In my last article, I wrote about the Essentials of Estate Planning. One important aspect of estate planning was a power of attorney, which I want to look at in deep dive. This is an important document that has the potential to be useful as you think about estate planning. However, you should bear in mind that while a power of attorney is accepted in all states, the rules differ from state to state. For state-specific advice or situations, please contact your local estate planning attorney.
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What Exactly is a Power of Attorney?
A power of attorney gives one or more persons (known as your agent) the ability to act on your behalf. You may grant your agent the power to do something particular, such as to sign for you when closing a bank account. You can also give your agent permanent authority to act on your behalf.
There are many ways to set up a power of attorney, and the best way to do it is to find out what is best for you and your situation. A power of attorney may be effective immediately upon signing or under certain circumstances (like a hospital stay or while you are out of the country). Or under the condition that you are determined to be unable to act for yourself due to mental or physical disability. This is particularly important even if you aren’t yet retired and have children or healthcare expenses.
As for the actions they can take on your behalf, that is also determined in the document. These can be any or all of the following.
- Make financial decisions on your behalf;
- Make healthcare decisions, including starting medical procedures, withholding medical procedures, or even stopping medical procedures;
- Recommend a guardian for minor children while incapacitated;
- Make gifts of money from your bank accounts or other property.
It is important to note that granting someone power of attorney is not giving them the right to do whatever they please with your assets and investments. An agent has the duty, commonly known as the “fiduciary obligation,” to make financial decisions in your best interests. Just because they have the power to buy themselves a brand new Tesla, it doesn’t mean they have the right to do that.
Different Types of Power of Attorney
There are four main types of power of attorney that have different purposes. You may have one, a few, or all of these in place, depending on your situation.
- General Power of Attorney – the agent can perform almost any action as you, the principal. This can include but is not limited to opening and closing financial accounts, managing personal financials, and signing on behalf of the principal. This arrangement is terminated if you become incapacitated but see “Durable Power of Attorney” below. You can revoke the power of attorney provided you can act, but it will terminate if you pass away.
- Durable Power of Attorney – In this document, you will designate another person, your agent, to act on your behalf in any and all ways stated above, even if you become incapacitated. This type of power of attorney becomes effective as soon as it is signed. You are still able to revoke this type of power of attorney, and it will become null and void upon your passing.
- Special or Limited Power of Attorney – This document sets out specific powers limited to a particular area. For example, suppose you had to leave the country. In that case, you could set up a limited power of attorney and grant your agent the authority to sell your home for you in your absence. They would have the legal authority to accept an offer and sign the closing papers.
- Springing Durable Power of Attorney – Springing power of attorney is available in some states but not all. This power of attorney becomes effective and “springs” into action upon the event specified, like becoming incapacitated.
Why is Having a Power of Attorney Important for Estate Planning?
Just as there are different types of power of attorney documents, there are various reasons to have one. The first and most important reason to have one in place is that no one knows what will happen from one day to the next. You never know when an emergency will arise, and a power of attorney may be needed.
Secondly, suppose you do not have a power of attorney in place. In that case, there may be no one to take care of your financial and medical needs if you become incapacitated, or conversely, there are too many people to represent you and your interests. A power of attorney gives clarity to your loved ones about your wishes when you aren’t able to express them yourself and will likely avoid having to go through the process of appointing a guardian for you.
Who Do I Pick as an Agent?
Emotion versus Logic
Most people choose their spouse, a close friend, a relative, or someone they trust. But anyone over the age of 18 (in most states) can be named an agent under a power of attorney. When selecting your agent, you are not necessarily choosing the person that is closest to you. You want to make this choice with your head and not your heart. You want to select the person that will best represent your wishes.
For example, you may be closer to your older sister. Still, she may be more prone to following her heart and making emotional decisions. While your little sister, to whom you don’t talk as often, is a by-the-book personality who will follow your wishes and do what is right. While your agent may disagree with the directives, you trust them completely that they will be willing to follow through, no matter their personal opinions.
You want to go with the person you trust the most to follow your wishes outlined in a power of attorney. If the person you choose makes you feel like you are being pressured to change your decisions and directives, then that may be a clear sign that you need to find someone else.
Five Important Traits
You want to look for five important traits in the person you are looking to appoint as your agent.
First and foremost, you want to find someone who has the willingness to serve. It can, in the event of an emergency, be a stressful and demanding responsibility. You want to make sure the person you pick is willing and able to handle that. You want to choose someone who lives nearby or travel to your area at a moment’s notice. You will also want to pick someone who can be assertive. They will be following your directives. You do not want someone who will easily bend to other family members’ pressure if they want something different. You want to look for someone who is articulate. Are they going to be able to calmly and sternly state your needs/wishes? Someone trustworthy. Essentially, you are placing your life in their hands; you want them to be someone you trust implicitly.
Final Thoughts on Estate Planning Deep Dive – Power of Attorney
No one likes to think about what could possibly happen in the future when it comes to illness, incapacitation, and even death. But spending the time to think things through and make the right decisions for yourself and your loved ones, while times are good, is going to make the potentially bad times just that much easier.
Thanks for reading the Estate Planning Deep Dive: Power of Attorney!
You can also read Essentials of Estate Planning by the same author.
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Jessica Strull, a freelance writer who works with leaders looking to drive employee engagement and increase customer satisfaction. She is passionate about bringing awareness to the working female perspective. Jessica holds a bachelor’s degree in Human Resource Management. When she’s not writing you can find her binging bad movies, reading great books, or hanging out at Walt Disney World. Find Jessica on jessicastrullwrites.com or LinkedIn.