Sound financial planning generally includes budgeting, minimizing bad debt, creating wealth, and building a nest egg for retirement. The complexity of these efforts depends on many factors, including the extent and nature of your assets and liabilities, whether you run a business, and whether you have dependents. What would happen if you suffered a serious illness or accident and suddenly were unable to manage your finances on your own?
As uncomfortable as it may be to imagine yourself incapacitated, preparing for this possibility is a crucial part of any financial plan. Fortunately, you may transfer certain decision-making powers to a trusted individual by drafting a Power of Attorney (POA). There are several types of POAs that may take effect in different situations, but each one allows you, the “principal,” to grant certain duties to an “agent.”
Drafting a Durable Power of Attorney for finances can help you create a legal safety net for your financial affairs. Let’s discuss the basics of this legal document and how it may fit in with your overall financial plan.
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What is a Power of Attorney, and what are the main types?
A Power of Attorney (POA) grants another individual legal and/or fiduciary authority over your affairs. It may grant this authority from the outset or serve as a contingency, only taking effect under certain circumstances.
There are several types of POA. These include:
- General. A general POA grants broad powers over your affairs, not necessarily limited to finances, and takes effect when it’s signed. In contrast to a Durable POA, it becomes inactive when you become incapacitated.
- Special or Limited. Special or Limited POAs take effect only in specific circumstances, such as when you’re out of town, and cover a limited set of responsibilities outlined in the document.
- Durable. A Durable POA may be invoked when you’re cognizant and remains in effect even when you are incapacitated. You can make changes to a Durable POA at any time, as long as you still have the capacity to do so.
- Springing. A Springing POA is a type of Durable POA that grants the agent control over your affairs only in the event you become unconscious, seriously ill, or otherwise unable to fulfill your normal fiduciary duties. This type of POA can also cover situations such as active duty military deployment.
Since a Durable POA may be active while you’re still in control of your faculties, it accounts for varying degrees of need, allowing for a smoother transition, while a Springing POA only activates once you’re out of commission. Also, keep in mind that a court may need to decide when a Springing POA is triggered.
How does a Durable Power of Attorney work?
A Durable Power of Attorney (Durable POA) designates an agent to make either healthcare or financial decisions on your behalf. This article focuses on the Durable POA for finances, which is typically a separate document from the Durable POA for healthcare.
In addition to naming an agent—someone you trust to make smart and honest decisions regarding your affairs—a Durable POA dictates the circumstances in which it becomes active and the extent to which the agent may act on your behalf. You have a great deal of latitude when creating a Durable POA, so before signing one, you may want to think carefully about the purpose of your POA and how you would like it to be implemented.
How much power does my agent have when a Power of Attorney (POA) is activated?
Your agent will have as much control over your affairs as your POA grants them. A Durable Power of Attorney for finances typically allows your agent to manage your investments, make bank transactions, sign checks on your behalf, file insurance claims, pay bills, pay child support, disburse funds to family members, and handle virtually any other financial duty you may have.
However, depending on your state’s laws, an agent generally may not:
- Make changes to your will.
- Transfer power to a new agent.
- Make decisions regarding your finances after your death.
Because of the broad powers a POA grants, you will want to be very careful about selecting your agent. Even your best financial planning efforts could fall apart quickly in the hands of someone inept. While agents do have a great deal of power, courts may revoke their status if they act recklessly, fail to act in the best interests of their principals, or engage in self-dealing.
Does your financial plan have a backup plan?
Even the most brilliant and well-managed financial plan can quickly fall apart in the wake of an emergency, whether it’s an extended absence or a serious illness. Since life is uncertain, make sure you cover all your bases by drafting a Durable Power of Attorney for finances. If you have additional questions or need specific legal expertise, don’t hesitate to contact a lawyer.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.