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Read fine print on power of attorney

Estate Plan Edge: Here are common misconceptions about powers of attorney and the best way to set one up.

No one likes to think about becoming disabled, but an important part of estate planning is making provision for how things will be handled for you if that does happen.

For our purposes, disability doesn’t mean a broken hip. If you are laid up but of sound mind, you still pay your own bills and make the decisions about the farm and any other financial matters. By disabled, I mean a condition that affects your mental capacity. This could be temporary, resulting from accident or sickness, or a long-term consequence of age, dementia, injury or disease. If you are unable to effectively manage your own property or financial affairs, you need someone to be able to handle your affairs for you.

Fine print on POA

The classic approach to disability planning was to give a family member a “general, durable power of attorney,” which took effect immediately upon signing. You are referred to as the principal, and the person you appoint is referred to as your agent. Several traps exist in this approach.

First, when does the principal want the agent to be able to act? Probably only when you are unable to do things for yourself, but the typical POA document gives the agent power to act now. Second, what power does the agent have? The typical understanding is that the agent can sign anything the principal could sign, but that is almost always incorrect. In most instances, there are powers you would want the agent to have that he or she doesn’t, and they are given other powers you might not want them to have.

For example, I often hear about agents who wrote checks to each of the principal’s children as Christmas gifts. “He always gave each kid the maximum he could under the gift tax exclusion, and I do whatever he did.” No, the law presumes that to give away Dad’s money would be acting contrary to his interest. So, a statutory general POA form does not include the power to make gifts. Such power, if desired, must be specifically added.

Too many benefits?

Another misuse of a POA is when it is used to benefit the agent. Let’s say you were renting your land to your son for $175 per acre, even though you could easily get $300 if you rented to someone else. You totally trust this son and sign a POA making him your agent with all the statutory powers. You become disabled, and he starts making your decisions for you. One such decision is how much you would charge him as rent. Most farmers assume that the son, as your agent, could continue to rent the ground to himself at the discounted rate.

Not so! When the agent is making decisions on your behalf, he must act in your best interests and against his own. Absent some specific instruction in the POA about the rental rate, your son has a legal duty to collect fair market value rent for you.

You might ask, “Who is going to complain?” Start with your other kids, who can easily prove that the son has a conflict of interest and is using the power you gave him for his own advantage. Also, government authorities might complain that your son is making unreported, potentially fraudulent, gifts to himself by charging himself discounted rent.

Public record

Putting more details in the POA document can solve some of these issues. However, the POA often must be recorded in the county deed records, so keep in mind how much of that you want in the public eye.

Many of you have living trusts, in part because that document stays out of the public records. The living trust is also the best place to plan for disability. To stay in control of the disability situation, you need to cover three issues:

  1. When will I be disabled? There should be a clear, workable test.
  2. Who will have authority to handle things for me? This would be the successor trustee, such as your child.
  3. What do I want them to be able to do? If the land should be rented at a discount, it must be stated.

Are these three issues covered in your living trust? If not, you should be having a serious talk with your attorney about planning for disability. It can create messes worse than death.

Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.

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