Illinois' Durable Power of Attorney Law offers a quick and easy way for entrepreneurs with business responsibilities or significant assets to delegate the handling of their financial affairs to someone they trust.
The statute even prescribes a fill-in-the-blank form, which is available at most stationery stores, to take advantage of the law's opportunities.
As with all kinds of standardized solutions to individual problems, off-the-shelf Powers of Attorney don't always deliver on their promises.
But the idea is attractive. If one is incapacitated or absent for an extended period, a designated agent can take care of the types of financial transactions checked off from among 15 categories listed on the form. And the last category is a seemingly all-inclusive catch-all -- "all other property powers and transactions."
So, taking up the act's offer appears both foolproof and comprehensive. But that's not always the case.
The trick is understanding what the different categories actually mean, what power is covered by each one, and what power is not included.
To the costly surprise of many, some categories have been construed to omit specific powers and authority one expects to be covered.
And, what's more, "all other property powers and transactions" category has been limited to exclude the very powers that may prove indispensable in achieving a client's financial objectives.
So, failing to revise the pre-printed form to expand the authority granted could lead to unintended and sometimes disastrous results.
A few illustrations should dramatically prove the point.
- A successful business owner, whose estate plan was once laid out within her will, created a revocable Living trust as her most important dispositive and estate-tax planning document.
This technique can largely avoid the costs, publicity and inefficiencies of probate.
Moreover, the business owner knew that if she changed her mind about who is to get what or if a revision to the tax laws warranted amending her trust, she could rip it up and sign a new one.
But, because she delegated to her agent only the "standard" powers listed on the pre-printed form and then became legally incompetent, her agent was unable to keep her estate plan timely by making necessary changes to her Trust.
- In another situation, a man sold his business and went on an extended tour around the world.
He believed that his agent could rely on the "standard" powers to maintain his gifting program and take advantage of the $10,000 annual exclusion from the Federal gift tax for transfers to each of his children. As he later learned, gifts just aren't contemplated by the standard language and couldn't be effected under a pre-printed Power of Attorney.
So, the cash gifts he intended (and their earnings) remained included -- and taxed -- within the traveler's eventual estate.
Similarly, specific authority must be granted to permit an agent to pay premiums on his or her principal's life insurance policy if it's owned by an irrevocable trust.
The use of such a trust, an increasingly common strategy, allows policy proceeds to be paid at death outside one's taxable estate, available to pay death taxes without themselves ratcheting up the estate's tax bill.
Before running out to purchase a fill-in-the-blank "Statutory Property Power" form, I'd encouraged you first to take a deep breath and verify that the form does what it's supposed to do just as it is.
A call to your attorney is likely to establish that an added line or two may preserve the integrity of your long-range financial plan.
Marc J. Lane ([email protected]) is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law.