Chapter 3: Basic Estate Planning and Drafting ^[1]

VI.   Durable Powers of Attorney

A. In General

§3.63   Estate planning tends to focus on the management of a person’s affairs after death, through a will or trust, or during disability, through an agent with a power of attorney. Unfortunately, the power of attorney, as developed under common law, clearly terminates when the principal becomes incapacitated, as well as on the principal’s death. Thus, from an estate planning perspective, the ordinary power of attorney becomes useless just when it is most needed.

Michigan’s Uniform Power of Attorney Act (UPOAA), MCL 556.201 et seq., repealed and replaced the durable power of attorney provisions (MCL 700.5501–.5505) in EPIC. The enactment of the UPOAA brings forth two significant changes to the rules regarding the durability of a power of attorney. First, under prior law, a power of attorney was durable only if it contained language explicitly affirming this intent. Under the UPOAA, however, a power of attorney will be considered durable as long as it is signed before a notary or signed before two witnesses, neither of whom is the agent nominated in the power. Therefore, under the UPOAA, powers of attorney are presumed to be durable if executed pursuant to these requirements and if they do not expressly provide that the authority under the power is terminated by the incapacity of the principal. Second, the UPOAA clarifies that powers of attorney created on or after July 1, 2024, that are not executed pursuant to these requirements cannot be durable. The result of each change offers significant help in providing a mechanism for managing the affairs of a disabled principal.

This statutory revision of common law permits the authority of the agent to continue even when the principal is incompetent or otherwise disabled and the agent knows of that fact. Thus, the durable power provides a mechanism for managing the affairs of a living person who becomes incompetent. The authority to delegate to an agent under a durable power, however, terminates when the principal’s death becomes known to the agent.

B. Use of a Durable Power

§3.64   Before the advent of durable powers of attorney, only guardians and conservators managed the affairs of disabled persons. Those roles, however, are statutory in nature and require court appointment and supervision. This can mean delay, significant expense, and a public procedure during one of the most vulnerable events in the life of a disabled person and the family.

The durable power of attorney offers an alternative to judicial guardianship and conservatorship. A person can anticipate the possibility of incapacity or other disability and provide an efficient, private, out-of-court mechanism for dealing with their affairs. Advance planning, however, is crucial. Once disability has occurred, it is too late for the person to sign a durable power. Most people probably do not anticipate disability, nor do they realize that they can make arrangements to have their affairs handled during disability. Consequently, the estate planner has an opportunity to counsel clients about the problems attendant on a disability. This topic can and should be part of estate planning.

C. Effective on Execution or Disability

§3.65   The agent’s authority can either take effect (1) immediately after the written durable power is signed or (2) only on the principal’s disability. Form 3.7 provides alternative language to create either type of document. If the client is aged or infirm, immediate authority is usually advantageous. On the other hand, a person (the principal) who is preparing and signing a durable power only to plan for a potential event of disability may be reluctant to authorize another to act presently, wanting to retain full control over their affairs. If the power is effective immediately, the agent could act and bind the principal without the latter’s knowledge or consent. The client may find this possibility uncomfortable no matter how apparently trustworthy the agent may be. Despite the agent’s fiduciary obligation to act in the best interests of the principal, the client may prefer to sign a durable power that is effective only on disability.

Despite the risks associated with a power that is effective immediately, there are also advantages. A primary advantage is that an immediately effective durable power eliminates the need to produce evidence that the agent’s authority has been triggered. When the power is to be effective only on disability, it is necessary to demonstrate that the disability has occurred in order to convince third parties that the agent may act. This step can take time and may be inconvenient as well. Because of this triggering mechanism, the power of attorney with delayed effectiveness often is called a springing power.

If you prepare a springing power for your client, you will need to anticipate the problem of showing that the principal is disabled and create a method to clearly demonstrate that the agent is authorized to act. Section 109 of the UPOAA, MCL 556.209, sets forth a particular process for springing powers. MCL 556.209(2) permits the principal to identify one or more specific persons in the document who are authorized to determine whether or not the principal is incapacitated. If no such person is named, or if this person is unable or unwilling to make the determination, the principal’s incapacity must be determined either by a physician or psychologist or by an attorney, judge, or appropriate governmental official. MCL 556.209(3). With a workable method for demonstrating incapacity, a power of attorney that becomes effective at a later time may be an attractive alternative to a power of attorney that is effective at execution.

