Power of Attorney for Finances: A Beginner's Guide

Quick summary

A power of attorney for finances is a document that appoints a person -- or sometimes an institution such as a bank or trust company -- to handle your parent's financial affairs. A power of attorney for finances can be used to make life easier for your parent even though he still makes decisions and handles some financial matters himself. Or it can be used to handle all his financial matters when he's incapable of doing so himself. For information about how to set up a power of attorney for finances, see Power of Attorney for Finances: A Step-by-Step Guide.

First, however, it's a good idea for you and your parent to familiarize yourselves with the basics concerning how a power of attorney for finances works:

Why would my parent need a power of attorney?

A power of attorney for finances can be used to ease your parent's burden of handling financial affairs. The document can allow the appointed person -- called an "agent" or "attorney-in-fact" -- to handle everyday financial matters such as rent, insurance, and doctors' bills, as well as major matters such as sale of assets or the management of a business, property, or investments. Your parent can also limit the power of attorney, keeping major decisions for himself as long as he is mentally competent.

A power of attorney can also serve to protect your parent if and when he becomes incapacitated. If your parent doesn't have a power of attorney and he becomes unable to handle his financial affairs -- because of an illness, dementia, or stroke, for example -- a court might need to appoint? someone (known as a guardian or conservator) to act for him. Such court proceedings are expensive and time-consuming, and your parent might not wind up with the person he would want to act on his behalf. A properly executed durable power of attorney avoids all this.

Is a power of attorney always necessary?

Under a few circumstances, your parent may not need a power of attorney. For example, if all your parent's assets and income are also in his spouse's name -- as in the case of a joint bank account, a deed, or a joint brokerage account -- a power of attorney might not be necessary.

Your parent might also have a living trust that appoints a trusted person (such as an adult child, other relative, or family friend) to act as trustee, and in which he has placed all his assets and income. (Unlike a power of attorney, a revocable living trust avoids probate if your parent dies.)

But even if he has joint accounts and property titles, or a living trust, a durable power of attorney is still a good idea. That's because there may be assets or income that were left out of the joint accounts or trust, or that came to him later. A power of attorney can provide for the agent -- who can be the same person as the living trust's trustee -- to handle these matters whenever they arise.

Are there different types of power of attorney?

There are several types of power of attorney for finances:

• General power of attorney. This document gives the agent authority in all situations (except for those specifically excluded in the document), including handling bank and investment transactions, accessing safe deposit boxes, buying and selling property, entering into contracts, filing tax returns, and managing government benefits. In some states, a general power of attorney could include creating or amending trusts during your parent's lifetime, or transferring assets into trusts. A general power of attorney lasts until a date specified in the document or, if there is no stated ending date, until the principal -- your parent -- dies or revokes the document. A general power of attorney also ends when your parent becomes incapacitated unless the document is also designated as "durable" (see below). A general power of attorney does not, however, mean that your parent gives up authority over his own affairs. As long as he is mentally competent, he keeps authority over all his own financial decisions, with the agent acting only as an "assistant" financial manager.
• Specific power of attorney. This document gives an agent authority only in specific situations named in the document, such as operating a business, making gifts or donations, collecting debts, or closing the sale of a home and distributing the proceeds. The specific power of attorney remains in effect until a particular date stated in the document, until the named transactions are completed, or until the principal becomes incapacitated, dies, or revokes the document.
• Durable power of attorney. This is the type of power of attorney that remains in effect and permits the designated agent to take care of all your parent's financial affairs if and when your parent becomes incapacitated, either temporarily or permanently. If your parent doesn't specifically designate a power of attorney as "durable," it will automatically end if your parent becomes incapacitated.
• Springing power of attorney. This type of power of attorney only becomes effective at a future time or with a future event, such as when your parent travels outside the country or becomes incapacitated. It used to be common for durable powers of attorney to be written as "springing" into effect only if and when a doctor -- or more than one doctor -- certified that the principal had become mentally incapacitated. However, the process of getting a doctor to certify that someone is incapacitated has become difficult, even when the incapacity is obvious. Also, "mentally incapacitated" is medically and legally vague, so doctors are sometimes reluctant to make that determination. It can even be difficult to get hold of your parent's medical records or to have his doctor discuss his condition. For all these reasons, it's not usually recommended that a durable power of attorney be springing.

How does my parent set up a power of attorney?

It's not essential for a lawyer to draw up a power of attorney for finances, but it's definitely a good idea. That's because there may be several legal aspects to the decision about how best to set it up. Also, having a lawyer represent your parent and create the document provides protection for the agent against charges of undue influence or elder financial abuse, or accusations that your parent wasn't legally competent when he executed the document.

Your parent should also check about power of attorney with any financial institution he does business with. That's because some institutions have their own power of attorney forms and require the principal -- your parent -- to sign those specific forms.

Who should be my parent's agent?

Obviously, your parent should select only someone he trusts to have power of attorney over his financial affairs. But there are other things to consider besides trustworthiness:

• A power-of-attorney agent should have a level of financial capability to meet the needs of your parent's financial affairs; the more complicated your parent's finances, the more financially sophisticated the agent should be. If the agent can't handle things and has to go out and hire lawyers and managers, the money to pay for them would come out of your parent's assets.
• It may help if the agent is geographically close to your parent and his property or business assets.
• Your parent should choose someone who can give sufficient time and energy to these financial duties, and who is likely to keep up the responsibilities over time. (Even so, it is important to name an alternate or successor agent in the document, to address the problem of a principal agent who eventually becomes unable to do the job.)
• If your parent executes a general power of attorney to become effective while he is still competent, he should not choose someone who is likely to try to take over more responsibility than your parent is ready to give up.

Does a power-of-attorney agent get paid?

Your parent decides whether the agent is to be paid. If the job is simple and is handled by a close family member, payment is not usually made, although your parent could choose to do so. If the job is likely to be complicated and time-consuming, or is to be handled by someone who is not a close relative, then the agent should be paid on an hourly basis. In either case, the agent may reimburse himself for reasonable expenses.

Is a power-of-attorney agent personally liable for my parent's financial losses?

Some people may be reluctant to take on the job of power-of-attorney agent because they fear legal liability -- meaning personal responsibility -- if their financial dealings for they result in losses. The general legal rule, though, is that an agent is not personally responsible for financial losses unless he committed theft or other fraud, neglected normal duties (repeatedly failed to pay rent on time, for example), or made a "reckless" decision that resulted in a substantial loss (legally, "reckless" means an intentional disregard of obvious high risk, not just poor judgment).

What does it take to make a power of attorney valid?

Your parent must be mentally competent when he signs the power of attorney. The process of having witnesses sign the document helps to ensure that it is authentic and that your parent is competent. Also, your parent's signature needs to be notarized, which also adds credibility. And if your parent has a lawyer prepare or review the documents, the lawyer's contact with your parent will also back up your parent's competence at the time.

A power of attorney is valid in all states. The law of the state in which your parent resides at the time he signs a power of attorney will govern the powers and actions of the agent under that document. However, if your parent regularly has financial affairs in another state -- he owns property there, or has a business interest -- it's not a bad idea to have a separate power of attorney prepared with the specific legal form used in that state.

Can my parent change a power of attorney?

As long as he is mentally competent, your parent can revoke a power of attorney at any time. Or he can maintain the power of attorney but change the agent. Your parent should periodically revisit the document to determine whether it still meets his needs. If he wants to make a change, he should execute a new document rather than trying to make amendments on the old one.