5 Practical Tips For Implementing A Financial Power Of Attorney

financial power of attorney
Last Updated On May 1, 2024

A Power of Attorney document is one of the most powerful estate planning documents, as it can dramatically impact your life while you are alive. Once it is complete, it is normally filed or put in a safe and not looked at again until a crisis develops. Unfortunately, that may not be the wisest approach.

This post covers what a Power of Attorney document is, the different types, why it is important, and the practical steps you should consider taking when it is complete.

Disclaimer: I am not an attorney and am not providing legal advice in this post. Laws vary by state, so consulting with your attorney is advisable before taking any action based on the content discussed.

What is a Power of Attorney (POA)?

A Power of Attorney (POA) empowers another individual (an agent) to act on behalf of the principal (you) in the event of incapacity. Incapacity can range from mental incompetence to physical disability or temporary unavailability due to an accident. If you live long enough, at some point you will probably be incapacitated.

Having a Power of Attorney is an important part of your estate plan, and also a crucial part of our stewardship responsibility.

There are two main types of POA’s:

Healthcare – provides authority for someone to make healthcare decisions on your behalf when you are incapacitated

Financial – authorizes someone to make financial decisions on your behalf, and is the focus of this post.

There are a few important points to note about POA’s:

  • your agent should be trustworthy
  • the agent has a fiduciary responsibility to look after your interests and not their own
  • signing a POA before you are incapacitated is ideal
  • your agent’s authority ends at death

Types of Financial POA

Understanding the two main types of financial POA is crucial:

Springing – this type of POA kicks into action only after a specific event, like incapacitation occurs. Your agent can only act on your behalf once you become incapacitated. Usually a physician (or two) needs to confirm your incapacity for it to become active.

Durable – with this type of POA, your agent gains authority as soon as you sign and can act on your behalf right away. Even if you become incapacitated later, it remains in effect.

One downside of the durable POA is that your agent could potentially act in ways you don’t agree with while you’re still capable. However, since you’re likely choosing a trusted agent, this risk seems lower (and can help you understand how they would act if you were incapacitated).

Depending on your situation, it’s important to speak with a local attorney to determine the most appropriate option.

Why is a POA Important?

A POA is the only legal way to empower someone else to handle financial matters while you are alive. Without a POA, if you become unable to make decisions, your family or friends would have to go to court to decide who gets the authority. Ultimately, a POA ensures your wishes and needs are met, while also allowing your loved ones to help you.

5 Practical POA Tips

Below are five practical observations about durable POA’s that I have gathered over time:

1. Be Prepared

Most people tend to only think about their POA after something bad happens, like an accident or illness. But that’s not the best time, as you’re already dealing with a lot of stress. It’s important to review your POA every few years. If any of your agents or successor agents have passed away or can’t serve anymore, you’ll have time to update the document before an emergency. It’s also a good idea to give each POA a copy of the document and let them know how to access your house and legal papers. Having a binder with all your estate planning documents and a list of your accounts can save time and help in an emergency.

2. Add POA’s to Accounts

If you have a durable POA, you can add your POA to each of your financial accounts. You still usually have control over the account (however that depends on the policy of the financial institution), but your POA can step in if needed without delay. Adding a POA can take a few days, so it’s a good idea to do it early.Depending on how many accounts you have, this can be a time-consuming process.

If you don’t add the POA before you’re unable to make decisions, your POA may need additional documentation as financial institutions are very cautious about granting access to your account when you aren’t the one requesting it.

It’s important to find a middle ground between convenience (letting others help you when needed) and protecting your finances (avoiding your POA making decisions while you’re still in good health). This balance varies for each individual and circumstance. In my experience, as people grow older, they often delay adding their POA to their accounts. When a medical crisis occurs, families are often caught off guard and unprepared. It’s wise to carefully consider when and how to add your POA to your accounts.

3. Different Treatment for POA’s

Each financial institution handles POA’s differently, there is no industry standard. Some require the actual POA document, while others might have a form you can use. Some will provide the POA online access of accounts, while others won’t. It is important to check with each financial institution to see how they handle POA’s.

4. Choosing A POA

Selecting a POA is very difficult. They should be someone you trust completely, but it can be hard to think of more than one person. Here are a few thoughts:

  • If married, having someone besides your spouse can be helpful. As you travel and live together, you could both be incapacitated at the same time due to an accident or illness.
  • Try to find at least one POA who is younger than you (ideally in the generation behind you). Often POA’s are around the same age as the principal, and that can create problems as they age together.
  • Finding an agent who is detail oriented is helpful.

5. Co-agent vs Successor Agent

The traditional way to write a POA was to have a primary POA and a successor POA. The successor is only able to act when the primary dies, becomes incapacitated or resigns. On the surface this sounds good, but in practice it can create complications. For example, imagine a husband appoints his wife as primary POA and their son as successor. If the husband were to be incapacitated while his wife is slipping into dementia, the son can’t step in and act unless his Mom resigns as POA. They would either need to convince Mom she no longer retains the ability to serve as POA, and she resigns or have a doctor (or two) declare her mentally incompetent (sadly this is becoming more of a common issue). If an emergency type situation were to arise, it could result in poor decisions.

The other option is to create co-agents, which allows both to serve at the same time. Using the example above, the husband appoints his wife and son as co-agents and allows either to act on his behalf at any time. In that case, when the husband becomes incapacitated and his wife develops dementia, their son can act on his behalf (without his Mom doing anything). You will definitely want to check with an attorney in your state to determine if this is appropriate. The main disadvantage of this approach is that both the wife and son can act at any point, even if the father isn’t incapacitated. However, whomever you are adding as POA is someone you trust, so the risk is small.

Final Thought

Creating a financial POA involves more than just putting your signature on paper at a lawyer’s office. It’s about considering the long-term impact and making it easy for the POA to step in for you. Being prepared beforehand can prevent a lot of complications when the POA needs to take action.

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