What Is the Most Important Estate Planning Document

What is the most important estate planning document that a person can have?  In my opinion, a financial power of attorney is the most important document, followed by an advanced health care directive.  I always say that a Will is important, but a Will is for other people.  By the time someone goes to submit your Will to probate, you aren’t alive anymore, so your Will really isn’t that important to you.  Your legacy, perhaps, but it has no impact on your life.

On the other hand, a financial power of attorney could greatly impact the quality of your life.  Without a power of attorney document, no one, not even your spouse of sixty years, could make financial decisions for you.  This means that your husband could not access your IRA.  He could not access your 401(k).  He could not access bank accounts, brokerage accounts, or annuities that are titled in your name only.  He could not sell the house even if you jointly own the house with him.  He could not mortgage the house.

Your children certainly could not access your financial assets.  And if you’re thinking, Well, I’ll just add a child’s name to my bank accounts.  Think about this.  By adding your child’s name to your bank account, you are making your child a co-owner of your bank account.

If your child wants to take all the money out of your bank account and use it to pay for her vacation, she could.  If your child gets sued, her creditors will go after your bank account.  If your child gets divorced, her spouse might go after your bank account.  If you die, your child will become the sole owner of that bank account and might not share it with her siblings (your other children).

Furthermore, you cannot add your child’s name to your IRAs, your 401(k), your life insurance.  So, these assets will remain inaccessible by your family in the event of your disability.

This is why I say that the most important estate planning document that a person can have is a well-drafted financial power of attorney.  What is a well-drafted financial power of attorney?

A power of attorney document should be comprehensive.  The person you appoint to make financial decisions for you—called an “agent” or “attorney-in-fact”—can only conduct those financial transactions for you that the power of attorney document says he can conduct on your behalf.  For this reason, I say that it is best to be overly-broad than to draft a power of attorney that is narrowly defined.

If you become disabled, you can no longer modify the power of attorney document.  You need to retain a certain level of mental capacity to sign a power of attorney, so you can’t wait until you need the document to sign the document or to modify the document.  If the document is too narrowly drafted, than your agent might not be able to perform some financial task on your behalf.  On the other hand, if the power of attorney is broadly drafted, even if it is too broadly drafted given your finances, than there is little question that your agent can perform any task he might ever need to perform on your behalf (and perhaps a number of tasks he may never have to perform).

I also recommend to the vast majority of my clients that they make the power of attorney document effective immediately.  I don’t think that my clients’ agents will actually use the powers of attorney that I draft immediately, but I recommend that the client make the document effective immediately.  In this way, when the agent needs to use the document, he doesn’t have to prove that the client is disabled.  This makes the document easier to use and makes it more likely that financial institutions will rely upon the document.

In rare instances, I might recommend that the client make the power of attorney effective only when the client is disabled.  This is called a springing power of attorney, but a springing power of attorney can interfere with a financial institution’s willingness to accept the document.

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