Here’s How to Protect Your Assets While You’re Alive

Many people spend lots of time carefully crafting their wills so that their assets will be distributed properly when they die.

But they often pay too little attention, or no attention at all, to a document that could be vitally important while they are still alive.

And then a terrible thing happens to them—they become incapacitated…chaos ensues…and their assets are squandered.

Fortunately, the document—a financial power of attorney—can stop such a sad scenario from ever occurring. It would dictate how your assets are to be handled if you become unable to manage your own affairs.

If well-written, it can help safeguard your assets while you are still alive and in need of the assets but unable to make sensible decisions. It can play as vital a role as the health-care power of attorney, which dictates who would make health-care choices for you.

Without a financial power of attorney in place, there might not be anyone poised to take over your financial affairs if you become unable to do so yourself, particularly if you are not married. (And if you are married, your spouse will not have control over assets held in your name unless your power of attorney puts your spouse in charge.)

Eventually your family might petition a court to appoint a guardian to look after your financial affairs. But the process of appointing this guardian can be lengthy and expensive, possibly costing tens of thousands of dollars, and the court might select someone you do not want.

Generally, a court-appointed guardian receives some compensation for his/her time. And the court proceedings are part of the public record, which means that private details about your health or mental status could become widely known.

Another trap: People who do have financial powers of attorney often don’t realize that the documents are poorly written—so the documents won’t provide the intended safeguards.

Here’s how to make sure the financial power of attorney that you create or that you already have created avoids major problems…

Problem: Your power of attorney does not take effect until it is needed. In many states, you have the option to create a “springing” power of attorney that goes into effect only if and when you become incapacitated. That sounds like a great idea—why grant someone power over your finances sooner than is absolutely necessary?

Trouble is, a springing power of attorney can lead to delays and headaches for your financial agent—the person you designate to take charge of your finances. That’s because strict health privacy laws make it difficult for your doctor to be able to sign a document stating that you have become ­incapacitated.

What to do: Consider having an “immediate” power of attorney, which goes into effect as soon as you sign it, rather than one that goes into effect when you are officially declared to be “disabled” or “incapacitated.”

Important: Monitor your financial accounts after your power of attorney takes effect to make sure that your agent does not take advantage of his access to them. If you cannot monitor your own accounts closely, or fear that you might not be able to in the future, ask a CPA or trusted friend or family member to monitor your ­accounts.

Problem: You empower your financial agent to make gifts. Many financial powers of attorney include a “gift ­provision” that lets your designated agent make gifts from your savings on your behalf. Unfortunately, this creates a greater risk that your agent could steal your assets by making excessive gifts to himself or to his friends and family.

In years past, it made sense for many people to include a gift provision despite the risk. That’s because by allowing the agent to make gifts to your family members on your behalf, you could reduce the size of your estate before you pass away, lowering your estate tax bill. But the amount that is excluded from federal estate tax has been increased to $5.34 million or more, depending on the year of death. That means the vast majority of people would never have to pay federal estate tax (although they might be subject to a state estate tax).

What to do: Make sure that your power of attorney does not grant your agent unlimited power to make gifts. If your estate is large enough that federal estate tax is a concern, tell an estate-planning attorney that you would like to discuss safer options to reduce that tax, such as authorizing your agent to make gifts only to recipients of your choosing and only up to the amounts that help reduce estate taxes.

Problem: You choose your agent based on age. It is vital for your agent to have—in order of importance—unimpeachable integrity…solid common sense…and at least a modest amount of financial knowledge. But what tends to happen is that people simply name their oldest adult son or daughter regardless of whether that person is the most qualified. That’s probably because the oldest child acted most responsibly when your kids were still kids.

What to do: Name whichever family member best meets the three requirements of the position listed above—even at the risk of offending your oldest child or other family members. If none of your close family members fits the bill, consider naming a close friend. You should also designate a successor agent, especially if your primary agent is as old as you or older. You can change your agent any time you wish, as long as you are not yet incapacitated.

Problem: You do not give your agent any instructions. Think about how challenging it can be to manage your own financial affairs. Now imagine what your agent will face if he has to keep your financial house in order without any help from you. He might have to guess your financial goals and priorities. He might have to dig through your files just to figure out which financial institutions you work with.

What to do: Sit down with your agent, and explain what, specifically, you would like him to do if you are incapacitated. It’s best not to include these specific instructions in the power-of-attorney document itself, because you then would have to go to a lawyer to have the document amended each time something about your finances related to your instructions changes.

Also create a list of your financial accounts, recurring bills, passwords and log-in information, and let your agent know where he can find this. Or use a bill-paying and financial-management software program such as Quicken, then provide your agent with the passwords needed to access your computer and this program. This not only gives your agent a listing of your accounts and bills, it also allows him to go back to prior months to see how you handled your financial affairs in the past, providing a template for how you would want them handled in the future.

What If There’s No One You Trust?

People need to designate a financial agent even if there is no relative or close friend they trust enough to take charge of their ­finances. Surprisingly, some choose a person who has chronic money problems or a history of unethical behavior. This can be a big mistake.

What to do: If you know no one who is suitable (and willing) to be your financial agent under a financial power-of-attorney document, tell your estate-planning attorney that you would like to discuss setting up a revocable living trust as your primary financial document. With this sort of trust, you can name a financial institution as trustee, so a financial pro—not someone who lacks financial expertise and/or is not trustworthy—will take charge of your finances if needed.

Yes, it’s true that this could increase your costs, but it might be worth it to ensure that your finances will be in good hands. A bank might charge 1% per year of the value of your assets to manage those assets and serve as trustee. A financial power of attorney still could be used for relatively ­minor financial matters, such as paying small bills.

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