What powers are so incredibly dangerous that they were deliberately omitted from a state-wide form? “Hot powers”, of course.
When Texas developed a new statutory form for the durable power of attorney, it left out an entire section of powers that could be delegated to an agent. These are commonly known as the “hot powers.”
Hot powers were born in 2017 when Texas made its much-ballyhooed change to the durable power of attorney statutes. Texans are still coming to grip with the best way to use them.
What Are Hot Powers?
Hot powers cover gifting, beneficiary designations, rights of survivorship, delegation of authority and living trusts. They are considered dangerous precisely because they are so sweeping. An agent who misuses a hot power could wreak havoc on your financial stability and estate plans.
For that reason, hot powers are addressed separately in the statute. If you are using the basic statutory form, then you have to add each hot power individually and initial next to it. You also have to get past a paragraph that states “CAUTION: Granting any of the following will give your agent the authority to take actions that could significantly reduce your property or change how your property is distributed at your death.”
What Do Hot Powers Include?
The basic description of each hot power is simple. It would be easy for you or your agent to be fooled about the scope of the power given.
For example, one hot power is described as “Create or change a beneficiary designation.” Of course, you think, that power goes hand in hand with the general powers to handle insurance contracts and retirement benefits. Why is the hot power to change beneficiaries such a big deal?
Because a hot power gives an agent even more authority regarding beneficiaries. An agent using a hot power could unilaterally name himself as a beneficiary, remove a beneficiary from a tax-advantaged plan to a less favorable investment, or re-configure how a non-probate asset will be distributed.
That gives your agent ample opportunity to create mischief, intentionally or unintentionally.
Another hot power is described as “Create, amend, revoke or terminate an inter vivos trust on behalf of the principal.” An inter vivos trust is one that is created and effective during the lifetime of the principal. This power represents a huge change in Texas law, which previously held that an agent could not create a trust for the principal.
The other hot powers have their risks, too. Under the power to create a right of survivorship, an agent could change an account from a probate to a non-probate asset. The power to make gifts could be deemed a general power of appointment, which leads to all sorts of adverse tax ramifications. The power to delegate authority could mean that someone you do not like could end up acting as your agent.
There is one statutory override on the hot powers – they all impose a duty on your agent to preserve your estate plan.
When are Hot Powers Useful?
With all of that danger, why would you ever want to use a hot power? Because sometimes they are necessary to give your agent flexibility to protect your interests in the event of a change in the law or a change in your circumstances or those of your beneficiaries and other agents.
And a hot power can be drafted with additional language that puts safeguards in place. You just need to work with your attorney to make sure your concerns are addressed in the document.
Virginia Hammerle is an attorney with Hammerle Finley Law Firm whose practice includes probate law, estate planning and contested litigation. To receive her newsletter contact her at firstname.lastname@example.org.