Using a durable power of attorney.

A durable power of attorney is an important part of the planning process. When a client faces surgery, illness or an extended absence, the need to write checks, sign tax returns, engage in financial transactions, maintain insurance, operate a business, buy or sell real estate, conduct or settle litigation and pursue business and financial affairs continues.

As a result, a durable power of attorney, which authorizes someone else to act in the client's place, is a valuable tool. Even if CPAs don't act as attorneys-in-fact for clients, they should inform them of this instrument's usefulness. In addition, because CPAs understand their clients' tax, business and financial goals and priorities, they can help attorneys draft a more effective instrument.

DURABLE IS DIFFERENT

A power of attorney is a written instrument with which one person--the principal--authorizes another--the attorney-in-fact--to act for him or her. The authority conferred can be narrow or broad, enabling the attorney-in-fact to do almost all things the principal could do if present. A power of attorney also can authorize a CPA to represent a client before the Internal Revenue Service at an audit or conference. This authority ends if the principal becomes mentally disabled.

In contrast, a durable power of attorney remains effective despite mental disability if it was executed when the principal was competent. The durable power of attorney can be used if the client has an ongoing degenerative disease or scheduled surgery, has been in an accident or had a heart attack. In addition, business executives who travel extensively and are thus enable to react quickly to changes in financial or tax situations may think it prudent to have an attorney-in-fact ready to act for them at all times.

ESTATE PLANNING USES

A durable power of attorney is effective only while the principal is alive, but it can specify estate planning actions to be taken if the client becomes disabled. These include a decision to revoke a living trust or begin or continue a lifetime gifting strategy to take advantage of the current annual federal gift tax exclusion or to reduce potential estate tax liability. If the client was an attorney-in-fact to become involved in gifting, the power should say so explicitly.

A durable power of attorney helps the client avoid costly, time-consuming and potentially embarrassing court proceedings necessary to establish mental incompetency. Moreover, it precludes the need for a court appointee who might not be the client's first choice. At best, the courts provide an imperfect solution to a problem clients could avoid with careful planning.

CHOOSING THE

ATTORNEY-IN-FACT

A CPA may serve as the attorney-in-fact, but the appointment must be structured with extreme care because the attorney-in-fact is a fiduciary who has a legal duty to avoid any self-dealing. If the CPA is the attorney-in-fact and provides a service for a fee, conflicts of interest could become a major problem. Often someone other than the CPA is chosen, but the document contains instructions to consult with the CPA before making any tax or financial decisions. Alternatively, the document may simply identify professionals with whom the principal regularly consults, but leave the choice of professional up to the attorney-in-fact.

When a professional is used, provision should be made to pay this person a reasonable fee. A bonding requirement, perhaps with payment to come from the principal's assets, could also be appropriate. In addition, a second or alternative attorney-in-fact should be appointed in case the first choice is unable to perform his or her duties.

PROPER AUTHORITY

The attorney-in-fact's authority should vary based on need. If the authority is meant only for business purposes--for the principal's closely held business, for example--the authority should be clearly limited. The authority may, on the other hand, be intended only for the principal's personal finances, and this should be made clear in the document. Financial caps and prohibitions can be specified. Some instruments require the concurrence of two attorney-in-fact for certain significant transactions, such as the disposition of a business interest or major asset.

Because of the potential for abuse, financial institutions are cautious about the use of a power. Financial institutions the client regularly does business with should be contacted to determine whether they have standard form documents that they will accept for durable powers. Providing these to the client's lawyer before the power is drafted enables him or her to use preapproved language and avoid any delay in using the power when needed.

For real estate transactions, the client's lawyer should create a power that is suitable and acceptable by the local government recording office, such as a county clerk, because it will probably be recorded as part of any authorized real estate transaction. In addition, since the power may be needed often, it is wise to provide in the document that copies are acceptable to third parties.

FIXING THE EFFECTIVE DATE

A durable power of attorney can take effect either immediately or upon some future event. CPAs can advise clients on how much management the client's financial affairs need and make suggestions to ensure an authorized and informed person will be available to make decisions, especially in volatile economic times or when fragile tax structures may be threatened by fast-breaking events.

If the durable power of attorney is triggered by a disability, care should be taken to formulate a pragmatic means to define disability. In the case of illness or injury, one method is to have one or more physicians, preferably at least one who knows the principal, state in writing that he or she can't make decisions.

A POWERFUL TOOL

The durable power of attorney is a financial planning tool that helps clients ensure their financial affairs are managed under any circumstances. As with a will, the failure to have one at the right time can be catastrophic. Clients should know that a well-planned power will help them control their finances and choose who will manage them if they can't.