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Understanding Hot Powers: What Does “Hot Powers” Mean in Estate Planning?

Understanding Hot Powers in Estate Planning | Trust & Will

A Power of Attorney (POA) is a crucial document in the estate planning process, offering a safety net for unforeseen circumstances. It allows you to designate someone - often a trusted family member or a close friend - to manage your affairs if you're unable to do so. This could be due to a temporary situation, such as hospitalization, or a more permanent one, such as a debilitating illness. By choosing a POA, you ensure that someone you trust has the agency to make decisions on your behalf, providing peace of mind for both you and your loved ones. It's a proactive step to ensure your wishes continue to be fulfilled, even when you can't advocate for them yourself.

One crucial aspect of a Power of Attorney (POA) document is the inclusion of "hot powers." These are powers that grant your representative the express authority to handle important matters, especially in urgent situations. In this guide, Trust & Will breaks down the term "hot powers" and explains their importance in estate planning.

Hot powers definition

"Hot powers" is a legal term that refers to specific permissions granted to an agent in a Power of Attorney (POA) document. These powers grant the agent the authority to make critical decisions and take actions on your behalf without seeking your consent or approval.

The term "hot powers" isn't typically used in law, but has become a commonly used term specific to estate planning. We'll go over how it was introduced in the next section. It is derived from the Latin phrase "in extremis," which translates to "at death's door." This phrase highlights the significance of hot powers in emergency situations.

If you're unfamiliar with how the Power of Attorney document works in estate planning, we highly recommend you familiarize yourself now before learning about hot powers. Read our Powers of Attorney article here.

The introduction of hot powers through the UPOAA

The concept of "hot powers" was introduced through the Uniform Power of Attorney Act (UPOAA). The UPOAA was adopted in 2006 by the Uniform Law Commission (ULC), an organization dedicated to creating and promoting the adoption of laws for clarity and uniformity across the nation. The UPOAA provides a framework for the use of POAs and is designed to protect the interests of the principal while ensuring the integrity of the agent's role.

The UPOAA outlines a list of "hot powers" that a principal must expressly grant to an agent in a POA document. These powers include the authority to create, amend, or revoke a trust, make a gift, or create or change rights of survivorship. This specific listing of hot powers provides clear guidelines to help protect the principal by making sure the agent is taking aligned action with the principal's wishes. We share the 9 types of hot powers in a following section so be sure to keep reading.

The UPOAA has been adopted in part or in full by many states in an effort to standardize the rules and regulations surrounding power of attorney documents and the responsibilities of appointed agents.

Hot powers vs. cold powers

Before we move on, it's important to address the difference between hot powers and cold powers. They have a large difference in scope and the types of situations where they're implemented.

Hot powers are those that an agent cannot exercise unless the principal expressly grants them in the POA document.

In contrast, cold powers are those that an agent can exercise without explicit permission from the principal. They are more common and less potentially impactful to the principal's estate. For example, the agent can enter into contracts, pay bills, manage bank accounts, and handle other regular financial matters on behalf of the principal.

Understanding the difference between these two types of powers is important for when you craft your POA document. Know that there are some important powers that your agent won't be able to exercise unless you expressly grant them. This is a legal design meant to protect your best interests.

The 9 types of hot powers

According to the Uniform Power of Attorney Act (UPOAA), there are nine types of hot powers that you can expressly grant to your agent. They are:

  1. Create, amend, revoke, or terminate an inter vivos trust.

  2. Make a gift, or make or revoke a disposition of property or a provision of the principal’s Will.

  3. Create or change rights of survivorship.

  4. Create or change a Beneficiary designation.

  5. Delegate authority granted under the Power of Attorney.

  6. Waive the principal's right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan.

  7. Exercise fiduciary powers that the principal has authority to delegate.

  8. Disclaim property, including a power of appointment.

  9. Access the content of electronic communications.

Would someone grant all nine types of hot powers? They might, but not necessarily. The hot powers you choose to grant in your POA document depends on your individual needs and preferences.

