If you are unable to make financial decisions in the future, who is going to make them on your behalf?
In many families in the United States, there is one main person who takes care of financial affairs. If something happens to that person, it can put the whole family in difficulty if nobody else has the authority or the ability to make financial decisions.
That is why a financial power of attorney (POA) is a critical part of your estate planning.
A financial POA is a legal document that allows you (the “principal”) to provide another person with the authority to act on your behalf in financial matters.
The person you select for this is referred to as the “attorney-in-fact”, the “agent” or “representative”, depending on your state.
A financial power of attorney should not be confused with medical power of attorney, which grants authority for a nominated person to make decisions about health care on your behalf.
While the two agreements serve a similar purpose (allowing decision-making for a trusted individual in the event of incapacity), two separate documents must be created in some states.
The same person may be nominated for both responsibilities – financial and medical. However, the completed power of attorney documents may need to be shared with multiple other parties, which is the main reason why two separate documents are required.
For instance, a bank might require a financial power of attorney to authorize access to the principal’s accounts but would not require the private and sensitive information contained in a medical power of attorney. For a doctor or a hospital, the reverse might be true.
You may hear the term “durable power of attorney for finances”. This simply means that the agreement continues after the principal becomes incapacitated, in contrast to traditional powers of attorney, which used to end when the principal was incapacitated.
Who should you choose as your financial POA?
Only you can choose your attorney-in-fact and it is not a decision to be taken lightly.
The nominated person will have access to all your financial affairs if you are incapacitated and has a big responsibility to manage these affairs in your best interests.
Cases of mismanaged or misappropriated funds are not unknown so you should make your choice with the greatest of care.
Your attorney-in-fact should be:
Capable of making important financial decisions
Familiar with your affairs
Willing and able to act in your best interests
Before making a final decision, make sure that your preferred choice is able to accept the responsibility.
You may also nominate a back-up or “successor” agent in case the primary agent is unable or unwilling to carry out his or her duties in the future.
There are no restrictions on who can act as your attorney-in-fact, providing he or she is at least 18 years old and legally competent to make decisions on your behalf.
Generally, people choose a loved one, such as a spouse or child but if this is not possible, a professional such as a banker or attorney can be named.
What can a financial POA do and not do?
A financial power of attorney should provide the legal authority for your agent to make finance-related decisions on your behalf.
This includes decisions about:
Bank accounts and savings
Property and real estate
Gifting and trust creation
The attorney-in-fact can also sign checks, file tax returns, deposit Social Security checks, and manage investment accounts on your behalf.
How broad these powers are is your choice. You can limit authority for certain aspects of your affairs but it is advisable to make plans for managing all of your financial affairs, one way or another, in case you become incapacitated.
Unlike a living trust, a power of attorney does not specify in detail how your affairs are to be handled – it simply provides decision-making authority.
What will happen if I don’t have a financial POA?
Without a financial power of attorney, your loved ones may need to apply for conservatorship through the probate court before important financial decisions can be made legally on your behalf.
This can create confusion, worry, and disputes within families.
Often, spouses, parents, children, and siblings are not across their relatives’ financial affairs and are not in a position to make decisions in the best interest of an incapacitated loved one.
It is essential to discuss your financial affairs with loved ones as early as possible in life, even though it can be awkward to talk about a time when you are no longer able to make financial decisions yourself.
Creating a financial power of attorney is a way to prepare for the worst so that a trusted and competent person can manage your affairs if you are unable to.
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