Many states, including North Carolina, allow people to execute certain legal documents called Powers Attorney. In a Power of Attorney, a person, called the Principal, can appoint other trusted individuals, called Agents, to make financial transactions and decisions for the Principal. The purpose of a Power Attorney is so that an Agent is appointed and legally permitted to access and manage the Principal’s property on the Principal’s behalf. Powers of Attorney are heavily relied upon when a Principal becomes unable to manage their affairs or finances due to age or declining health. When a Principal is no longer able to manage their assets, then an Agent’s ability to handle the Principal’s assets is limited only to the specific legal permissions granted within the Power of Attorney.
Not all Powers of Attorney are created equal, however. Powers of Attorney can vary in terms of scope and complexity. The specific language used in a Power of Attorney can impact whether an Agent can use or access the Principal’s assets to maximize asset protection. The permissions granted within a Power of Attorney can often ensure that the Principal’s estate plans are followed even if the Principal needs long-term care.
Some Powers of Attorney are very simple and may only permit an Agent to access and manage money, accounts, or property. Under these basic Powers of Attorney, an Agent may pay bills, make investments, and even sell property if necessary. With a simplified Power of Attorney, an Agent may only be obligated to use the Principal’s money for the Principal’s needs. The North Carolina Statutory Short Form Power of Attorney, which many people still use today, is an example of a simplified Power of Attorney that grants the most basic permissions to an Agent to handle the Principal’s property or finances. A short form Power of Attorney may avoid the need for a court-appointed guardianship while offering an Agent the ability to access and use the Principal’s assets for the Principal’s needs. In most cases, however, a short form Power of Attorney is deficient in authorizing an Agent to engage in any asset protection or to make critical financial, legal, or long-term care planning decisions for the Principal. In fact, under such circumstances, a short form Power of Attorney can detrimentally impact not only the Principal, but also a Principal’s spouse—particularly if they share ownership of certain assets.
Some Powers of Attorney can also grant extraordinary powers to an Agent that provide for significant asset protection or allow for more complex planning. These powers are commonly known as “hot powers” and need to be specifically stated in a Power of Attorney as giving the Agent permission to conduct such transactions. These hot powers are well-named, since they give an Agent considerable power to create or modify the Principal’s financial and estate objectives. Among some of the hot powers that could be considered in a Power of Attorney are the following:
- The power to create, amend, revoke or terminate a trust during the Principal’s lifetime. Trusts can be effective tools to avoid the public process of probate. The hassles and the expenses of probate can be avoided with a trust. Trusts may also be effective tools for providing for loved ones in blended families, with real estate owned in other states, or in providing for minors or disabled beneficiaries. With the proper limitations, an Agent under a Power of Attorney may fulfill the Principal’s estate planning objectives and asset protection goals by creating and funding certain kinds of trusts for the Principal.
- The power to create or change rights of survivorship. This powerful tool could allow the Agent to maximize the Principal’s estate planning goals for assets ranging from real estate to bank or investment accounts. Significantly, this hot power can protect assets for long-term care planning.
- The power to create or change a beneficiary designation. With the right limitations, this hot power could allow an Agent to update beneficiary designations on certain assets, again for the purposes of fulfilling estate planning goals and asset protection objectives.
The most popular hot power is the power to make a gift of money or property. This power is often used to continue a plan of gifting or to protect money or property from having to be spent entirely on long-term care. A gifting hot power could be beneficial to provide for a spouse who remains at home when the other spouse enters a care facility. The power to gift can be limited to a dollar amount or unlimited in scope. The power to gift can also be restricted to certain recipients like a spouse or family members.
Executing a Power of Attorney with these hot powers requires careful decision making and discussion with an attorney to decide if hot powers are appropriate for each person’s unique circumstances. Many hot powers are practical to have if a person is concerned about asset-protection for long-term care planning. However, great consideration needs to be given as to who will be given the powers and under what terms. An Agent needs to understand the responsibilities owed to the Principal by using the hot powers.
Critically, a Power of Attorney—with or without hot powers—is not a document that a Principal should attempt to download from the internet to execute on one’s own. Aside from concerns that the document may not be validly executed or recorded properly, Powers of Attorney found online are largely deficient in offering the specific hot powers necessary for asset protection planning. Online forms are often not state-specific. An attorney can and should advise a client as to whether hot powers are appropriate for the client’s needs. Additionally, the attorney should advise the client whether the Agent or the hot powers should have any necessary limitations that are appropriate for the client’s needs.
Further, a Principal can only execute a Power of Attorney—with or without hot powers—when the Principal has the cognitive capacity to understand what the document can do. Many families who are seeking to protect assets for loved ones may find out too late that an existing Power of Attorney lacks the specific hot powers needed to conduct any meaningful planning. At this same time, a Principal’s cognitive decline would prevent the Principal from executing a new Power of Attorney with hot powers. For this reason, it is beneficial to meet at least annually with an elder law or estate planning attorney to review existing documents, discuss any changes in the law, and discuss plans for an Agent’s responsibilities.
Adding an inexpensive durable Power of Attorney that contains hot powers to an estate documents, while a person is still healthy to sign such documents, can offer critical opportunities for long-term care and financial planning.