As an additional alternative to the traditional “effective immediately” and “effective only upon disability” variations, in appropriate circumstances, consider a hybrid authorization in which the primary agent is authorized to act effective immediately, but one or more successor agents are authorized to act only after the principal’s disability. The alternate versions of section 1 in form 3.7 can be modified to accomplish this result. The hybrid arrangement is particularly suitable when the principal has complete confidence in, and is willing to have financial information disclosed to, the primary agent (perhaps a spouse of many years), but a lesser degree of comfort or experience with the successor agents (perhaps children or siblings who have had limited involvement with the principal’s finances).

D. Selecting the Agent

§3.66   Any competent adult may act as an agent for another person. Institutions may also act as agents. Most banks with fiduciary powers will agree to act as agents under a durable power. Choosing an agent, like choosing a personal representative or trustee, involves practical considerations. One consideration is the agent’s proximity to the principal. The agent may need to make bank deposits, pay bills, arrange for the physical care of both the principal and the principal’s property, and engage in other transactions that make the agent’s physical presence extremely desirable. In many instances, the need for close proximity leads a principal to name a financial institution as agent because family members are geographically distant and scattered.

Another consideration is the extent of the agent’s authority. The agent can be authorized to conduct virtually all of the principal’s affairs. If such broad authority is contemplated, the agent should be a person or an institution in which the principal has the utmost confidence and trust. Theoretically, if a limited authorization is to be used, a lesser degree of trust and confidence might be permissible.

Because a disability may prevent a named agent from being able to act and because the named agent’s medical information is protected under HIPAA, an individual named as agent should provide an authorization permitting the disclosure of health care information for the limited purpose of determining the agent’s ability to serve. An example of this type of authorization is included as form 3.4. For further discussion of estate planning issues related to HIPAA, see §§3.70–3.72.

E. The Agent’s Powers

1. Nature of Authority

§3.67   The agent is subject to the principal’s control and supervision. Although the principal-agent relationship is primarily contractual in nature, in the context of planning for the management of a person’s affairs during disability, the fiduciary relationship is as important as the contractual one. EPIC authorizes the conservator to revoke or amend the power of attorney. MCL 556.214(2) sets forth an agent’s fiduciary duties of loyalty and care. The power of attorney, however, should state explicitly that the agent is to act as a fiduciary and solely in the principal’s best interests.

MCL 556.205 requires that a durable power of attorney be (1) signed by two witnesses (neither of whom is the agent) who were present when the principal signed the document or (2) acknowledged by a notary public. Similarly, MCL 556.301(1) prohibits the agent from doing the following, unless specifically authorized in the durable power of attorney or by judicial order: making gifts of the principal’s assets; creating or changing rights or survivorship or a beneficiary designation; creating, amending, revoking, or terminating an inter vivos trust; delegating authority; waiving the principal’s right to certain entitlements; exercising fiduciary powers that the principal has authority to delegate; or controlling the principal’s electronic communications or the principal’s financial accounts in a foreign country. Finally, MCL 556.402 describes the form and content of an acknowledgment that the agent is required to sign before acting.

In general, the authority of an agent is strictly construed. Therefore, you should anticipate the various types of specific authority that the agent might require. If the agent selected is trustworthy and someone in whom the principal has full confidence, it might be appropriate to give the agent the broadest possible authority. In essence, the principal can state that the agent has “full authority to deal with my property and affairs as fully as I might or could if personally present.” Third parties, however, usually have difficulty visualizing all of the powers that this statement encompasses and will often want to see that a particular transaction is authorized specifically. Therefore, you should also give a comprehensive list of the common types of transactions that fall within the scope of authority as well as a general grant of broad authority. The following are some specific powers found in form 3.7, which may be modified or omitted, depending on the circumstances and the client’s preferences.

• The agent may delegate authority to another. Very often such flexibility is desirable.
• The agent may transfer assets to the trustee of a trust the principal established for the principal’s own benefit. If separately owned property may be added to a trust, the trust might be a better vehicle for ongoing management. Such a transfer also will avoid the need for probate proceedings when the principal dies.
• The agent may file the principal’s tax returns and represent the principal in dealings with the IRS.
• The agent may initiate and conduct litigation on the principal’s behalf.
• The agent may make gifts. This power, as drafted in form 3.7, is restricted by the requirement that there is a court finding that the gifts are consistent with the principal’s desires and will not jeopardize the principal’s security. Some clients may be comfortable permitting an agent to make gifts within the annual exclusion amount of IRC 2503(b) to a specified class of recipients without a court order. A durable power of attorney could also permit the agent to make direct payment of tuition and medical expenses as contemplated by IRC 2503(e).

