A power of attorney is an overlooked and under-loved document . . . with all the potential of saving your posterior and avoiding a Class A Mess-up! Even if you DO have a power of attorney it may not have what it takes to avoid the Unpleasantness I just referred to.
For a simple example of usefulness, you can read what I wrote earlier on how a power of attorney is an important way to avoid a common banking error.
You can read about these make-or-break documents in less than 3 minutes right here.
What Is A Power of Attorney?
A power of attorney (or a POA) is an instrument in which a person called a “principal” appoints a person called an “agent” or an “attorney in fact” to manage some or all of the principal’s financial affairs.
By the way, an “attorney in fact” need not be (and usually isn’t) an attorney. The word “attorney” comes from the old French Norman word “attourne” meaning “one appointed.”
Is A Power of Attorney Really Necessary?
Without a power of attorney, if a person becomes incapacitated many of her affairs may be unmanageable without a court-appointed guardian or conservator. This will likely involve paying a licensed Appointed One (ok, ok . . . an attorney) to bring a guardianship petition, court supervision of the guardian, likely payment of a bond, and add all sorts of additional pressure on the family.
And that is if everyone is getting along. It becomes much messier if there is not peace in the land.
It doesn’t matter a bit that the incapacitated one is married because the ability of a spouse to manage many affairs is limited.
In fact, as I have written, if a principal is concerned with managing money if she becomes incapacitated, a power of attorney is a much better way to manage money than setting up a joint account with someone else (perhaps a child).
Broad? Or Narrow?
A power of attorney can be very narrow. “I hereby appoint Joe to manage my checking account while I am out of the country through next month.”
A power of attorney can be very broad. “I hereby appoint Joe to do anything and everything I could for myself until further notice.”
“Durable” confuses many. In some states a POA will become invalid after the incapacity of the principal unless the POA specifically states that the POA continues in effect after the incapacity of the principal. In any event, to use quaint terminology, a POA designed to last beyond the incapacity of the principal is said to be “durable.”
In North Carolina, a POA is by default “durable” — a POA must specifically “opt out” of durability if the principal wants it to be revoked after incapacity.
Now? Or Later?
A Principal may wish to appoint an Agent with immediate authority to act, but subject to a mutual understanding that the Agent will not do anything until needed. Thus, an “immediate” power.
On the other hand, the Principal may be a bit nervous about vesting too much power too soon in the Agent and might prefer to specify that the POA does not become effective until after the incapacity of the Principal. Thus, a “springing” POA.
The problem with a springing power of attorney is the task of convincing ever suspicious banks and financial institutions that the POA has “sprung” — that the conditions triggering the effectiveness of the POA have, in fact, occurred.
My usual question to a client wanting a springing POA is: If you don’t trust the Agent NOW, how can you trust her LATER when you won’t be able to do anything about it?
Is It Christmas Yet?
By the way, unless the POA specifically allows for gifting, the Agent won’t be able to make gifts, even if the POA is otherwise broad. Gifting, by the way, isn’t referring to Christmastime, it is referring to the ability to move assets around for planning purposes . . . which could be critical.
Back to the old trust issue. Restrictions can be put on gifting. Perhaps written permission from a sibling, a trusted advisor or friend.
POAs are important. And tricky. The best approach is to have an attorney draft one for you.