You may have noticed that these powers fall into two key buckets: financial and medical.

Financial hot powers typically include the authority to manage the principal's bank accounts, real estate, investments, and other financial assets. They also include the power to enter into contracts or make gifts on behalf of the principal.

On the other hand, medical hot powers grant the agent the authority to make healthcare decisions for the principal in case they become incapacitated. This may include choosing doctors, consenting to medical treatments, and making end-of-life decisions.

Each of these hot powers should be carefully considered within the context of an your overall estate planning strategy.

Should you give hot powers? Hot tips & more

Hot powers play a pivotal role in estate planning, providing a safety net for unforeseen circumstances. By incorporating hot powers into your POA document, you're empowering your agent to act on your behalf in specific scenarios if you were to become incapacitated. They allow someone you trust to make prompt, effective decisions and potentially avoid costly court proceedings such as Guardianship or Conservatorship that often become necessary when someone becomes incapacitated without a designated agent in place. This can bring you peace of mind, with a sense of confidence that your affairs will be managed according to your wishes in your absence.

With that said, should you grant hot powers to your agent? The answer largely depends on your personal circumstances. Hot powers are extraordinary, meaning that you certainly don't want them to end up in the wrong hands. The key is to appoint an agent that you thoroughly trust. Even then, you'll want to go through each of the nine hot powers and determine whether or not you want to grant these powers to another individual if you were to become incapacitated.

Here are some tips to keep in mind when selecting hot powers:

1. Evaluate Your Trust Level: Consider how much you trust the person you're granting hot powers to. They will have significant control over your affairs, so it's essential to choose someone you trust wholeheartedly.

2. Understand Each Power: Each of the nine hot powers carries different responsibilities and capabilities. Make sure you understand what each one entails before granting it to anyone.

3. Consider Professional Advice: Estate planning can be complex. Consider seeking advice from an estate planning professional who can guide you through the process and help you understand the potential implications of each hot power.

4. Think About Your Health: If you're in excellent health and young, you may not feel the need to grant certain hot powers. However, if you're older or have health issues, it feel more pressing to consider them.

5. Review Regularly: Your circumstances can change, so it's a good idea to review and update who you've granted hot powers to regularly. Life events such as marriage, divorce, birth of a child, or a significant change in financial status or health may require changes to your POA document. This is a best practice for your estate plan as a whole.

6. Consider Your Financial Situation: If your financial situation is complex, you might want to grant hot powers to a professional, like a financial advisor or attorney, rather than a family member or friend who may not necessarily understand the intricacies of your financial strategy.

7. Factor in Family Dynamics: Family relationships and dynamics can affect the execution of hot powers. Be mindful of potential conflicts that might arise due to the distribution of powers.

8. Discuss with your Agent: Should you decide to grant hot powers to your agent, be sure to have discussions with your agent in advance. Make sure that they understand your preferences since they're the one who will be responsible for making important decisions on your behalf.

Set up your powered-up estate plan today

Hot powers are a powerful tool that can be implemented in your Power of Attorney documents and estate planning. They provide protection and ensure that important decisions can be made in your best interest. Know that hot powers are decisions that cannot be made on your behalf unless you specifically and expressly grant them to your agent. That's why it's so important to understand the 9 key hot powers and grant the ones you wish your agent to have in the event that you were to become incapacitated.

It's also important to regularly review and update your estate planning documents. As life changes, the hot powers and other provisions included in your estate planning documents will also need to change and adapt. This is a best practice that will ensure that your estate plan meets its full potential in terms of protecting you and your loved ones at all times.

Wondering if there's an easy system to review and update your estate plan? Trust & Will has your back! Our online platform makes it easy to not only put your estate plan in place, but to store it securely and make changes as needed. Even better, it's affordable! Find out more about how to create an estate plan, including a Power of Attorney document with hot powers, here.

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