It’s seven in the morning after the worst night of your life. You’re in the hospital; still wearing the clothes from last night. You had arrived at your father’s house for dinner to find him unresponsive on the floor. Doctors think he had a seizure. They have done everything they can, but they don’t know when he will wake up. After seeing him settled in the hospital room, you head home for a shower and change of clothes.
As you drive, you’re creating a list. A list of all the things you’ll need to handle now that your father is debilitated – his mortgage, credit card bills, car payments – the list goes on. Taxes are due next month, has he filed already? And you realize you have no idea where to start. You go to his house and start reaching out to the companies you see on bills laying around. To each you explain the situation, trying to obtain the information you need to help out. They all have the same question, are you his power of attorney? “No,” you respond, “he never created one.” They apologize and explain, without that or a court order, they are unable to help.
No one thinks this will happen to them. Your parents are healthy, they are a long way away from needing a power of attorney. Your spouse will be around, he or she can manage things without you. Your daughter is only 18, of course you will still be able to manage her affairs if needed. In reality, without a proper financial power of attorney, you just turned the worst moment of your family’s life into a nightmare.
As an estate planning attorney, I cannot overemphasize the importance of having a financial power of attorney. If a person over the age of eighteen is unable to make decisions about finances and has not planned for someone to make such decisions, the probate court must appoint a conservator to administer the person’s assets. While the appointed conservator will most likely be a family member, the conservator must report to the court on a regular basis, the court must authorize most expenditures, the conservator must post bond equal to the value of the incompetent’s assets, the investment options for the incompetent’s assets are very limited and the conservatorship will likely incur attorney’s fees. A financial power of attorney helps to avoid court involvement and is designed to make the most difficult time of your life, your incapacity, go as smoothly as possible. Below are some questions I often get from clients when talking about financial power of attorney documents.
What is a financial power of attorney and what all does it cover?
A financial power of attorney, also called durable power of attorney for finance, is a document in which you name another person, often called “agent” or “attorney in fact,” to make legal financial decisions for you. Your agent will also be able to take action on your behalf in accordance with the document (like paying bills, opening accounts and making financial transactions on your behalf). A financial power of attorney can be “general” or “limited.” Meaning, it could apply to all your affairs, or be limited and apply only to particular assets or accounts you own. So, for example, if you own a business, you might execute a limited financial power of attorney for your business affairs naming your business partner as limited agent and a general financial power of attorney naming your spouse to handle everything else.
While some power of attorney documents include both health care and financial powers for the person you name as agent, they typically are separate documents. If you have an existing power of attorney document and are not sure if it has the necessary powers, it is important you, or a legal professional, review those documents to determine their authority.
If I have a revocable living trust, do I need a financial power of attorney?
Yes, because there are several matters which fall outside of your trustee’s powers. Your trustee only has control over those assets that are in the trust at the time he or she is serving. Matters such as signing individual tax returns, dealing with social security and managing retirement accounts are not managed by the trustee. A financial power of attorney may act on your behalf where the trustee’s ability to do so falls short.
When is a financial power of attorney valid?
In most states, you will have the option of allowing your financial power of attorney to be effective immediately or upon incapacity. If a document is effective immediately, it means from the minute the document is signed the person you named as agent may act on your behalf. If the document is effective upon your incapacity, the person you named may only act when you are deemed incompetent. A determination of incapacity is usually made in writing by one or more licensed physicians. There are advantages to both options and the attorney you are working with to draft your documents will be able to help you determine what is appropriate for you.
A durable power of attorney means this arrangement will generally continue either 1) until your death, unless it is formally revoked, or 2) it remains in effect when you become incapacitated or are no longer able to make financial decisions on your own behalf.
No matter whether you choose for your financial power of attorney to be effective immediately or upon your incapacity, the authority granted to your agent terminates on or shortly following your death. Accordingly, it is incredibly important you have other estate planning documents, like a revocable living trust or a will, in place as well.
If I create a general financial power of attorney, does that mean my agent may do whatever they wish with my assets?
No, because the relationship between the principal, you, and the agent, is a fiduciary relationship. It is one of the highest standards of care under the law and a legal obligation for your agent to act in your best interest. Some clients desire to reduce the risk of a rogue agent by cutting back on the authority the document can give the agent but, I generally recommend against this. Giving a broad grant of powers is typically a good thing. We can’t predict the future but we do know we don’t want your agent’s hands tied behind his or her back when it is time for them to serve. Being general helps with that and you can feel better knowing those powers may only be used by your agent in your best interest. What this stresses is the importance of naming someone you trust as your agent.
Who should I name as my financial power of attorney?
This is often where clients get stuck because there are many options. As long as the person you name is legally competent themselves, you can name almost anyone. I meet with clients all the time who know exactly how they would like their children to receive an inheritance but haven’t considered who would handle their affairs in the event they were incapacitated. It is important to not fall into the trap of paralysis by analysis. Consider, it is unlikely anyone out there will make the exact same decisions you would. When deciding who you would like as your agent, you are naming the next best option to you making your own decisions. Even if you can’t think of someone who would do exactly what you would do, would you rather you be the one who decides your agent or do you want the probate court to assign a conservator they deem appropriate?
Your agent needs to be someone you trust. Your agent may be a spouse, partner, good friend, family member, or a bank or trust company. When thinking who you want to appoint, consider the following questions: Is this person responsible? Is he or she reliable? Is he or she good at managing his or her own affairs? Does he or she live near you? Would you trust this person with your social security number or to manage your investments? If it is necessary to sell property to provide for your care, do you think he or she would make wise decisions?
I encourage my clients to name multiple levels of individuals. If the first person you chose is unable to serve, you need to have a backup. Many assume their spouse will be able to act. But what if your spouse is incapacitated at the same time? Maybe the accident that caused your incapacity was on your way back from date night and your spouse was in the car with you. You are back to square one. Like a basketball team having a deep bench to be able to replace starters when they are tired, having backups to the person you name as agent will help make sure you always have someone named who can help you out.
Will I need to update my financial power of attorney?
Yes, you can expect to have to update your document periodically. Creative Planning’s recommendation is for you to review/update your estate planning documents every 10 years, including your financial power of attorney. We have a few reasons for this.
First, there will be updates in law that are impossible to anticipate. Generally, a financial power of attorney will be effective from the time of execution until the person who created it passes away or revokes it. There is no way to include in a document from 2019 everything that will be necessary in 2050. Regularly updating your financial power of attorney will help to catch any updates to law.
Second, it is unlikely the people you choose today to make decisions for you will be the same people in 30 years. Maybe your parents or siblings are a great choice now but, in 30 years your children will be. Executing a new document will help you to reevaluate the individuals you chose to act on your behalf.
Finally, it is important to consider how this document will be used. Your agent will need to present this document to act on your behalf. If he or she shows up at your bank with an older document, the bank might have concerns about the validity of the document. Is it the most recent version? Or, has the document been updated and this person is trying to steal from your account? The concern isn’t about the document’s legal validity but, rather, the bank’s exposure to liability if they honor it and it is not the current version. Here, too, a new document can reduce the chance of making it more difficult for your agent to act on your behalf. For almost everyone, the answer to the question “Do I need a financial power of attorney,” is “yes.” A financial power of attorney must be established while you still have your mental faculties. You cannot create a financial power of attorney once you become incapacitated and waiting till you need it means you are already too late.
Mary Tunakan, J.D.
This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.