The Importance of Establishing Financial Power of Attorney

Hi friends! This week’s article is about financial power of attorney. This is an important document that everyone should have, believe it or not. Before we dive into why, though, just a quick personal note.

Here we are in the middle of June already, and I hope this month finds you happy and healthy. So many graduations going on right now, and even though they aren’t what the class of 2020 imagined at the beginning of the year, I’m loving the creative ways communities are finding to celebrate. The past months have given us time to reflect through fear, isolation, grief, and rally for change. 

While we wait to see what our ever-changing world will look like for the new graduates, I’d love to continue our discussion on one of my favorite subjects: ways to protect your financial future.

You may know you need life insurance and a will. But, many people aren’t as familiar with power of attorney as a part of their financial plan. Power of attorney may be something you associate with a single transaction. Or a tool for someone that is living out of the country but has investments requiring active management.

Maybe you are married and therefore think your spouse can handle things if something should happen to you. Sometimes this is true, but you may be surprised at how limited your spouse’s rights are if sickness or an accident should leave you unable to make decisions while you are still alive. 

Types of Power of Attorney

Financial Power of AttorneyThere are different types of power of attorney documents, and reasons almost everyone should have one in place.

Ahh…the legal acronyms: POA, AIF, FPA. The power of attorney is a document where you, the Principal, authorize someone else, the Attorney in Fact (AIF), to act on your behalf. The AIF, also called Agent, does not have to be an attorney, it can be anyone 18 years or older. Financial power of attorney is specific to your finances, whereas the other common use for power of attorney relates to your health and medical wishes. This is also known as a living will.

You can establish financial power of attorney in different ways. A limited power of attorney means someone has your permission to sign only for certain documents or for a certain period of time. For example, maybe you will be out of the country while in the process of purchasing property and you designate someone to sign documents for you at closing. 

A durable power of attorney means that the person you select has power to sign for you immediately and continuously, including in the case of your incapacitation. 

A springing durable power of attorney is similar, but only gives that power in the case that you become incapacitated.

Why Would I Need Power of Attorney?

Let me give you a few examples of where a financial power of attorney may be needed. First, make sure you are not confusing an executor and power of attorney. If you have a will, your executor has no power until you have died. If you have dementia or are in an accident, your spouse can write checks from joint accounts to pay bills. But if you own property or vehicles together, both signatures are still needed to sell.  

Example 1: Conservatorship Dilemma

What if your spouse needs to withdraw retirement funds to pay bills?  If investment accounts are in your name only and there is no financial power of attorney, they have no power to act until they can establish conservatorship through the court system. 

This can be a lengthy and expensive process to prove incapacitation and intent.  Also, you are not guaranteed that the person you want in charge of your accounts is the one that will be appointed by the courts. For instance, a grown child from another marriage could challenge your spouse’s role. Without a financial power of attorney in place, you cannot guarantee who will end up in that role. 

Example 2: Joint Accounts

Aside from retirement funds, most investment accounts can have multiple names added, so often the owner’s first thought is to add a trusted person directly to the account who could act on their behalf. No lawyers needed! Unfortunately, there are many ways this can backfire. 

Adding someone to your account gives them joint ownership over that account. Suppose you have multiple children, and add the one who lives closest to the account as a precaution should you be unable to manage your own money at some point. This seemingly straightforward action can cause a lot of drama. 

The shared ownership causes tax difficulties on both sides. In fact, it also puts your money at risk if the child ever files for bankruptcy. Once added to the account, the child also has the ability to withdraw funds at their discretion. If something happens to you, the child becomes the sole account owner and may not know or remember that you intended to share your assets with other children. At the very least, the others may be hurt by what they view as favoritism. 

Using a financial power of attorney instead means that child can make decisions without transferring ownership, and the conditions of that power can be clearly described.  

Example 3: Divorce

Here’s something to consider: If you are going through a separation, your spouse is likely still the person who would make financial decisions if you suddenly could not.  You may need power of attorney to avoid that situation.

Example 4: Succession Planning

What if your marriage is great but don’t want your spouse to make financial decisions with your business or retirement investments?  Of course, he or she still has access to joint accounts. However, a financial power of attorney can provide another trusted person to handle decisions. They can also guide your spouse to sell investments or property.  Financial power of attorney allows the person of your choice to be your advocate in financial decisions. Moreover, it overrules your spouse’s authority to make those decisions alone.

Even if you do want your spouse making decisions when you are unable, what if something happens to them? For example, consider the possibility that something happens to your spouse while you are incapacitated.  Couples age together.  If you are in your 80’s with dementia, your spouse may not outlive you. A power of attorney allows you to designate a hierarchy of individuals to serve as next in line without a court dispute should one be unable to take over.

Example 5: Living Trusts

What if you have a living trust in place already?  This document only speaks for the properties held in trust.  Usually not all financial accounts are in the trust. You may still need a power of attorney.

Example 6: Business Ownership

If you own a business, you probably have a plan in place (you should!) in the event you become incapacitated. In particular, small businesses or sole proprietors may overlook this step. As a matter of fact, businesses where one person makes most of the decisions are the most susceptible if the unthinkable happens.

Hopefully by now I’ve shown you several examples where a financial power of attorney can help in a variety of circumstances. I know it’s not fun thinking about the what ifs when they involve something bad happening to you.  But a power of attorney is a simple document that can prevent big misunderstandings. Furthermore, it can make sure your assets are handled the way you want while you are still living. As such, this is ultimately an act of love towards your family and the people you care about – including yourself!

*Disclaimer: Tammy Lally is not an attorney. Please contact an attorney for legal advice.

Tammy Lally

Tammy Lally

I BELIEVE MONEY IS NOT YOUR WORTH. Tammy Lally is an author, speaker, and Certified Money Coach (CMC). She helps others master their finances by first conquering their emotions around money, then by creating a comprehensive financial plan. She brings decades of experience and endless love to her bulletproof process for money mastery. She is the author of the book Money Detox, and her TED talk on Money Shame has over 2 million views.

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