A Power of Attorney is the foundation of any good disability plan and is a legal document that allows you to delegate your right to manage, invest and spend assets owned in your individual name or in joint names as tenants in common to someone else, called your "Attorney in Fact."
State Laws Govern Powers of Attorney
As with Advance Medical Directives and Living Wills, all 50 states have their own laws governing Powers of Attorney. Some states even provide specific forms for their residents to use. These laws generally cover the following:
- Who can make a Power of Attorney;
- What minimal provisions the Power of Attorney must contain to be legally enforceable;
- Who can and can't be named as your Attorney in Fact; and
- What formalities must be observed when the Power of Attorney is signed.
Springing Powers of Attorney vs. Durable Powers of Attorney
Many states distinguish between a "Springing" Power of Attorney and a "Durable" Power of Attorney."
A Springing Power of Attorney is one that only goes into effect if you've been declared, either by a court or one or more physicians, that you've become mentally incompetent and can't properly manage your finances. Thus, your Attorney in Fact won't have any legal authority to manage your finances unless and until you've been determined to be mentally incapacitated. The main disadvantage to this type of Power of Attorney is that it will delay the payment of your bills and investment of your assets until after the proper documents have been signed that declare you mentally incompetent.
On the other hand, a Durable Power of Attorney is one that goes into effect as soon as you sign it. Thus, your Attorney in Fact will have immediate authority to manage, invest and spend your assets on your behalf and won't be delayed by your doctors or a judge.
Your Power of Attorney and Your Revocable Living Trust
It's important to understand how your Power of Attorney will be used to manage your finances if you have a Revocable Living Trust.
For your assets that have been properly funded into your Revocable Living Trust, your trust agreement will govern the investment and management of the trust assets. Thus, you, as the initial Trustee, or your Disability Trustee if you do become mentally incapacitated, or your Administrative Trustee after you die, will have the legal authority to deal with the trust assets.
On the other hand, any of your assets that you haven't funded into your Revocable Living Trust and you continue to hold in your individual name can't be managed by your Trustee. Thus, your Power of Attorney will be needed for the investment and management of these unfunded assets. After you die, however, your Power of Attorney will become invalid and the legal authority of your Attorney in Fact to manage your individual assets will be revoked. If this is the case, then your individual assets will need to be probated.
