Chances are, you don’t have a power of attorney. After all, most Americans don’t. Only one-third of adults 55 and older have a durable power of attorney, according to a survey by Merrill Lynch and Age Wave. The percentage among younger generations is likely even lower.
If so many Americans don’t have a power of attorney, is it even necessary? In a word: yes.
You need a power of attorney if you want to have a say in who gets to make financial decisions for you if you can’t on your own. And it’s essential that your parents or loved ones name you as their power of attorney if you are a financial caregiver for them. Without that designation, you won’t have the legal right to make financial transactions for them.
The ABCs of POA
A power of attorney is a legal document that allows you to name someone to make financial and legal decisions for you if you can’t. You might need someone to make financial decisions for you if an injury or other health emergency leaves you temporarily unable to make decisions on your own. You might need someone to manage your finances for you if you develop dementia. Or you might simply need someone to make a one-time financial transaction for you if you’re overseas and can’t access your accounts.
In short, there are a variety of situations when you might have to rely on someone else to handle your finances for you. You want that to be someone you trust and have chosen to take on the responsibility. Otherwise, if something happens to you, the person who steps into this role – or is appointed by a court – might not be the person you would want handling your finances (more on this below).
Even if you’re married, you still need to have a power of attorney (you can name your spouse) because there are limits on the authority your spouse has over property you own together. Plus, it’s a good idea to name a backup in case your primary power of attorney is unable to take on the responsibility at any given point. This also helps prevent putting so much power into just one person’s hands.
Types of power of attorney
There are four main types of power of attorney. The one you choose will determine how much power you actually give the person you choose to be your agent.
Limited POA: A limited power of attorney gives someone the right to make only certain financial decisions for you or one-time transactions. For example, you might have a limited POA to close a real estate deal for you.
General POA: A general power of attorney gives someone broad powers – essentially the right to make any sort of financial decision if you are temporarily unable to do so yourself. It’s no longer valid if you become incapacitated or when you die.
Durable POA: A durable power of attorney can be general or limited. However, it remains in effect when you become incapacitated. For example, if you develop dementia, you would need to have a durable power of attorney to make financial decisions for you.
Springing POA: This type of power of attorney springs into effect under certain circumstances that you designate. For example, you might have a springing POA that becomes valid once you become mentally incapacitated and are designated as such by one or more physicians.
[ Read: General, Limited, Springing, Durable – Which Financial Power of Attorney Do You Need? ]
Elder law attorney Josh Berkley recommends having a general durable power of attorney – the kitchen sink power of attorney, as he calls it. “It gives someone the power to do anything,” he says. “It’s about as broad as can be.”
A limited power of attorney can be too restrictive and, therefore, ineffective if you truly need someone to step in and take over your finances if you become incapacitated. “I don’t normally recommend that because you don’t always know what will come up,” he says. “You need people to have broad powers.”
The problem with a springing power of attorney is that your agent might not be able to act on your behalf without jumping through hoops – such as getting documentation from doctors – to prove you’re no longer competent. Even more troublesome is defining in a springing POA document at what point you are incapacitated. The triggers that make your power of attorney springing could be subject to argument in court, Berkley says.
The power of power of attorney
The idea of giving someone so much power over your finances with a generable durable power of attorney probably seems risky. It can be if you don’t name the right the person. That’s why it’s so important to choose someone you trust to be your power of attorney.
If you want to make sure that person only uses that power once you’re no longer able to make financial decisions on your own, put the POA document some place safe and spell out under what conditions you’re comfortable with that person accessing the document.
Elder law attorney Josh Berkley recommends having a general durable power of attorney – the kitchen sink power of attorney, as he calls it.
You see, your power of attorney will need to show the actual document to your financial institutions before getting access to any of your accounts. Without the document, your POA doesn’t really have any power. This is something you can point out to your parents if you will be their financial caregiver and they are reluctant to name you power of attorney. Tell them they can hang onto the document naming you power of attorney until a point when they actually need your assistance with their finances.
You (and your parents, for that matter) also can name more than one power of attorney to create a system of checks and balances, so to speak. Keep in mind, though, that you could make it difficult for your POAs if you require them to act collectively. If want to allow them to act independently, you need to spell that out in the power of attorney document.
What could happen if you don’t have a power of attorney
Drafting a power of attorney document is a task you shouldn’t delay – especially not until an emergency makes it necessary. If you have a stroke, develop dementia or have some other health issue that makes you mentally incompetent, it’s too late for a power of attorney to be drafted and signed. That’s because you must be mentally competent to sign this document.
In that case, someone will have to go to court to be legally appointed to make financial decisions for you. There are two big problems with this.
For starters, that person might not be the one you would’ve chosen for this role. Even if the person is someone you’re comfortable with assuming this role, that person – likely a loved one – might have to spend a lot of time and money going through the court process to become your conservator. Your loved one will likely have to hire an attorney for himself or herself and for you and pay for a doctor or specialist to assess your competency.
Not only is this process expensive, but also it can be emotionally taxing. Your loved ones will basically be putting you on trial to prove you’re no longer competent enough to make financial decisions for yourself.
[ Read: What You Need to Know About Being a Financial Caregiver ]
How to appoint a power of attorney
Meet with an estate planning or elder law attorney to draft a power of attorney document – as well as a will or living trust and an advance health care directive. The cost of these estate planning documents can be up to $1,000 – or more, depending on the complexity of your situation.
To find an attorney, you could start by visiting your state bar association’s website (search for your state name and “bar association”) to see if it has an online member directory to locate an estate planning or elder law attorney near you. You could use the National Association of Estate Planners & Council’s online directory to search for an estate planning attorney near you. Or you could search the National Academy of Elder Law Attorney’s online directory. If possible, opt for one with the Certified Elder Law Attorney (CELA) designation.
There are a variety of situations when you might have to rely on someone else to handle your finances for you. You want that to be someone you trust and have chosen to take on the responsibility.
There are lower-cost POA forms available on websites such as Nolo.com, LegalZoom and Rocket Lawyer. However, there are some risks involved in using these do-it-yourself forms. It’s safer to have this legal document drafted by an attorney to conform to your state’s laws and to be tailored to your situation. However, if paying an attorney doesn’t fit within your budget, getting fill-in-the-blank legal documents can be better than nothing, some estate planning attorneys say.
[ Read: The Pros and Cons of DIY Financial Power of Attorney Forms ]
After naming a power of attorney, review and update the document every three to five years, Berkley says. If you draft a power of attorney document and stick it in a lockbox for more than a decade, there’s a risk that your financial institutions won’t accept it because they’ll consider it outdated. The document will still be valid, but some companies have policies that require POA documents to be no more than a few years old, he says. You don’t want to end up in a situation where your power of attorney can’t act on your behalf when you need help the most.
This material is designed to provide general information on the subjects covered. It is not, however, intended to provide specific financial or legal advice or to serve as the basis for any decisions.