Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client’s father has Alzheimer’s and will one day be unable to make decisions for himself, so my client will need to step in and help. Should my client be made power of attorney or some other designation like guardian or conservator? What are the differences?

Answer: While we don’t know enough about your client’s and his father’s circumstances to be able to advise on what he should do, we can provide some general advice on powers of attorney, guardianships, and conservatorships. However, for most clients it makes sense to opt for a power of attorney rather than a guardianship or conservatorship. Keep in mind that once the client becomes incapacitated, he can no longer enter into a valid power of attorney agreement.

Guardianships and conservatorships are essentially the same thing. In both situations, a court will appoint a person to act on behalf of the incapacitated person. As with any court proceeding, this can be costly, time-consuming and difficult. The court process usually involves a petition to the court, a committee of physicians, nurses or social workers, an attorney representing the incapacitated person, and a judicial hearing. Once appointed, the conservator or guardian can make decisions and manage the affairs of the incapacitated person.

On the other hand, a power of attorney is a legal document where one person (the “principal”) gives another person (the “agent”) the power to act in the principal’s name. The principal can specify the rights given to the agent, which can be narrow or broad. The agent’s rights and duties are determined based on the legal document as opposed to the judge under a conservatorship.

Both a conservatorship/guardianship and a power of attorney can have limited scopes. For example, a person could be a guardian of the estate, meaning he only can manage finances; or a guardian of the person, where he manages medical and personal decisions with no authority over the person’s assets. Similarly, powers of attorneys are generally separated into a medical POA and a financial POA.

Conservators must seek court approval for some types of transactions, such as selling real estate owned by the incapacitated person. The conservator must also post a bond which acts as insurance for mishandling the person’s finances. Both of these limitations can be avoided by entering into a power of attorney agreement.

Since POAs are easier to implement, less costly and less difficult, when would a conservatorship be the preferred action? In most circumstances, we would suggest having the parties enter into a power of attorney agreement. However, if the relationship lacks trust, the extra difficulty and cost from going through a court proceeding might make sense to ensure the person’s assets are being managed properly.

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