When most people think about making an “estate plan,” they jump straight to deciding who gets what when they die. But there’s a lot about an estate plan that comes into play when you are alive. The most important: your financial power of attorney.
Why the Financial Power of Attorney?
Every adult should have a financial power of attorney. It’s a document that names someone (an “agent” or “attorney in fact”) to handle your finances if you can’t. Such a document typically gives your agent the power to do every possible financial act for you. You also can sign powers for limited financial purposes, such as selling real estate. There’s a separate power of attorney for health care, which names an agent to make medical decisions for you if you can’t. The financial power of attorney is more important. Arizona law allows relatives and even friends to make medical decisions for you, but there is no similar law for finances. Even spouses don’t automatically get access to their spouse’s separate assets.
If you become incapacitated and have no power of attorney, loved ones may have to obtain a conservatorship. The court proceeding can be expensive and intrusive.
You Still Get to Retain Control
When you sign a power of attorney, you don’t give up your ability to control your own financial destiny. Your agent is not legally responsible for paying your bills or filing your taxes because your document names them. But your agent has the power to act for you, to do what you want, when you want.
Typically, the person who signs a power of attorney (or “principal”) gets older and at some point realizes he or she is losing the ability to track finances, and the agent under power of attorney steps in to help or take over. But a power of attorney also works if you take a long trip and want someone to pay bills while you are away, or if a young adult isn’t quite ready to go it alone. A power of attorney is generally better than joint ownership, which has risks and may result in unintended consequences.
But is it Durable?
You may have heard about “durable” powers of attorney. Will your financial power of attorney be durable?
The short answer: yes. Before changes implemented in the 1970s, powers of attorney always ended with the incapacity of the signer. Today virtually every document includes language making the power durable. The word “durable” does not have to appear on the top of the document — or anywhere in it, for that matter. Look for language that indicates that the power survives after incapacity. That’s all it takes.
How to Get One
Although you can easily find a basic power of attorney form online or at an office supply store, documents provided by an established estate planning attorney will include more provisions than the basic pre-formatted document. Most estate planning attorneys revise their documents as issues arise or laws change.
An attorneys also can customize your document to specifically suit your situation. You can specify when your agent’s powers kick in; usually it’s either at the very moment you sign or when you can no longer manage your affairs. The latter are “springing” powers because they spring into effect when needed. You can decide what triggers the power, such as a statement from one or more doctors regarding your ability to handle your finances.
A Few Possible Complications
One warning: In Arizona, financial institutions may choose not to accept a power of attorney document — even if it is perfectly drafted and signed. A bank might refuse to honor a document because it’s too old (we recommend updating them every five years), the signature or notary stamp is blurry, or just the agent looks suspicious. Financial institutions are looking out for “red flags” of elder financial abuse, such as an agent who is not a relative or a recent change of agents. A power of attorney prepared by an attorney, executed in the attorney’s office, is less likely to be questioned. If your document is questioned, your attorney’s office may be able to vouch for the document and its proper execution.
Some institutions, however, have their own forms and will not honor any power of attorney prepared elsewhere. You should check with your bank, broker, financial adviser, etc., to ensure any power of attorney you execute will be honored when it is needed.
Be aware that there are some assets that a power of attorney does not cover. Social Security and Veterans Affairs benefits require additional steps. And if you have a trust, your successor trustee will be in charge of any assets held by the trust. (It usually makes sense for your agent under power of attorney and successor trustees to be the same.)
Agents Held to High Standard
Your agent is a “fiduciary,” someone held to the highest standards of good faith, fair dealing, and loyalty. To you – and you alone. If your agent misuses or abuses the power, he or she can be subject to severe penalties.
A financial power of attorney is absolutely essential, but the document does grant the agent a lot of power. Make sure you choose someone you trust.
