Understanding Power of Attorney
They often say dying is the easy part, because you are gone, and your assets just pass on to your beneficiaries. At the worst, they go to probate court to fight over your assets because you didn’t have a proper will.
The worst thing that could happen is your incapacitation. Now, your assets don’t transfer and the ability for you to access them may be limited by your incapacitation.
What happens if your bills need to be paid but you are in a coma?
This is where your power of attorney will step in and take over. Unfortunately, a power of attorney is not a simple document that can be drafted and then pulled out years later and everything be okay.
There are a lot of things to consider when drafting your power of attorney and keeping it up to date so it is accepted at your various custodians.
What is a Power of Attorney (POA)
As you can imagine, this is not a decision that should be taken lightly.
You will be giving someone complete access to your finances, your bank account, retirement accounts, and brokerage accounts.
They will have the authority to step in as if it was you to access these funds and make financial decisions. Some of the decisions that they can handle will be paying bills, selling assets, or pay for medical expenses.
There are two main types of power of attorneys: durable power of attorney and springing power of attorney.
The durable power of attorney is effective when it is signed and put in place by you. It will last your entire life, whether healthy or incapacitated. It is called a durable power of attorney because it does not last past your death. Once you are no longer on this world, the power of attorney shuts off and is no longer active. Power of attorneys shouldn’t be thought as just being useful if you become incapacitated. If you have a spouse that travels or is out of the country for work a lot, you may need a durable power of attorney so you can make some decisions while they are unreachable.
The springing power of attorney “springs” into effect when you become incapacitated. This power of attorney is more “ideal” because it can’t be used until you are incapacitated, which is typically when you want someone to use a power of attorney. On the downside, these types of POAs are usually harder to use. Most custodians are going to force the agent to prove you’ve become incapacitated.
Power of attorneys are a legal document that should be drafted by a lawyer. Cutting corners with your estate documents is never recommended. You don’t want to be incapacitated or dead and realize that the documents that you drafted don’t work.
When you issue a power of attorney, it doesn’t mean that the agent has access to everything you own. You can draft the power of attorney to be as limited or as encompassing as you desire.
Setting Up a Power of Attorney
Keep in mind, that your spouse does not have an automatic power of attorney just because you are married. If you have a piece of property in your name only, your spouse will not be able to make decisions regarding that property without a proper power of attorney.
After you have selected a proper agent, give some thought of a secondary agent in case something happens to the original agent selected.
What happens if you name your spouse in a power of attorney and then a car accident kills your spouse and leaves you incapacitated?
The next decision you will have to make regarding your power of attorney is the scope of powers that will be granted. Again, power of attorneys can be as encompassing or as limited as you may need. You could have a power of attorney to take care of your vacation home located in another state.
You have your principal agent, secondary agent, and powers you want them to control, now you need to draft the power of attorney. Yes, you could draft the POA yourself and have it notarized with a witness, but it is not recommended. Get a lawyer to look to draft your POA for you to make sure it is done properly.
All this work needs to be done before you become incapacitated. Your family cannot get a power of attorney done for you if you no longer know what is going on. They will have to go to court to be appointed as a conservator of your estate. This can be very costly and will come with time-consuming delays.
Issues with a Power of Attorney
There is an old saying, which probably has some fact in it, that more money is stolen with a power of attorney than with a gun.
Power of attorney grant a lot of power to the agent selected to handle your finances. Custodians recognize this power and are very cautious to give someone access to your finances. The custodian doesn’t want to be on the hook in case something was wrong with that power of attorney.
The custodians can refuse to honor the power of attorney, forcing you to go to court to seek a court order. In the eyes of the custodian, this puts the “blame” on the courts if something negative happens with your finances and power of attorney.
The biggest issue with power of attorneys not being accepted is that they become stale. You cannot draft a power of attorney five years ago and expect it to be accepted. Power of attorneys are just pieces of paper that don’t get filed or turned in anywhere until you are forced to use it. The custodian has no idea if the POA from 5 years ago is the most recent power of attorney. You could have drafted a new POA last month, but the person holding the power from the original steps forward to claim your assets. Again, the custodian doesn’t want to be liable for something they don’t know exist.
To avoid having a stale power of attorney, it is a good idea to reauthorize the power every year. This doesn’t mean you have to get a new one drafted every year, but to sign and date it every year. If you’ve signed and dated this POA for the last ten years, this shows the custodian that this is probably the most recent power of attorney and you definitely want this person acting as your agent.
The next issue with a power of attorney is not using the proper form at the custodians. If you have a lot of your assets tied to one custodian, reach out to them to find out if they have special forms or rules for power of attorneys. The custodian should accept your power of attorney drafted by your lawyer, but to cover their own butt, they may have additional forms and rules to follow. It is a good idea to find out what those are and to follow those rules to make sure your wishes are upheld upon your incapacitation.
If you have a springing power of attorney, you will have to show proof of incapacitation before the custodian will grant you access to the assets. Having a letter from a physician showing incapacitation would be ideal at this point.
You need to think long and hard about who will act as your primary and secondary agent. This decision will give them access to your assets, so you need to be able to trust them at all cost. These decisions are not set in stone and can be changed if something changes in your life.
Have your power of attorney drafted properly by a lawyer and then continue to sign and authorize it every year so it does not become stale. Remember, custodians are there to cover their own butt and make sure they don’t wind up in legal trouble from a bad power of attorney document.