Defines what is a Financial Directive and its need in advanced estate tax planning. Compare the Financial Directive with general Power of Attorney. What provisions you do not want to assign to your agent.
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I recently wrote about the absolute need for a Medical Directive granting the “exclusive power” to your Agent for the purpose of communicating your healthcare wishes and to instruct those in charge of your medical care and to respond to the actual facts and variables known when an actual healthcare decision needs to be made. Your Medical Directive becomes effective, when:
- You cannot communicate your own wishes for your medical care:
- Orally,
- In writing, or
- Through gestures, and
- You are diagnosed to be close to death from a terminal condition, or to be permanently comatose, and
- The medical personnel attending to your care are notified of your written directions.
What is a Financial Directive?
To summarize, a “Medical” Directive is a legal Instrument addressing the issue(s) of your healthcare and a “Financial” Directive is legal financial Instrument that empowers your Agent over all your financial matters and to exercise or perform any act under a recognized “Principal / Agent” relationship, with power, duty or right of any obligation whatsoever over everything that you now presently have or may thereafter acquire in the future, relating to any person, matter, transaction or property, real or personal, tangible or intangible, now owned by you or thereafter acquired by you, including, without limitation, general powers and specifically enumerated powers as to each possible event or circumstances.
In order for your Financial Directive to be legally binding on all third parties, the third parties so notified of your Principal/Agent relationship, your instrument must be in writing, properly witnessed or notarized with power to indemnify all those who accepted it in good faith.
Your Financial Directive should grant your Agent full power and authority to do everything necessary in exercising any of the powers as fully as you might or you could do if you were personally present, with full power of substitution or revocation, ratifying and confirming all that your Agent may lawfully do or cause to be done by virtue of your Financial Directive.
Essential Estate Tax Planning: The Financial Directive
A Financial Directive should be part of your estate tax planning.
Your Financial Directive Instrument should address the following general powers and specifically enumerate those powers as to each possible event or circumstance:
- Demand, receive, and obtain by litigation or otherwise, money or other thing of value to which the Principal is, may become, or claims to be entitled, and conserve, invest, disburse, or use anything so received for the purposes intended.
- Contract in any manner with any person, on terms agreeable to the Agent, to accomplish a purpose of a transaction, and perform, rescind, reform, release, or modify the contract or another contract made by or on behalf of the Principal.
- Execute, acknowledge, seal, and deliver a deed, revocation, mortgage, lease, notice, check, release, or other instrument the Agent considers desirable to accomplish a purpose of a transaction.
- Prosecute, defend, submit to arbitration, settle, and propose or accept a compromise with respect to a claim existing in favor of or against the Principal or intervene in litigation relating to the claim.
- Seek on the Principal’s behalf the assistance of a court to carry out an act authorized by your Financial Directive Instrument.
- Engage, compensate, and discharge an attorney, accountant, expert witness, or other assistant as it becomes necessary or relevant to principal objective(s).
- Keep appropriate records of each transaction, including an accounting of receipts and disbursements.
- Prepare, execute, and file a record, report, or other document the Agent considers desirable to safeguard or promote the Principal’ s interest under a government statute or governmental regulation.
- Reimburse the Agent for expenditures properly made by the Agent in exercising the powers granted by this Instrument.
- In general, do any other lawful act with respect to the subject at hand.
When does Your Financial Directive Become Effective?
Your Financial Directive becomes effective when you are considered disabled or incapacitated.
For purposes of your Financial Directive Instrument, “disabled or incapacitated” means when a physician certifies in writing at a date later than the date of your Instrument was executed that, based on your physician’s medical examination of you, your doctor declares you mentally incapable of managing your financial affairs.
Your Financial Directive should have a paragraph to “legally authorize your/the physician” who examines you to disclose your physical or mental condition to another person for validation. You may even authorize a second physician for a second opinion. Subsequent to this verification and disclosure of your incapacitated condition, a third party that accepts your Financial Directive is fully protected from any action taken.
Financial Directive Compared to General Power of Attorney
I am reminded of cases where the spouse is precluded to sit in important business meetings of which her temporarily incapacitated husband was a member, and decisions were being made affecting her husband’s interest in the business. While a general power of attorney may have been sufficient, but more likely would have required further court action. The Financial Directive is a significantly stronger Instrument than a general power of attorney, and would have specifically addressed issues concerning the spouse’s ability to sit and vote with the Agent, in decisions affecting the business, and more specifically her ownership interest in the business, with ability to bring in professional assistance to consult with her on such important matters.
Cautionary Provisions Within Your Financial Directive You Do Not Want to Assign to Your Agent
While we have enumerated the specifics of the powers to your Agent, there are some powers you would not want your Agent to have:
- Your Agent cannot execute a will or codicil on your behalf.
- Your Agent cannot execute any trust on your behalf; however, your Agent can enter into a custodial agreement with another “independent” individual or bank with trust powers.
- Your Agent cannot divert your assets to himself [or herself], his [or her] creditors or his [or her] estate.
- Your Agent shall not exercise, and shall not be vested with any incidents of ownership as to insurance policies insuring your life and shall have no power and no authority over life insurance policies you may own on your Agent’s life.
- Your Agent is your FIDUCIARY, possessing no general or limited power of appointment.
- Your Agent shall not exercise any powers which you received from your Agent in a fiduciary capacity, and your Agent shall have no authority to exercise any powers, the exercise of which would cause any of your assets to be considered as taxable in your Agent’s estate for the purposes of the federal estate tax or the inheritance tax.
Your Agent shall have NO Power to void or modify any portion of your Financial Directive in any way whatsoever. Only the Principal may revoke or amend by written notice to all parties and only by certified mail with return receipt.
