Agents: the key ingredient to every estate plan
What Are Agents and Why Do They Have to Be a Part of Every Estate Plan?
Principals and agents – why does it seem estate planning is full of confusing legalese?
To be fair, all areas of law have what are called terms of art – words that have both an ordinary meaning and a special meaning that is basically shorthand for a legal concept. But let’s break down the basics.
What is an agent and what is a principal?
An agent is a person who has legal authority to act on another person’s behalf. The person on whose behalf that agent acts is called the principal.
The most straightforward example of this is an employee-employer relationship. The employee is allowed to take certain actions for their employer. The employee is the agent, and the employer is the principal.
Agents are all over the place in estate planning
And this makes sense, because estate planning isn’t just about deciding what happens to your stuff when you pass. Estate planning is just as concerned with planning for periods of incapacity – time when you are still alive but can’t take care of yourself for whatever reason.
The first agent you probably think of is an Executor
An executor is responsible for carrying out the wishes you express in your Last Will and Testament. When your estate is probated, they represent your estate before the probate court and distribute you’re assets according to your wishes.
You may sometimes hear an executor called a personal representative, that is the same thing. Different states use different terminology, though personal representative can be a broader distinction – so think, executor as a type of personal representative.
If you pass without a Will in place, the person the probate court appoints to wrap up your estate is called an administrator.
The next one you probably think about (makes medical decisions) - Healthcare Power of Attorney
If you've ever had any surgical procedure or any procedure that requires anesthesia, your provider likely asked if you had a healthcare power of attorney in place. This is because the hospital needs to know if there's someone you trust to make medical decisions for you in the event of an emergency that doesn't allow enough time to consult you for consent.
The scope of the agent's power is found in the document the principal signed, but generally they are required to honor your wishes as you've previously expressed them. If your wishes are unknown, they are required to act in your best interest. You can read my post here that goes into more detail.
A less obvious one, but absolutely crucial to an estate plan – Financial power of attorney
Did you think of the person who can pay your bills while you’re laid up in the hospital? If so well done! This agent is vital to every estate plan.
I call it a financial power of attorney because it's an easy way to remember it is separate from the healthcare power of attorney, but it's often referred to as a durable power of attorney.
It's easy to fall into the trap of thinking that spouses especially, but also children to a certain extent, will be able to do the things you need them to do if you need help. And I of course understand there may be more flexibility where people know each other, every institution is a little different. But the reality is that if you are sole owner of an asset, not even your spouse can access it without some prior authorization from you. And while ownership may seem straightforward - you either own it or you don’t - it isn’t always that simple.
That's what makes the financial power of attorney so important. They provide a way for you to communicate to third parties who you trust to access or use your resources. And these powers of attorney can be tailored to be very narrow - meaning they don't allow the agent to do a whole lot - or they can be broad, which allows the agent much more authority. They can also be tailored to give certain powers to one agent versus another - think, I want to give full authority to my spouse, but limited authority to my child, perhaps.
So, what happens if you don't select agents in advance?
Well, then there’s guardianship
Not trying to scare you - this is very unlikely in short-term situations. I’m mostly talking about long-term incapacity.
Someone's got to be around to make decisions, and if you can't, third parties like doctors and bankers are going to look to someone with authority. Guardianship is a formal process by which an individual, called a guardian, can obtain authority from the probate court over another individual, called a ward.
Guardianship of the Estate allows the person applying for authority to control the assets belonging to the ward, Guardianship of the Person allows control over the ward's physical care, such as medical care and aspects of the ward's day-to-day life.
Guardianship is the alternative to selecting agents in advance, and is the less desirable option primarily for two reasons: it involves the loss of privacy, and it requires ongoing probate court supervision.
When a guardian applies for guardianship, the probate court will send a case worker to visit the potential ward to determine if there is genuine need for guardianship. The report they make to the probate court is public record. Motions, basically requests for specific authorization from the probate court, are also often public record. And because the probate court is always the superior guardian, the appointed guardian needs to obtain prior authorization to act, and that takes time.
The Takeaway
Agents are at the heart of every estate plan. Having a plan allows you to select the people you trust in advance, protect your privacy, and assure you can be taken care of as efficiently as possible. Planning ahead of time also relieves loved ones from having to go through the guardianship process, and gives you an opportunity to express your wishes in advance.