I've been talking about trusts, Wills, and Power of Attorney Documents with a lot of clients lately. Usually, a Power of Attorney (POA) document is drafted up and provided to you with the trust and estate strategy package. Not always, but usually. If you will become, or if you have created your Power of Attorney, it's essential to understand the role of said POA.
Unfortunately, not all POA docuemnts are useful. We have had a client whose POA document, which was drafted by an attorney, was deemed useless. All the money spent went out the window. It was heartbreaking for us to see, and extremely frustrating for the family.
If you have stories of how a POA document didn't work out well, let us know; we're compiling a list of stories and experiences.
I'm going to reference a scenario where an adult child, who may even have kids or grandkids of their own at this point, is considering the document for their aging mom and/or dad.
If you do not have your own estate strategy set up, or don't know how mom and dad's are set up, walk through the Estate Management Checklist to get everything in order.
What is a Power of Attorney (POA)?
A Power of Attorney is a legal document that grants a person (referred to as the agent or attorney-in-fact) the authority to act on behalf of another person (the principal). This gives you the financial power to help out with mom and dad's finances, pay the bills, and do banking. The extent of this authority is explicitly outlined in the document. It can range from very broad, sweeping powers to limited authority for specific circumstances. Most think that the Durable Financial POA a catch-all, giving your full authority to help mom and dad, but that's NOT always the case.
There are different types of POAs:
Immediate POA: Goes into effect as soon as it is signed. It's automatically in effect. This is NOT the most common type unless mom or dad have an expected cognition decline.
Springing POA: Only becomes effective if the principal loses capacity. However, the Springing POA is less favored in estate planning because proving incapacitation can be challenging. Springing POAs usually "spring" into action after 1 or 2 physicians deem mom or dad no longer being able to handle their own affairs.
It’s crucial to understand the specific terms outlined in the POA document you hold, as this will dictate the scope of your responsibilities and powers.
Your Responsibilities as a POA
Being named as a POA means you have the legal authority to act on someone else’s behalf. This role is often utilized when the principal becomes ill, disabled, or is otherwise unable to manage their affairs. Here are some common responsibilities you may be expected to undertake:
Financial Management: Oversee and manage the principal’s financial affairs.
Bank Accounts: Have direct access to and manage the principal’s bank accounts.
PRO TIP: Keep in mind, that the bank's legal department usually wants to review the documents before they come into effect, which could easily take 3-6 weeks. This leaves all their bills unpaid unless auto-draft is set up. In the meantime, you may have to come out of pocket to pay the mortgage, medical expenses and everything else.
Insurance Decisions: Make decisions regarding the principal’s insurance policies.
Estate Documents: Maintain possession of and manage estate documents.
Tax Returns: File the principal’s tax returns.
Safe Deposit Box: Access and manage items in the principal’s safe deposit box (but you need to know where the key already is).
Real Estate Transactions: Sign documents related to the sale or purchase of real estate.
Detailed Record-Keeping: Keep meticulous records of all financial transactions, including bills paid, assets sold or traded, and income collected. It’s also important to document your own expenditures if you seek compensation for your efforts (e.g., saving gas receipts, mileage, etc.).
What a POA Cannot Do
While the POA grants significant authority, there are limits to what you can do:
Write, Amend, or Revoke Estate Plans: In most states, you cannot write, amend, or revoke a will, trust, or other estate planning documents.
Vote on Behalf of the Principal: You cannot vote in public elections on behalf of the principal.
Make Decisions Beyond the Document: You cannot make decisions that are not explicitly stated in the POA document.
Transfer Assets to Yourself: You cannot transfer the principal’s assets into your own name unless explicitly authorized.
Borrow or Lend Money: You cannot borrow or lend money on behalf of the principal unless the POA document specifically grants this authority.
Durable Power of Attorney
One important aspect to understand is the concept of a "Durable" Power of Attorney. A Durable POA remains in effect even if the principal becomes physically or mentally incapacitated. This means your responsibilities and authority will continue regardless of the principal’s health status. Without this durable component, your role as POA would cease if the principal becomes incapacitated.
Final Thoughts
Being named a POA is a significant responsibility and a powerful tool in estate planning.
It is essential to fully understand the scope of your authority and the duties you are expected to perform.
Please review the POA document carefully to ensure you are aware of all responsibilities and limitations.
If you have any questions or need further clarification on your role as a POA, please do not hesitate to contact me.
I am here to support you in navigating this important responsibility.
Again, send us any stories of how a POA document didn't work smoothly; we're compiling a list of stories and experiences.
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This article provides a general overview of powers of attorney and the roles and responsibilities associated with them. It is not exhaustive and does not include state-specific details, which can vary significantly. This information is intended to introduce you to the basic concepts and types of powers of attorney available, but it is not a substitute for professional legal advice. For questions or to address specific circumstances, please consult with a qualified legal professional.