Imagine that you or an elderly family member has a stroke. Chances are she appointed a proxy to make health-care choices for her. But what about the money decisions that she is no longer capable of handling?
Solution: A financial power of attorney (POA) lets you name an individual to act in your name and manage your financial affairs if you can’t. Without a POA, it can be difficult for your spouse, children and/or caregivers to withdraw money from your accounts, sell your home, manage your Medicare and Social Security benefits, and pay your bills. To gain that authority, they would have to go through expensive court probate procedures to become your conservator(s).
Bottom Line Personal spoke to elder-law attorney Michael Gilfix to find out how to properly craft a financial POA…
You can prepare a POA yourself—inexpensive forms are available online—but if your finances are at all complex, it is best to work with an elder-law or estate-planning attorney familiar with your state’s requirements. Comprehensive POAs run 12 to 18 pages long and cost between $200 and $500 to prepare.
When creating a POA, you choose an “agent”—also known as an “attorney-in-fact”—to manage your assets. You decide how much authority that agent has. Your POA can become effective the moment it is signed…or take effect only after you’re declared incapacitated. Incapacity is established by a person’s physician and sometimes a second opinion. You must sign the POA, as well as witnesses and a notary public if your state requires it. While not a legal requirement, many POAs require your named agent to sign. Keep your POA with your will, advance medical directive and estate-planning documents, and make sure loved ones know where it is.
To ensure your financial POA is sound and can go into effect as soon as needed, avoid these common mistakes.
Mistake: Not creating a POA before you suffer ill health or diminished mental capacity. Waiting may result in your not being competent enough to sign a POA at all. Options…
Create a “durable” POA at the same time you draw up your will. This kind of POA gives your agent power the moment it is signed and lets him/her continue to take actions in your name if you can no longer handle your finances. Important: A durable POA does not prevent you from making decisions or conducting business while you are capable. If the agent does not respect your wishes, you can replace him.
Use a “springing” POA if you are uncomfortable sharing control of your finances. This takes effect only under certain conditions such as when you are incapacitated. Drawback: You must define what terms like “incapacitated” or “dementia” mean, and you’ll need one or two physicians to certify your condition.
Mistake: Appointing the wrong person as your agent. You should trust the person you choose implicitly—agents have ample opportunity to misappropriate your assets. What to do…
Don’t automatically select a family member to be your agent. If your spouse is elderly and has trouble making decisions or your child isn’t very good with his own money, they may not be suited to be your agent. Make sure your agent is willing to take on the responsibility. Talk with him honestly about your wishes for your financial affairs so he is comfortable making decisions for you when the time comes. A responsible person need not understand all aspects of your financial affairs but should know when to get advice from a professional.
Consider choosing someone skilled at managing other peoples’ financial affairs, especially if your finances are complex. Attorneys, accountants and professional fiduciaries are popular choices. Annual compensation for a professional fiduciary to act as your agent can range from 0.7% to 1% of the assets they oversee. The appointment is personal, which means that an individual is named, not a law or accounting firm. If that professional moves to another firm, the appointment remains effective unless otherwise specified. The named agent could retire or pass away, underscoring the need to name an alternate agent.
Don’t name more than one person as agents. That can cause conflicts in making financial decisions. But: There are circumstances when you might split responsibilities—perhaps you have a complicated investment portfolio. You could name a professional to oversee investment decisions and a family member for routine tasks such as paying bills.
Always name a successor agent in case the primary agent cannot fulfill his responsibilities. Many times, married couples name each other as the agent. Naming a successor ensures that if anything were to happen to both spouses, someone else could step in.
Mistake: Putting insufficient instructions in the POA. Agents need flexibility to handle your finances, but granting an agent “any and all powers” may be imprudent. What to do…
Spell out the specific powers you want to grant. Example: Gift-giving powers are a common issue of contention. Do you want the agent to be able to give gifts from your assets to himself? To family members? To charities you list?
Limit actions that the agent can take, perhaps not allowing sale of your house until your spouse dies or redesignating beneficiaries of insurance policies.
Establish oversight. Most states follow the Uniform Power of Attorney Act, which imposes legal safeguards in POAs to protect grantors. Examples: Agents cannot alter your will, and they have a fiduciary responsibility to act in your best interest. But you can add safeguards if you want—for instance, you can require the agent to send monthly statements of any POA transactions to family members or financial professionals.
Mistake: Not revisiting your POA. People tend to set up a POA and forget it. But if you get divorced or become estranged from a child, you may no longer want your former spouse or that child to be your agent. You can change agents or any of the POA’s terms at any time. What to do…
Revoke the old POA, and have your attorney create a new document. You cannot simply edit an existing POA. Be sure to notify your original agent about the changes in writing, and contact any third parties who have your POA on file.
Mistake: Not planning for what happens to your POA once you pass away. All POAs become invalid upon your death. At that point, the executor of your will takes over management of your estate, which must go through probate before ownership of assets can be transferred to beneficiaries. Probate can take months—creditors must be paid and assets sold or distributed. What to do to avoid probate…
Create a revocable living trust at the same time you put together your POA. You control the trust and typically name yourself as trustee. You also name a successor trustee to take over if you die or become incapacitated. It is common for your POA agent and successor trustee to be the same person, but your successor trustee is bound by the terms of the trust, which can be changed or revoked by you at any time. Note: Assets in a living trust typically include bank accounts, real estate, personal property and taxable investments—but not retirement accounts such as 401(k)s or IRAs because of the tax consequences.
Mistake: Expecting your bank to honor your POA. Many financial institutions prefer to err on the side of caution, given how common it is for elders to fall victim to fraud. What to do…
Share your POA with your banks, brokers and insurance companies. They may want you to use their own POA forms in addition to the one you have.
Introduce your agent to someone you have a relationship with at your financial institutions. That way, they won’t be dealing with a stranger.
