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Written by Christy Barton of the Barton Law Firm, PLC

What is the most important estate planning instrument you will ever sign? Most would answer “a Will” or “a living trust agreement” and either or both of those answers would often be correct – but not always. As our experience has taught us, the most indispensable instrument in your estate planning toolbox may prove to be a properly crafted durable power of attorney.

Though most planners focus on helping clients reduce death tax exposure, avoid probate administration and accurately dictate who gets what at the client’s death – all of which is quite important, the impact that disability can have on the ultimate outcome of an individual’s or couple’s estate plan is almost always overlooked. I will illustrate with a “real life” example of how a family’s estate plan can be wrecked by an unanticipated disability.

Years ago I was consulted by a CPA wrestling with a heartbreaking situation which could have been avoided with good estate planning. Mom and Dad were equal owners of a successful corporation which also employed their two sons. The parents’ estate plan was based on separate Wills for each spouse, with Mom’s Will providing that at her death, her 50% of the corporate stock would pass to Son A. Similarly, Dad’s Will gave his 50% share to Son B.

As it happened, Mom gradually lost her mental capacity and, as a result of poor legal advice, was declared incompetent by a local court. Generally speaking, one of the legal consequences of mental incapacity is that the incompetent person cannot change her Will.

Sometime after Mom was officially determined to be incompetent, Dad and Son B discovered that Son A had been stealing from the family business for a long time. His documented embezzlement exceeded $700,000 by the time he was exposed, after which Son A was fired. Unfortunately, Mom’s Will (which gave her 50% of the corporate stock to Son A) couldn’t be revoked or modified, so Son A was waiting in the wings to pounce on Mom’s 50% share of the family business at her death.

Though the preceding example is more flagrant than most, we have seen numerous instances where financial, health, relationship and legal challenges within a family, occurring after a family matriarch or patriarch has signed a Will and then lost mental capacity, produced woeful outcomes after the senior family member’s death when the Will was enforced.

These planning disasters can usually be avoided completely when Mom and Dad have executed state-of-the-art, enhanced durable powers of attorney which enable designated family members to modify the existing estate plan, or to even create an entirely new plan, to effectuate the parents’ intent in a financially protective, tax-free and probate-free fashion.

An enhanced durable power of attorney needs to explicitly equip the designated agent(s) to do anything and everything that the senior family member, i.e., the principal, could do himself, for example: (1) changing beneficiary designations on life insurance policies, IRAs, bank accounts and annuity contracts; (2) creating and funding revocable and irrevocable trusts and taking other steps to change the principal’s estate plan; (3) making unlimited gifts of the principal’s assets (for tax planning and nursing home protection purposes); (4) developing and implementing new financial and investment plans; (5) appointing additional agents to act on the principal’s behalf; and (6) exercising fiduciary and executive powers that the principal may have over other trusts, corporations, partnerships and LLCs.

Under Missouri law, special powers like those described above must be clearly spelled out in the durable power of attorney instrument; otherwise, the agent will not be able to exercise such powers. Iowa law has not meaningfully addressed financial/property powers of attorney in the past, so there has previously been no guidance on the statutory scope of a durable power of attorney in that state. All of that changed, though, on July 1st – the effective date of the new Iowa Uniform Power of Attorney Act.

Suffice it to say that, going forward, the enhanced durable powers of attorney we draft for Iowa residents will be significantly different from the instruments we have prepared for Iowa clients in the past. We also anticipate that when Iowa clients come in for a routine or special review of their existing estate plans, we will recommend updating their durable powers of attorney, to specifically comply with the new and sweeping provisions of the Iowa Uniform Power of Attorney Act.

Finally, given the critical role that an enhanced durable power of attorney could end up playing in the successful outcome of your estate plan, it would be prudent to have your existing power of attorney reevaluated in light of the standards discussed in this article.

Christy Barton with Barton Law Firm, PLC is not affiliated with Silvercap Wealth Management or Arete Wealth Management.