A “power of attorney” is an important part of almost any estate plan. This document allows someone else to take over your day-to-day financial affairs if you become incapacitated but like any element of an estate plan; a power of attorney needs to be reviewed occasionally to see if it still meets your needs. If you signed such a document many years ago, it might be a good idea to check whether it needs to be updated.
Three things you might want to consider are:
1) Who should be your agent (the person who will make decisions for you);
2) What decisions should they make; and
3) When should they start making decisions?
Who should your agent be?
Many people simply choose a close relative to act as their agent, which is usually fine. However, you might have a lot more assets than you used to, and the person you originally picked as your agent is not very skilled at managing wealth. You might want to consider naming another relative who is more financially savvy, or even naming a financial professional.
This is especially true if you have a family business or other assets that require extensive decision making.
If you have complex assets but still want a close loved one as your agent, you name that person your agent, but require them to give an accounting at regular intervals to a legal or financial professional. That way a professional can provide sound advice and make sure your agent isn’t doing anything foolish.
If you plan to have a child act as your agent, and you have multiple children, you might want to review how that choice will affect family relationships. Tensions among siblings can arise if only one child is acting as your agent, especially if they have different attitudes toward money.
It’s possible to name two or more children as your “co-agents”. In that case, they would have to agree before they could take any actions on your behalf.
This can be a good solution in some cases, but there are also drawbacks. For instance, it can be cumbersome if two or more people have to sign every document, especially if they live far away or disagree on how to manage your affairs.
What can they decide?
Most powers of attorney give an agent broad powers to handle all types of financial affairs but in reviewing your current circumstances; you need to decide whether you want to place certain restrictions on these powers.
For instance, some people have a pattern of making annual charitable gifts, and they want to insist that their agent continue this pattern or some people are afraid that once their agent has the power, another relative will prevail on the agent to arrange matters in a way that unfairly benefits the relative. In such a case, you might want to limit your agent’s ability to make gifts. If you do allow gifts, you might want to place limits on their size, frequency, or purpose.
Some people signed a power of attorney document years ago, and later changed their estate plan to benefit some heirs more than others. This change might still be a secret, or might not be universally popular within the family. In such a case, you might want to limit your Agent’s ability to “undo” other aspects of your estate plan. For instance, you might want to ensure your agent cannot change the beneficiary of your life insurance policies or retirement accounts, or the named survivor on your financial accounts.
When should they start making decisions?
Powers of attorney come in two varieties. One takes effect immediately – as soon as you sign it, your agent can manage your affairs. The other is called a “springing” power of attorney. This document does not take effect immediately, but “springs” into effect if you become incapacitated.
The springing power is a good idea, but one recent problem is that some banks and other financial institutions have become reluctant to honor such a power if there’s any question at all about the person’s incapacity. They are afraid that if they follow the agent’s instructions, they could get sued.
Sometimes it’s obvious when a person is incapacitated – such as after an accident – but more often, an older person gradually becomes more and more forgetful and disoriented, and it’s difficult to say exactly when they’re no longer competent to handle their finances.
In light of this recent development, you might want to update your power of attorney by being more specific about when it takes effect. For instance, you might want to say that it will take effect if a doctor provides an affirmation that you can no longer handle your affairs.
Another solution is to have a lawyer or other professional hold the power of attorney in escrow for you. A trusted professional who knows you and your financial affairs might be a better position to make the decision than a doctor, whose training is in diagnosing physical ailments. Once a professional releases the document from escrow, banks and other financial institutions should have confidence in relying on it.