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. …