When you have a family and children, it's critical to think about the “what if” scenarios. If you or your spouse became incapacitated, who would take care of your family's finances? If you were unable to act, could someone else make decisions in the best interest of your household? A power of attorney is an important document that can help you prepare for such events. Here’s what you need to know as you consider what to include in yours.
What Is a Power of Attorney?
A power of attorney document grants a person, called the “attorney-in-fact” or "agent" the authority to manage your finances and assets for you. This person does not need to be an actual lawyer to be called an “attorney.” Creating a power of attorney is not mandatory, but it could help in the event you are incapacitated or unable to make decisions. It's important to understand how much easier it is to name a power of attorney when you are in good health compared to when someone becomes incapacitated. The process is difficult, lengthy, and involves working through complex rules dictated by the court system and local laws. Working ahead is a way to take care of your family in the event Mom or Dad are unable to. Note a power of attorney serves a distinct purpose from other documents like a will or a legal document that specifies a guardian for your children.
Naming a Power of Attorney
Someone who has power of attorney will have complete access to your finances and property. However, this person is legally obligated to act in your best interest when using their power of attorney.
It’s possible to name multiple people in your power of attorney document, but this could cause confusion and frustration should a disagreement arise.
In some cases, it may be beneficial to name a financial professional as your agent. If your finances are especially complex, a financial professional may have greater insight into how they should be managed and handled moving forward. Or, you may not wish to cause conflict amongst family members. In this case, choosing a neutral and unbiased third party could be the answer.
Just remember that choosing a business or professional as your power of attorney may incur fees.
How to Name a Power of Attorney
You should never feel pressured by someone to sign a power of attorney document. This is something you need to decide to do for yourself, not something anyone forces you into.
In order to create a power of attorney document, you must be mentally capable at the time of signing. This will generally mean understanding the financial and legal decisions surrounding your estate and the consequences of these decisions. The specific definition and requirements will vary by state.
Types of Power of Attorney
When naming a power of attorney, there are two common types: general power and continuing or enduring power. The specifics regarding each type, again, may vary by state.
General Power of Attorney
This document would give your attorney power over all (or some) of your property and finances. This power could give someone else the ability to handle financial business, transact on insurance, operate a business, settle a debt, make a gift, or procuring a service. A common use for this type of document is when someone leaves the country and wants a trusted advisor to help manage their affairs at home.
You have the option to let your general power of attorney be “limited” or “specific.” This means the attorney would have power for a specified period of time, or for a specified task.
Durable Power of Attorney
A durable power of attorney allows your attorney to continue making decisions on your behalf should you become mentally incapable. You can have your power of attorney go into effect as soon as the paperwork is signed. In some instances, you may be able to specify that your power of attorney only goes into effect after you’ve been deemed mentally incapable. A durable power of attorney can be broad or limited to a specific set of decisions and responsibilities.
Abilities & Limitations of a Power of Attorney
The amount of authority your agent will have is dependent on the type of power of attorney document you create and the limitations you outline within that document. If no limitations are presented, your attorney-in-fact will have full access to your finances and property.
While your agent will have the power to do things like buy or sell property in your name, sign checks and do your banking, none of the money or property is owned by them. Everything is still in your name, they only have the power to make the transactions.
Your attorney will not have the ability to:
- Make or change your will
- Change the beneficiary on your life insurance policy
- Give power of attorney to someone else
Depending on your location, you may be able to prepare documents that allow your attorney to make health-related and non-financial decisions on your behalf.
Other names or variations for these types of documents may include:
- Personal or health directives
- Springing Power of Attorney
- Medical Power of Attorney
Naming a power of attorney while you are of sound mind and body can provide great comfort and relief. It can serve a practical purpose in terms of planning ahead and can provide flexibility in the type and amount of power granted to others. Work closely with your financial professional to address any concerns you may have, as choosing an attorney is an important decision.
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