Giving power of attorney (POA) to someone you trust (as your “agent”) can help ensure that your financial best interests will be protected.
POA gives the agent the authority to manage your personal finances, including paying bills, paying taxes and filing tax returns, managing your bank and investment accounts, and meeting with your financial advisor or banker on your behalf if you’re unable to do so yourself.
One major consideration when giving someone POA is determining when it will go into effect. Generally, there are two kinds of POA: Springing Power of Attorney and Durable Power of Attorney.
Springing power of attorney
With a springing power of attorney (SPOA), you name the agent in advance, but they are only given power of attorney over your financial affairs under certain conditions, most commonly if you become physically or mentally incapacitated and can no longer handle your own financial affairs.
One of the issues with SPOA is that a qualified third party, such as one or more physicians, needs to formally determine that you are incapacitated for it to take effect.
Many physicians don’t want to take on this responsibility for fear of getting involved in legal disputes with family members who might not agree with their diagnosis.
This can become an issue if important financial decisions on your behalf need to be made quickly.
If you choose an SPOA arrangement, it’s important to clearly specify in the document the “springing conditions” that will activate it.
For example, you might specify that SPOA only takes effect when:
- You become physically or mentally incapacitated due to a heart attack or stroke, cancer, advanced dementia, a major injury or other illnesses.
- Your incapacitation must be formally determined in writing by one or more qualified physicians.
- SPOA may be revoked if your condition is temporary and you’re physically or mentally able to assume control over your financial affairs (after this determination is made by one or more qualified physicians).
Durable Power of Attorney (DPOA)
With a durable power of attorney, your agent is immediately given the authority to make general or specific financial decisions on your behalf as soon as the document goes into effect.
Your agent continues to have DPOA even if you become mentally or physically incapacitated and are no longer able to make your own decisions.
The main benefit of DPOA is that your agent can start acting on your behalf right away. Unlike a springing POA, a formal determination of incapacity from a physician isn’t required. This can be critical if you need your agent to make timely decisions for you when you’re no longer able to.
Letting people know about your POA arrangement
Assigning POA is only effective if your financial institutions are aware of it. Once you have the completed form, consider providing copies to your banks, brokerage companies, IRA custodians and your financial advisor so they’re aware of the authority you’ve given to your agents and the conditions under which it will go into effect.
Choosing an agent you trust
Whether you’re choosing a SPOA or DPOA arrangement, it’s important to understand that when activated, your agent will be able to conduct authorized financial activities (like paying bills or taxes) without your knowledge or authorization.
However, this authority also creates opportunities for abuse. There have been many cases where agents have embezzled money from grantors’ accounts or used their credit cards to make major purchases for themselves.
Unfortunately, the majority of this abuse is conducted by unscrupulous family members, which is why it’s critical for you to choose an agent you trust.
You can also assign more than one agent. For example, you might give DPOA to both your spouse and a trustworthy child, so they can act together in making important financial activities.
If you change your mind, you can also change your agents by completing another POA form. You can also revoke a DPOA and replace it with a SPOA or vice versa.
Get professional help
While most states offer standardized POA forms, it’s almost always a good idea to work with an estate planning attorney to create an SPOA or DPOA with specific conditions. This is particularly important if you serve as a trustee for a family trust, where you'll want to have every element of your estate plan fully coordinated and documented.
This article was authored by Martin Baker and Jeffrey Briskin. Martin is a financial advisor and Director of Financial Planning with Canby Financial Advisors, LLC, an Investment Adviser registered with the U.S. Securities & Exchange Commission. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or ability. Martin can be reached at 508.598.1082 or mbaker@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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