Estate Planning Isn't Just About Dying
Over the course of thirty years as a trusts and estates lawyer I have drafted hundreds, maybe even thousands, of wills. After all, that is what estates lawyer do – we help our clients memorialize the disposition of their assets when we they die. Wills are tailor-made to address each client’s specific needs and desires at his or her demise
For every client for whom I draft a will I also draft at least one other document -- a financial power of attorney (plus, in most cases, an advance directive for healthcare). In the estate planning process financial powers of attorney do not, however, get the amount and depth of attention which wills do. After all, a financial power of attorney is typically an “off-the-shelf” kind of document which does not vary much from client to client. Sounds right, doesn’t it?
Nothing could be further from the truth. A financial power of attorney requires time and attention so that it complies with each client’s particular needs.
By a financial power of attorney a client designates one or more individuals, and perhaps successors, to serve as “agent” or “attorney-in-fact” with the authority to manage the client’s assets, financial affairs and business interests. A power of attorney can take effect as soon as it has been signed or it can take effect at such time as the client becomes incapacitated. In the latter case it is often referred to as a “springing” financial power of attorney because it “springs” into effect if and when incapacity occurs.
The financial power of attorney document includes a laundry list of powers which the agent has the authority to exercise on behalf of the client. It typically includes the powers to pay bills, trade securities, sell real estate, hire caretakers and address tax matters.
The list of powers also includes the power to handle business interests. For a client who owns an interest in a closely-held business, giving the agent the power to handle business interests is crucial and should be carefully thought through. By giving an agent the authority to manage a business the business can continue in operation even if the client becomes unable to run the business him/herself. The power granted to the agent can also include the power to vote stock or other interests in the business, to deal with vendors and landlords, to explore new markets or business opportunities, to change the type of legal entity under which the business operates and to address tax matters. The financial power of attorney can also include the power to sell the business or to liquidate its assets and terminate the business.
Often the same person is designated as agent for all personal financial resources and also for closely-held business interests. But can the same person effectively handle both personal and business matters? If the client’s spouse or child is the agent for personal matters, is that family member qualified and sufficiently informed to make business decisions? Does that individual have the time to be involved with the business? Do the managers of the business know and trust that individual? That of course depends on the level of involvement the family member has in the business and other factors that are specific to each particular client.
I often recommend to clients who own interests in closely-held businesses that they have two financial powers of attorney – a General Financial Power of Attorney and a Business Power of Attorney. For the General Financial Power of Attorney the agent might be a spouse, child or other family member. For the Business Power of Attorney the agent might be a co-owner of the business, a manager of the business or a chief financial officer. It could also be the outside accountant for the business or another professional who is familiar with the business and can be expected to exercise good judgment. Of course, under the right circumstances it could also be a family member. In any such event the authority which the agent may someday have can be expansive and have a real and significant financial impact on the operation of the business and the financial lives of the owners and employees of the business. So the client should consider with great care the individual s/he selects as agent under the Business Power of Attorney.
It is a good idea in designing a Business Power of Attorney that a limitation be imposed on the scope of authority given to a non-family member named as agent. He or she might be given the authority to operate the business but not to sell or liquidate the business at least without the consent of a family member or another owner or key employee of the business.
Even though a Business or General Financial Power of Attorney may never be used, when it is used it will be crucial to the client, to other family members and to business associates. The client and the client’s counsel should discuss and consider carefully the powers granted to an agent under a power of attorney and the circumstances under which those powers may or may not be used.