Sometimes legal terms sound like gobbledygook. But even though a financial power of attorney (POA) sounds like some tricky thing you’d read about in the fine print of a contract, it’s really simple. Let’s learn more about why you might need one.
What Is a Financial Power of Attorney?
A financial power of attorney is just a document you need when you want to grant someone else the power to make money decisions for you. And it’s usually created alongside your will. This kind of POA is written specifically to let someone else act as your legal rep for financial matters. Much like other powers of attorney, the person who creates a financial POA is known as the principal—that’s you if you make one.
No, being the principal doesn’t mean you’re putting anyone in detention. In the context of a POA, a principal is just the person whose money is being protected. And the person you choose to do things with your money when you can’t do them yourself is known as the agent or attorney-in-fact.
How Does a Financial Power of Attorney Work?
The most common use for a financial POA is during a medical emergency. When you’re in a situation like that, your daily financial needs might not be top of mind. But do those needs just disappear because you’re in a hospital bed? Unfortunately, they don’t. Your bills still need to be paid, accounts need to be managed—like paying your rent or house payment and insurance premiums.
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The key word here is “financial.” Just as a medical POA only applies to medical choices someone makes for you, the financial POA extends no further than the right for someone else to make money decisions if and when you’re unavailable to do so yourself. (In case you’re wondering, you need both kinds of POA to have full protection.)
So, what if something unthinkable happened to you that prevented you from making an urgent financial choice for yourself? Whether it’s due to an accident or sudden illness, the last thing you want is for your long-term financial future to be at risk because of a (hopefully) temporary setback. With a financial POA, your agent can keep everything moving smoothly with your money.
Like most legal docs, the main purpose for creating a financial POA is to protect you and your family from a preventable legal battle. In this case, the idea is to be sure there’s always someone trustworthy available to decide what should happen to your money.
When you’re out of commission, the last thing you want is someone you don’t know messing around with your financial future! But that’s exactly what sometimes happens when you’re unavailable for a financial choice and you lack a financial POA. At that point, going through courts to get control back might be unavoidable.
When Does a Financial Power of Attorney Take Effect?
It’s completely up to you when someone can be your financial POA, and it will depend on how your document is worded. There are two ways to time this:
Effective immediately. In this case, the financial POA lets your agent act on your behalf even if you’re available and not incapacitated. (No, incapacitated doesn’t mean getting your head chopped off. It’s actually just a ten-dollar word for losing the power to tell people what you want to do.)
If you’re married, you’ll probably want your spouse to be able to make financial decisions should you face a medical emergency. In that case, making the document effective immediately is a smart move. In general, the more closely related the agent is, the more likely you would be to choose to have the POA effective immediately. Making it immediately effective could also be a good option if you’re frequently on the road and you have lots of financial needs that require your official approval to get done.
Three reasons you might opt to make your financial POA effective immediately are:
- You expect to be unavailable for a particular transaction that can’t wait for your return
- You want to allow your spouse to complete financial business if you’re often out of town
- You anticipate an upcoming medical issue that will make financial chores difficult
Effective only when a certain event happens. On the other hand, many people want to keep the option of making financial decisions for themselves for as long as possible. If you’d like to name one of your children or someone more distantly related to serve as your agent, creating a springing power of attorney is a great option. The event that would most often trigger a financial POA into action is if the principal became incapacitated. Hopefully that’s not something you or your family ever have to deal with, but it’s within the realm of possibility.
When a financial POA is tied to an incapacitating event, it can only happen when one or more doctors have certified that you’re in a state of being physically or mentally unable to make decisions.
This is known in attorney world as “springing into effect”—maybe because it kicks in when the principal has lost a spring in their step. Some of the certifiable conditions that could cause a financial POA to spring into effect include:
- Onset of Alzheimer’s disease
- Mental illness
- An inability to communicate
So, whether it’s effective immediately or tied to a potential future event, your agent only gets the power to handle your finances when you grant it. But when do they lose it?
When Does a Financial Power of Attorney End?
A number of things can make a financial POA kaput:
- The death of the principal
- The principal choosing to revoke the power at any time
- A court ruling it invalid
- The principal’s agent becoming unable to fulfill their duties as financial POA (this can be avoided by naming a successor agent in the document)
- In some states, when the principal has both 1) named their spouse as the agent, and 2) later divorced their spouse
- And generally speaking, if the principal becomes incapacitated unless the POA is worded to say that the agent’s authority should continue anyway
What would happen if you fell into a coma? Your family would have a lot on their plate—and they’d really want to have say-so into your finances. The great news is that your financial POA can be written specifically to say that the agent’s power continues even in the event of the principal’s incapacity. This is a form of POA known as a durable financial power of attorney (DFPOA), and it’s the kind of document Dave recommends.
What’s particularly great about a durable financial power of attorney is that if the principal does become incapacitated, the document lets their family avoid “conservatorship.” That’s more fancy legal talk for going to court to be given the official say-so over your property. If your document is durable, you get to skip that whole nightmare.
What Your Financial Power of Attorney Agent Can Do
As the principal, you have the power to grant your agent any financial privileges you wish. But you’ll want to think about the agent’s actual abilities and knowledge. (In other words, your uncle the CPA may be a great candidate to handle paying your taxes, but don’t put him in charge of minding the family shop if he has zero business know-how.)
Here are some of the powers you’re able to grant a financial POA to do for you:
- Collect retirement benefits
- Log into financial accounts
- Manage real estate
- Operate a business
- Pay bills
- Pay medical expenses
- Pay taxes
- Purchase insurance
- Sell assets
How to Choose Your Agent
First let’s deal with the bare legal requirements. Your agent is required to be of sound mind and at least 18 years old. Yes, those criteria eliminate tons of people. But you still need to narrow it down some more!
When it comes to picking someone to decide what should happen to your money, the main ingredient is trust. Family members can be great agents. They can also be disasters.
Before you give this job to your Aunt Gloria, maybe think about the fact that she’s always trying to borrow money from everyone in your family . . . so she’s probably not the best option for your financial POA. But there is your Cousin Joe, who’s really good at helping everyone in your family find sweet deals on used cars. Yeah, Joe could be an awesome agent.
For many people, the obvious choice is their spouse. If either of you travel a lot for work, appointing the other as an agent in your financial POA makes a lot of sense.
Or maybe you know someone outside your family who just has good character and financial smarts. They’d also be an outstanding candidate. Either way, pick someone you’d be comfortable giving access to everything you’ve worked so hard to build over the years.
How to Make Your Financial Power of Attorney Form
To be binding, a financial POA needs to be signed in front of a notary public. In some situations, the document may also require a witness at the time of signature. And in some states, the agent must sign to indicate they accept the assignment.
In general, filling out your state’s official form is a good start to making a financial POA. But keep in mind that some banks require you to use their own specific forms in order for your agent to conduct business there on your behalf.
Similarly, some lenders, title insurance companies and closing agents have unique forms you must fill out before they will accept an agent’s actions. In the end, some people wind up with more than one financial POA. What a headache!
Nobody should be sticking their nose into your most important financial decisions unless you give them say-so. That’s why making your financial power of attorney along with your will is an essential step to guarantee your hard-earned funds stay under your control (or someone you trust) at all times. We’ve put together a super easy bundle to give you peace of mind that you’ve got your bases covered. Create your POA and will today!