A power of attorney is a legal document that gives one person (the attorney) the right to act on behalf of another (the principal) in certain situations. A trust is a legal arrangement wherein some person (the trustee) is designated to manage the property of another (the grantor or settlor) for the benefit of a third party (the beneficiary). Some but not all trust arrangements require a power of attorney to ensure that the trustee is able to perform their duties under the trust.
Powers of Attorney
Any power of attorney is likely to specify a limited number of situations in which the attorney in fact is authorized to act on the principal's behalf. It can also provide specific instructions on how they are to act in those situations, or may remain purposefully vague in at least a few areas to allow room for attorney in fact to exercise their discretion. A power of attorney can be deposited with a bank holding a trust account with the express purpose of empowering the attorney in fact (as trustee) to operate the account. A springing power of attorney is one that takes effect only once the principal is declared mentally incapacitated. If the power of attorney is in effect prior, and explicitly says it is to remain in effect should the principal become incapacitated through illness or injury, it is called a durable power of attorney.
Read More: Two Types of Power of Attorney
There are several types of trusts that might require a power of attorney, for several different reasons. But in any revocable trust, the income of the trust flows through to the grantor's individual taxes, and the property remains titled in their name. The trustee, therefore, if anyone other than the grantor, will have to obtain power of attorney to control the assets of the trust or manage accounts in the grantor's name. This is especially true in the case of a living trust that is designed to convey the grantor's assets after their death or incapacitation. Even if the grantor acts as trustee during their lifetime, a durable power of attorney can be used to give a third party the power to act in their role as trustee if the grantor/trustee is incapacitated.
A durable power of attorney is used to authorize a person to make decisions for someone who is unconscious, on mechanical life support, or otherwise incapable of managing their own affairs. For many, decisions such as whether to authorize risky medical procedures or to disconnect life support are important considerations, and a durable power of attorney is an important part of ensuring that someone with legal authority is there to make sure your intentions are realized. When used in conjunction with a living trust, the durable power of attorney ensures that assets can be managed in the most advantageous way prior to or immediately following your death without unnecessary complications of establishing and empowering a successor trustee or springing power of attorney in emergency situations.
A power of attorney is a separate document clearly identifiable as such by its title. The title should also note whether it is a durable power of attorney. The parties to the document should clearly be identified and the powers or limitations of the attorney in fact enumerated. Though a trust document can have parts that resemble a power of attorney, listing the powers of the trustee, a power of attorney should remain a separate document. It can be incorporated into the trust document by reference. Most states have statutory power of attorney forms that are easy to fill out and quickly recognized by courts and other authorities.
The only real type of trust that separates the income of the trust from the income tax liability of the grantor is an irrevocable trust, in which the grantor permanently surrenders ownership of the assets given to the trust. In this type of trust, it is highly advisable to have a separate person other than the grantor serve as the trustee. A power of attorney is not strictly necessary, since the property given to the trust is titled either in the name of the trust or of the trustee.
Joseph Nicholson is an independent analyst whose publishing achievements include a cover feature for "Futures Magazine" and a recurring column in the monthly newsletter of a private mint. He received a Bachelor of Arts in English from the University of Florida and is currently attending law school in San Francisco.