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 someone's financial affairs. A power of attorney for finances can also be used to make life easier for your parents, for example, or loved ones even though they still make decisions and handle some financial matters themselves. Or it can be used to handle all their financial matters when they're incapable of doing so themselves. 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 the person in your care to familiarize yourselves with the basics concerning how a power of attorney for finances works.
Why Would Someone Need a Power of Attorney?
A power of attorney for finances can be used to ease the 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. Many people also choose to limit the power of attorney, keeping major decisions for themselves as long as they're mentally competent.
A power of attorney can also serve to protect older adults if and when they become incapacitated. If someone doesn't have a power of attorney and becomes unable to handle financial affairs -- because of an illness, dementia, or stroke, for example -- a court might need to appoint an individual (known as a guardian or conservator) to act on the person's behalf. Such court proceedings are expensive and time-consuming, and the person in your care might not wind up with someone 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, a power of attorney isn't necessary. For example, if all of a person'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.
Many people 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 they have placed all their assets and income. (Unlike a power of attorney, a revocable living trust avoids probate if the person dies.)
But even if spouses have 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 one of the spouses 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.
Power of Attorney Types
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 the senior'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 -- the person -- dies or revokes the document. A general power of attorney also ends when the person becomes incapacitated, unless the document is also designated as "durable" (see below). A general power of attorney does not, however, mean that the person 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 the person's financial affairs if and when he becomes incapacitated, either temporarily or permanently. If the person doesn't specifically designate a power of attorney as "durable," it will automatically end if he 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 the person 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 someone's medical records or to have a doctor discuss his condition. For all these reasons, it's not usually recommended that a durable power of attorney be springing.
How to Establish 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 the person or couple and create the document provides protection for the agent against charges of undue influence or elder financial abuse, or accusations that the individuals weren't legally competent when they executed the document.
It's also a good idea to check about power of attorney with any financial institution they do business with. That's because some institutions have their own power of attorney forms and require the principal -- the person you're concerned about -- to sign those specific forms.
Who Should Be Chosen as the Agent?
Obviously, whoever is creating the power of attorney should select only someone they trust to have power of attorney over their 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 older adults' financial affairs; the more complicated their 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 the family's assets.
It may help if the agent is geographically close to the people involved and their property or business assets.
It's a good idea to 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's 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 parents or others execute a general power of attorney to become effective while they're still competent, they should not choose someone who is likely to try to take over more responsibility than they're ready to give up.
Power of Attorney: Financial Responsibility and Considerations
Does a Power-of-Attorney Agent Get Paid?
The person giving the power of attorney 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 he could choose to do so. If the job is likely to be complicated and time-consuming, or is to be handled by someone who isn't 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 the Person'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 result in losses. The general legal rule, though, is that an agent isn't 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 Makes Power of Attorney Valid
People granting power of attorney must be mentally competent when they sign the power of attorney. The process of having witnesses sign the document helps to ensure that it's authentic and that those involved are competent. Also, their signatures need to be notarized, which also adds credibility. And if they have a lawyer prepare or review the documents, the lawyer's contact with them will also back up their competence at the time.
Is a Power of Attorney Valid in All States?
A power of attorney is valid in all states. The law of the state in which they reside at the time they sign a power of attorney will govern the powers and actions of the agent under that document. However, if they regularly have financial affairs in another state -- they own property there, or have 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 a Power of Attorney Be Changed?
As long as a someone is mentally competent, he can revoke a power of attorney at any time. Or he can maintain the power of attorney but change the agent. The person granting power of attorney 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.