to time. We believe that this offers a more efficient approach, based on the underlying assumption that no one would appoint as his or her attorney in fact anyone other than a person in whom the principal as the utmost faith and confidence and implicitly trusts to always act in the best interest of the principal at all times.[2]
After the power of attorney is executed, the attorney in fact typically retains the original.[3] When and if the attorney in fact needs to act on the authority granted to him or her under the power of attorney (i.e., the principal becomes incapacitated), the attorney in fact records the original power of attorney with the register of deed in the county designated in the power of attorney (and if no county is designated, then in the county where the principal resides). The attorney in fact obtains from the register of deeds several certified copies of the recorded power of attorney. The attorney in fact can then present to banks, governmental agencies or any other third party with whom the principal would otherwise interact with the certified copy of the power of attorney and those third parties are entitled to deal with the attorney in fact as agent for the principal as to those matters specified in the power of attorney.
Because the attorney in fact can only act on behalf of the principal as to those matters specified in the power of attorney, it is important that the power of attorney contain an extensive list of those matters as to which the attorney in fact is authorized to act. The power of attorney form that we use at our firm includes the authority to act on a variety of matters, including: the power to take control of the principal’s property and to either hold, manage or sell it; the power to invest the principal’s assets; the power to continue the principal’s business operations; the power to borrow or loan money on behalf of the principal; the power to prosecute or defend litigation on behalf of the principal and a myriad of other powers. In reviewing the power of attorney, it is important that the client be comfortable giving his or her attorney in fact the powers specified in the instrument. If the client is not comfortable with the scope of authority granted, he or she needs to advise his or her lawyer who should revise the instrument.
One issue of particular concern is the ability of the attorney in fact to make gifts. Historically an attorney in fact was prohibited from making gifts of the principal’s assets because the attorney in fact owed a duty to look out for the best interest of the principal and giving away the principal’s assets was typically inconsistent with that duty. Gifts, however, are a highly effective manner for decreasing an individual’s taxable estate and thus the inability of the attorney in fact to make a gift can deprive the principal of this valuable estate planning tool. Under North Carolina law, if the power of attorney authorizes the attorney in fact to make gifts, then the attorney in fact may make gifts to any individual or charity other than the attorney in fact.[4] The inability of the attorney in fact to make a gift to himself or herself may be contrary to the principal’s wishes. Often the attorney in fact is one of the principal’s children and most gifting programs implemented to avoid estate taxes contemplate gifts to all of the donor’s children, including a child that also may be serving as the donor’s attorney in fact. In order to avoid this unintended consequence, we give the attorney in fact authority to make gifts of the principal’s assets to himself and others.[5] We limit, however, the amount of the gift that the attorney in fact can make to an individual during any calendar year to the maximum amount that the principal can give pursuant to the gift tax annual exclusion (currently $14,000 per year for each individual to whom the agent makes a gift of the principal’s assets). That way, while the attorney in fact has some ability to implement a gifting program in order to reduce estate taxes, he or she does not have the complete and unfettered authority to give away all of the principal’s property. If the principal desires that the agent have the authority to make gifts in excess of the annual exclusion amounts, we can always modify our forms in order to meet the individual client’s specific needs.
Once the attorney in fact records the instrument, he or she is required to file a copy of the recorded power of attorney with the clerk of court. In addition, the attorney in fact is required to file with the clerk an inventory of all property held by the attorney in fact on behalf of the principal as well as annual and final accounts reflecting all transactions entered into by the attorney in fact on behalf of the principal. The attorney in fact, however, is excused from these burdensome and expensive filing and accounting requirements if the principal in the power of attorney document waives the requirement that the attorney in fact make these files with the clerk of court. Because one of the reasons for executing the power of attorney is to avoid the expense incurred in having the guardian account to the clerk of court on an annual basis, we typically waive the accounting requirement in the powers of attorney that we prepare for our clients. Again, we assume that the attorney in fact appointed by the principal is someone the principal implicitly trusts to always act in the best interest of the principal. If that level of trust does not exist, then a power of attorney as a substitute to a guardianship proceeding may not be a viable option. We note that by law the attorney in fact is required to maintain full and accurate records of all transactions in which the attorney in fact acts as agent of the principal and of all property of the principal passing through the hands of the attorney in fact and the disposition thereof. In addition, we require in our documents that the attorney in fact account to the principal, his or her guardian (if any) or his or her personal representative upon request. That way if someone suspects that the attorney in fact is abusing his or her position of trust, the suspecting party can have a guardian appointed or, upon the death of the principal, ask the principal’s personal representative, to investigate the activity of the attorney in fact, and the attorney in fact is required under the documentation to account to the guardian or personal representative.
In the event that the power of attorney does not provide for compensation for the attorney in fact, then attorney in fact is entitled to “reasonable compensation” as determined by the clerk of court based on a number of factors including: (1) the degree of difficulty and novelty of the tasks required of the attorney in fact; (2) the responsibilities and risks involved; (3) the amount and character of the assets managed by the attorney in fact; (4) the skill, experience and expertise of the attorney in fact. Given the difficulty in predicting the responsibilities of the attorney in fact, we generally do not specify the level of compensation to be paid to the attorney in fact for his or her service. Instead, we leave it up to the attorney in fact to petition the court for appropriate compensation. Note, however, that we can always modify our standard forms to reflect your wishes in the event you want to specify the compensation to be paid your attorney in fact for his or her service.
In short, a power of attorney is a great way to avoid an expensive and often emotionally draining guardianship proceeding. It really should be part of most estate plans (with the biggest exception being those clients who do not have a close and trusted friend or family member willing and capable of serving as the attorney in fact). I have been drafting powers of attorneys for clients for years and have the experience necessary to advise clients on all the issues to be addressed in connection with the execution of a durable power of attorney. If you would like our firm to assist you with the preparation and execution of a durable power of attorney, I hope you will give us a call. We are more than happy to help you with this matter.
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[1] Note that under N.C. Gen. Stat. § 32A-8, if the durable power of attorney provides that it “springs” into effect only upon the principal’s subsequent incapacity or mental incompetence, then a third party may rely on an affidavit from the agent that the principal is, in fact, incapacitated so long as the third party does not have information to the contrary. Of course that begs the question as to how the agent can give that affidavit absent a judicial determination to that effect.
[2] Indeed, if the principal does not have absolute trust in the agent then the principal should not appoint the person to serve as his or her agent. Instead it may be more desirable to have a guardian appointed in the event the principal becomes incapacitated. While (as discussed above) a guardianship can be more cumbersome, at least the guardian is subject to court supervision, thus making it harder for the guardian to abuse his or her position of trust.
[3] Alternatively, a third party can hold the power of attorney in “escrow” until such time as the conditions under which the principal wanted the attorney in fact to act have occurred. We do not like the “escrow” approach as it can prove problematic in a crisis situation if the escrow agent cannot be located or is not satisfied that the conditions under which the attorney in fact is to act have in fact occurred. Nevertheless we can use that approach if a client finds it more desirable.
[4] Presumably the rational for this is so that the attorney in fact is not temped to abuse his or her power and give all of the principal’s assets to himself or herself.
[5] The other option is to seek a court order allowing the attorney in fact to make gifts to himself or herself, but that is expensive and entirely avoidable if the principal trusts the agent to act responsibly.