To spring or not to spring?
A financial power of attorney (POA) can be a critical component of your estate plan. It appoints a trusted representative (often called an agent) to make financial decisions on your behalf in the event you’re unable to do so.
Without a POA, if you become incapacitated because of an accident or illness, your loved ones wouldn’t have the ability to handle your finances without going through the lengthy and expensive process of petitioning a court for guardianship or conservatorship. To ensure that financial decisions or tasks don’t fall through the cracks, consider excuting a financial POA, also known as a POA for property. This document authorizes your agent to manage your investments, pay your bills, file tax returns and otherwise handle your finances, subject to limitations that you establish.
Springing vs. durable POA
One important decision you’ll need to make is whether your POA should be “springing” — effective when certain conditions are met — or nonspringing (also known as “durable”) which is effective immediately.
A springing POA takes effect (in other words, it “springs” into action) under specified conditions. Typically, that means you’ve become mentally incapacitated, comatose or otherwise unable to act for yourself. In most cases, to act on your behalf, your agent must present a financial institution or other third party with the POA as well as a written certification from a licensed physician stating that you’re unable to handle your financial affairs.
Although a springing POA allows you to maintain complete control over your finances while you’re able, a durable POA offers some distinct advantages:
- Because it takes effect immediately, a durable POA allows your agent to act on your behalf for your convenience, not just when you’re incapacitated. For example, you might ask your agent to conduct a business or real estate transaction on your behalf while you’re traveling abroad.
- If you do become incapacitated, a durable POA allows your agent to act quickly to handle urgent financial matters on your behalf without the need for a physician to certify that you’ve become incapacitated. With a springing POA, the physician certification requirement can lead to delays, disputes or even litigation at a time when quick, decisive action is critical.
- Durable POAs may also be advantageous for the elderly, who may require or desire assistance in handling their affairs even though they’re of sound mind and haven’t become incapacitated.
Durable POAs have one important disadvantage: Some people are uncomfortable with a POA that takes effect immediately because they’re concerned that their agents may be tempted to abuse their authority or commit fraud. Of course, if an agent can’t be trusted with a durable POA, why would you trust that agent with a POA that takes effect when you become incapacitated? Arguably, under those circumstances, the risk of fraud or abuse would be even greater because you wouldn’t have the ability to defend yourself.
In light of the advantages of durable POAs and the potential delays caused by springing POAs, the best approach is to grant a durable POA to someone you trust implicitly, such as your spouse or one of your children. If you feel that you need additional assurances, ask your attorney or another trusted advisor to hold the durable POA and deliver it to the designated agent only when you instruct them to do so or you become incapacitated.
Keep your POAs fresh
Although this article has focused on financial POAs, similar considerations apply to health care POAs (also known as heath care proxies). To ensure that your wishes are carried out, it’s advisable to prepare and sign financial and health care POAs as soon as possible and to let your loved ones know where to find them.
It’s also a good idea to sign new POAs periodically. Financial institutions and health care providers may hesitate to honor POAs that are years or decades old.