Creation of a power of attorney allows you or your aging loved one to appoint an agent to act on his or her behalf should they become incapacitated and unable to make financial decisions on their own. Appointing a power of attorney provides your loved one with the assurance that someone they trust will be making financial decisions in their best interest. If a power of attorney is not appointed prior to incapacitation, the family likely would be forced to undergo expensive and time-consuming measures to court-appoint a guardian or conservator to handle their financial or medical decisions. Financial power of attorney is explained below.
What is a Financial Power of Attorney?
A financial power of attorney is a document in which the principal (you or your loved one) appoints an agent to act under specified circumstances. The principal can decide what they will allow their agent or representative to decide for them, and should plan for a broad range of responsibilities to fit their future needs. For example, many people allow their agent to conduct the following:
- handle everyday expenses and investments;
- file and pay taxes;
- maintain or sell property;
- collect government benefits;
- maintain, buy, or sell insurance policies;
- maintain a small business;
- create or maintain a trust;
- hire an attorney; and
- manage retirement accounts.
The agent has a duty to act in the best interest of the principal, not commingle their property with yours, avoid any conflicts of interest, and retain accurate records.
Types of Power of Attorney
A financial power of attorney can take effect immediately when the form is signed, or it can be drafted so that it only begins upon the occurrence of a specific event, i.e., incapacitation. Many spouses maintain ongoing, active power of attorney designations in the event something unexpected happens to one spouse. It is the principal’s decision when a power of attorney begins and ends.
Conventional Power of Attorney: Effective when signed by the principal and ends when the agent becomes incapacitated themselves.
Springing Power of Attorney: Effective only when a specified event occurs, i.e. the principal’s incapacitation. This type allows the principal to stay in control of their affairs until the event. A springing power of attorney can create a whole host of problems for the agent if the form is not drafted to explain exactly when the specified event is deemed to have occurred, and the power of attorney then “springs” into action.
Durable Power of Attorney: Effective when signed by the principal, and remains in effect throughout the principal’s life, unless they revoke it. A durable power of attorney is often the best choice, because it remains in effect even after the principal recovers from incapacitation. There is also no ambiguity as to when this type of power of attorney takes effect. The principal can remain in control of their finances even after signing, until they can no longer make sound decisions.
Termination of a Power of Attorney
A durable power of attorney terminates at the principal’s death. As a result, you cannot give your agent power to handle your estate – naming the executor of your estate is a separate process entirely. Power of attorney can also terminate if revoked by the principal (so long as they are of sound mind), divorce (if you designated your spouse as your agent), invalidation by court order, or your agent is unavailable.
Creation of a power of attorney does not require the consultation of an attorney. However, it is certainly recommended, particularly if your finances are rather complex or extensive. Power of attorney forms and instructions can be found online through a diligent search. You should only appoint someone you trust and know will act in your best interests as your agent when they assume the responsibility of your power of attorney.
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