If you've ever considered planning for your future or helped someone plan for theirs, you've probably heard the term "power of attorney." But do you really know what it is and how it works? Read more…
If you've ever considered planning for your future or helped someone plan for theirs, you've probably heard the term "power of attorney." But do you really know what it is? The terms “power” and “attorney” carry weight but may not mean what you think. In fact, there are many misconceptions about what a power of attorney is and what authority it gives to someone. And no, it doesn’t grant someone a temporary law degree.
In this article, I’ll address the misconceptions about powers of attorney so you have clarity about what to do if someone appoints you as their power of attorney. Then, armed with this knowledge, you’ll understand your legal responsibilities so you don’t inadvertently make any mistakes or run afoul of the law.
Let’s start with a little background info. If a power of attorney doesn’t confer attorney status, then why is it called that?
What is a Power of Attorney?
Generally speaking, a power of attorney is a legal document granting someone else the authority to act on your behalf regarding your financial life. The term "power of attorney" is a bit of a historical holdover. Originally, powers of attorney were primarily used to appoint lawyers to represent individuals in legal matters. However, over time, the concept has expanded to include appointing someone to act on your behalf for various purposes.
So, while you don't need to be an attorney to hold a power of attorney, the term has continued due to its historical origins. Granting power of attorney is a way to indicate that an appointed person has the authority to act as your agent or representative, similar to the way an attorney would act on your behalf.
Not everyone wants someone to act on their behalf to manage their financial affairs. In fact, I’d venture that most people don’t. But there are times when it’s necessary in order to preserve your assets, especially if you reach a point in life when you are unable to manage your own financial, legal or healthcare matters, whether from old age, a terrible accident or simply being out of the country for that year-long trip you’ve been planning for years. In each of these cases, it’s possible that if you don’t have someone acting on your behalf, problems could occur. Your financial institutions could charge extra fees on your accounts, a fraudster could drain your accounts and you wouldn’t know it happened, taxes could go unpaid, your property could go into foreclosure, or your credit ruined. So to prevent these horrific outcomes, you want someone else to be able to maintain your financial life on your behalf.
Types of Powers of Attorney
We don’t need to get too much in the weeds here (if you want to get in the weeds, though, read to the end and I’ll show you how to book a call with me), know that there are different types of powers of attorney, each with its own specific purpose. Here are some examples:
General Power of Attorney: This grants the agent broad authority to act on your behalf, including managing your finances and signing legal documents, even if you’re capable of handling your affairs. It becomes effective as soon as you execute the document. When might you want this? Say you travel for work and you and your spouse have decided to refinance your mortgage. You may want your spouse to sign the paperwork on your behalf, rather than waiting for a time you’re back in town.
Springing Power of Attorney: This also grants authority to someone to manage your financial and legal affairs. You can execute the document whenever you want, but it doesn’t kick in until you’re no longer able to make your own decisions.
Durable Power of Attorney: This is a type of general power of attorney that remains in effect even if you become incapacitated. Think of it as the General and Springing Powers of Attorney combined.
Limited Power of Attorney: This grants the agent authority to handle specific tasks only, such as managing your property or making healthcare decisions.
Healthcare Power of Attorney: This grants your named agent authority to make medical decisions on your behalf.
Even though each of these documents operates differently, they all have one important thing in common: the agent’s power ends as soon as you die.
What No One Told You About a Power of Attorney: It Ends With Death
You may mistakenly believe that a power of attorney gives someone the right to access your financial accounts indefinitely. However, this isn't the case. A power of attorney is a temporary arrangement that ends when the person who granted the power dies. What does this mean, exactly?
Let’s say your aging mother can no longer manage her affairs and she executed a Power of Attorney to give you the authority. While she’s living, you can access her bank accounts to make sure all her bills are paid, and paid on time. But as soon as she dies, you no longer have the legal authority to access any of her accounts. If she had a Will or no estate plan at all, you will have to file paperwork with the probate court and wait for the case to make it through the court system until the judge grants you authority again. In the meantime, if you can’t afford to cover her bills along with your own, you may have to make the difficult decision to let her bills go unpaid. If she still has a mortgage on her house, for instance, and you can’t pay her mortgage and yours, too, the bank could begin to fore lose, and you could lose any equity she had. This equity could have been a significant part of your inheritance.
Going to court can be a frustrating and time-consuming process, and if you haven’t planned appropriately you can suffer negative consequences. But there’s a silver lining. You and your loved ones can avoid probate court, and maintain access to the other’s finances, if you create a Whole Life Plan.
The Good News
With some careful planning ahead of time, you can ensure all your bills get paid and your assets are preserved for your loved ones. The way to do that is by creating a Whole Life Plan with a living trust. A trust is a legal arrangement that allows you to transfer your assets to a trustee, who manages them for the benefit of your beneficiaries. Importantly, a trust survives your death, so there’s no disruption in the ability for someone to manage your finances after you die.
You may have seen ads on the internet, or maybe your financial advisor has offered to draft a trust for you. And you may have the impression that a trust is a simple document you can get for little to no money. But I want to empower you with some education before deciding to go one of these routes. A trust is a legal document with legal consequences, and even lawyers who’ve gone to law school, passed the bar, and practiced law for awhile find that trusts are more complicated than they first thought. If you draft a trust yourself or with someone who isn’t a lawyer who specializes in this area of the law, you’re taking a big chance with your money and your family. I see these cases often, and usually, the trust isn’t worth the paper it’s written on.
You owe it to yourself and your loved ones to ensure your power of attorney, trust, and related estate planning tools are created correctly and updated over time, and that you understand the benefits and consequences of your plan.
When you work with me to create a Whole Life Plan, I’ll empower you with the education you need so you can make the right choices for yourself and your family, that you fully understand how your plan works, and that your family has my support after you’re gone.
How We Help You Preserve What Matters
Understanding the limitations of a power of attorney and the benefits of a trust is crucial for protecting your hard-earned assets. As your Personal Family LawyerⓇ Firm, we specialize in helping individuals like you create a Whole Life Plan that addresses your unique needs and provides peace of mind, no matter what happens. Once your plan is in place, you can rest easy knowing that your wishes will be honored, your loved ones cared for, and your property protected.
Click here to schedule a complimentary 15-minute consultation to learn more and start your journey toward a secure financial future:
Comments