There are many legal terms that can be confusing to laymen. For example, people often wonder if their attorney, such as their estate planning attorney, is their “Power of Attorney.” A Power of Attorney is a document, rather than a person. A Power of Attorney is a document in which the “Principal” gives powers, duties, and responsibilities to the “Agent” who acts for the Principal under certain circumstances. The Power may be over health matters (a Health Care Durable Power of Attorney – also known as a Health Care Proxy or Advance Health Care Directive in some states) or financial matters (a General Durable Power of Attorney). Even though the Agent may also be called your “attorney in fact,” they are seldom the person you consult for legal advice, who is your “attorney at law.”
Another area of confusion is the difference between a Power of Attorney and a Power of Appointment, especially since both terms may be abbreviated “POA.” A Power of Appointment is a power which the owner of assets, or former owner, gives to someone to control assets. For example, your mother might leave her money in trust for your benefit and give you the power to designate where the money goes after your death. Your mother would be the “grantor” of the power and you would be the “holder” of the power. You might be able to exercise it only at your death, in which case it would be a “testamentary” power. You might be able to exercise in favor of anyone in the world, in which case it is also a “general” power of appointment. If you cannot exercise it in favor of yourself, your creditors, your estate, or the creditors of your estate, it is a “limited” power.
Why should I care about Powers of Appointment? Flexibility. Generally, people can plan out some amount of time. We think we know what will happen next week or next month. By the time we get to next year, we may use pencil rather than ink when we write plans on the calendar. Who knows what will happen by the time our children’s children are grown and gone? Often, in an estate plan, we are faced with that situation. At most, we know what the world is like at the moment before our own death. How could we know what will happen far in the future? One way to lessen this problem is by using Powers of Appointment to add flexibility. Let’s look at an example. Mary leaves an inheritance in trust for her son, John, who has two children, Jane and Bobby. At the time of Mary’s death, Jane and Bobby are minors and in good health. However, ten years after Mary’s death Bobby develops a debilitating condition that requires expensive medical treatment and assistance from public programs which would terminate if he were to inherit a large sum of money. In the interim, Jane wins the lottery and does not need financial assistance. If Mary had given John a Limited Power of Appointment over his trust, John could ensure that his trust share could be distributed to a “special needs trust” for Bobby after John’s death. Thus, the assets would be available to help pay for Bobby’s needs that are not covered by any government programs from which he is receiving benefits, such as SSI, Medicaid, and HUD subsidized housing, while not disqualifying him from eligibility for these public benefit programs.
Legal terms and concepts can be confusing at times. A qualified estate planning attorney can help you cut through the complex concepts to allow your plan to react to unforeseeable circumstances, even after your death.
Compliments of the McGee Law Firm, Attorney Brandon McGee
Written By: The American Academy of Estate Planning Attorneys