By FPA member, Richard Durso, CFP®, AEP®
Last Updated: October 9, 2012
What happens if you are in an accident and cannot communicate? What happens if you suffer a brain injury and need to transfer money to pay your mortgage?Many estate attorneys argue that the single most important estate document is a durable power of attorney (POA). It allows you to appoint someone (an “agent”) to step in and handle your finances if you become incapacitated physically or mentally. This trusted person would handle certain legal and financial duties for you such as paying bills, Medicaid planning, insurance and benefits coordination, and handling investments. It is more efficient to prepare your POA now rather than having to petition the court which involves court costs, time delays, and public hearings. By having it in place now, your agent can immediately make decisions for you which can relieve much stress on behalf of your family if an unfortunate event were to occur. When executing your durable power of attorney, you must be of sound mind and not suffering from any dementia. It is recommended that you name successor agents in the event the primary agent is no longer willing or able to perform the duties.
The person you name as the agent is held to the “fiduciary” standard, which means the agent must follow your instructions as set forth in your durable power of attorney and act in your best interests. The agent can be held liable if he or she does not act in your best interests. Be sure to name someone who you believe would handle your financial concerns properly.
There are two primary types of durable powers of attorney. One type springs into effect when the person is deemed incapacitated which is called “springing”. Typically a licensed medical doctor would make that determination. The other type takes effect as soon as the document is signed which is referred to as “standing.”
You can also limit certain financial duties or include all financial decisions such as selling the primary residence. You can set forth provisions about how to handle distributions from your investments and to require a second signature on certain checks. There are certain powers that you must explicitly state in your power of attorney such as giving your agent the ability to change beneficiary designations, to change a trust, or to make a gift. You should have an attorney who specializes in estate law draft the document for you.
The POA can be amended or revoked at any time, as long as you are deemed competent. Otherwise, it stays in force until you die. The power ceases at death. Be sure to review your document each year as well as after any major life events such as divorce, death of spouse at which point you should revoke and have a new one set up. Also, be sure to review your agents and successor agents.
The downside is that certain financial institutions (banks and/or investment companies) may not accept your power of attorney. They may have their own company specific document. It is recommended to have any company specific power of attorney document reviewed by your estate attorney.
In conclusion, you may never need to use your POA, but it is much better to have one and not need it than not to have one and need it.
Richard Durso, CFP®, AEP® is a financial planner at RTD Financial Advisors, Inc. in Philadelphia, PA.