You will also encounter situations in which the agent’s authority should be tailored to fit a unique need. An example is a client who owns and operates a business as a proprietor or general partner. Powers of attorney might grant the authority to continue the business, to borrow funds, to dispose of assets, or to incorporate the business. The planning in these instances may need to be as comprehensive as the planning for the testamentary disposition of property.

The actions of an agent under a durable power of attorney are not revoked by the death of the principal when the agent has completed all actions necessary for the transaction before the principal’s death and all that remains is completion of the transfer by a third party. Capuzzi v Fisher, 470 Mich 399, 684 NW2d 677 (2004).

2. Limitations on Authority

§3.68   Although it is advantageous to grant broad authority to the agent, you might want to impose some limitations on their authority. For example, it seems appropriate to forbid the agent to make a will, codicil, or any will substitute for the principal. Likewise, the agent might be prohibited from making any changes to the beneficiary designation under life insurance policies. In addition, if you do not want the agent to have the ability to make gifts, an explicit restriction on making gifts would remove the danger of an incorrect interpretation of the agent’s authority (but note the specific prohibition of MCL 556.301, which may make such an explicit restriction in the document unnecessary).

The broad authority granted to an agent could be construed as a general power of appointment and could lead to tax problems for the agent during their lifetime or for the agent’s estate at death. For example, unrestricted power over income could result in the agent’s being taxed under IRC 678. The agent’s ability to make transfers of assets could be construed as the ability to give the property to the agent themselves under a general power of appointment. As a result, all of the principal’s assets could be included in a deceased agent’s gross estate. Such an attenuated result should be negated by a clear statement in the durable power that the agent is serving only in a fiduciary capacity. If additional protection is desired, the durable power could include language restricting the agent’s ability to appoint to themselves.

F. Facilitating Transactions with Third Parties

§3.69   Unless third parties accept the durable power and follow the agent’s instructions, the power of attorney is ineffectual. Another important feature of the UPOAA is the addition of liability on third parties who do not accept a properly executed power of attorney. MCL 556.220. The act further establishes specific time frames for resolving a third party’s question about the validity of a power of attorney. A third party questioning the legitimacy of a power of attorney can seek an opinion of counsel, a translation from another language, or a certification of validity by the attorney or the agent named in the document. MCL 556.403 contains a form, similar to a certificate of trust, to certify facts concerning a power of attorney and its effectiveness and enforceability. The person presenting the power of attorney for acceptance must provide the requested information to the third party within a reasonable period of time, and once the documentation is received, the third party has five days to accept the power of attorney. If the third party does not accept a valid power of attorney, the third party could be subject to a court order mandating acceptance of the power and liability for reasonable attorney fees and costs incurred in any action or proceeding that confirms the validity of the power or mandates acceptance of the power. MCL 556.220.

If third parties can be convinced that there is little or no risk in dealing with the agent, the agent will probably be able to transact the necessary business. For that reason, the durable power should include language directing third parties to rely on all representations of the agent. The provision might stipulate further that reliance on the agent’s representations will cause third parties no liability and that if any such liability does arise, it will be discharged by the principal.

The agent may wish to be protected by an indemnification provision in the power of attorney. Often, the agent will be acting without compensation and will want to know that no liability will ensue if they have acted in good faith and with as much care and reasonableness as possible. Therefore, you might include an indemnification provision in the power of attorney.

Two other steps can facilitate transactions by the agent. The first is to have the power of attorney executed in recordable form because transactions involving real estate must become a matter of public record. The authority of the agent may not be recorded unless the execution by the principal is acknowledged by a notary public and otherwise complies with the statutory recording requirements. See MCL 565.201. The second is to state that reproductions of the original power of attorney are as acceptable as an original power of attorney. It is usually difficult for principals, who might be aged or disabled, to sign a sufficient number of originals. Therefore, reproductions must be acceptable to third parties. Stating that the reproductions are as acceptable as the original may help persuade the recipient that they are, indeed, valid.