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Financial Power of Attorney Documents

By:Robert Moore, Thursday, September 15th, 2022

Legal Groundwork

When going through the estate planning process, determining and implementing the terms and conditions of the will or trust consume the most time.  However, some thought and consideration should be given to the Power of Attorney (POA) documents that are typically completed at the same time as the will or trust.  The POA documents designate who may act on behalf of someone who is alive but unable to act for themselves.   These documents are very important, especially for those people who are operating farms and businesses.

There are generally two types of POAs – financial and health care.  The financial POA is sometimes called a General Power of Attorney or Durable Power of Attorney.  Regardless of the name, the financial POA designates who may act (Agent) on behalf of the person who is incapacitated (Principal).   Most financial POAs give the Agent full authority to manage any and all assets owned by the Principal.  Due to this broad authority, the financial Agent has significant power and control and thus should be someone in whom the Principal has complete confidence and trust.

It is possible to limit the scope of authority for the financial POA.  Perhaps the Principal gives authority to the Agent to manage all assets except real estate so that the Agent cannot sell any of the Principal’s farmland.  Or, perhaps the Principal gives authority to manage all non-farm assets to one person and authority to manage all farm assets to another person.  The POA can be customized to meet the goals and objectives of the Principal.

One of the more important terms of the financial POA is when it become effective.  There are basically two options:  the POA can become effective when the Principal becomes incapacitated or become effective immediately upon execution of the POA.  Let’s discuss the advantages and disadvantages of each.

Having the POA become effective only when the Principal becomes incapacitated ensures that the Principal will maintain full control over their assets while they maintain capacity.  The Agent has authority over the Principal’s assets only after the Principal has become incapacitated.  Typically, incapacity is determined by a physician after an examination of the Principal.

A logical question is: why would you ever want your POA to become effective until you become incapacitated?  There are two reasons.  First, a person who becomes mentally incapacitated is usually the last person to know it.  That is, people with dementia or other mental problems will usually not admit they are unable to make decisions for themselves.  Additionally, getting the person who may be incapacitated to visit a doctor to be examined for incapacity may be very challenging.  So, making the POA effective upon signing may save the Agent much frustration and grief by not having to get an incapacity determination from a doctor.

Consider the following example.  Bill is not married and names his niece, Cathy, as his financial POA.  Bill has always been a little suspicious of everyone so he causes his POA to become effective only upon his incapacity.  Bill develops a medical condition where he becomes unconscious and thus is obviously incapacitated.  Cathy’s authority as Bill’s Agent becomes active and she can begin managing his assets and paying his bills.

Let’s change the scenario a bit to show why the time of effectiveness is important.  Bill starts to show signs of dementia and begins to make bad decisions with his money.  Bill starts giving his money away to unscrupulous people and making poor business decisions.  Cathy sees this happening but cannot convince Bill to see a doctor for a capacity determination.  The more Cathy asks about seeing a doctor, the more upset Bill becomes because “there is nothing wrong with me, it’s my money I can do what I want with it!”.  By the time Bill is actually deemed to be incapacitated by a doctor, much of his hard-earned wealth has been squandered.

The second reason to consider having the financial POA effective upon execution is convenience.  Sometimes, someone may be perfectly healthy but due to travel or a busy schedule may need someone to act on their behalf.

In this example, Bill has named Cathy as his POA and the POA is effective immediately.  Bill is in the process of selling a farm and the closing has been scheduled in the middle of Bill’s long-awaited vacation.  Instead of changing his vacation plans, Cathy can attend the closing and sign the documents on Bill’s behalf.

What if someone does not have a financial POA?  Without a POA, a guardian will likely need appointed for the incapacitated person.  A guardian is appointed by the probate court.  Family members can request to serve as the guardian, but it is ultimately up to the probate judge as to who will serve as the Agent.  Some attorneys serve as guardians.

Being a guardian can be challenging.  The guardian is required to take classes on the duties and obligations of being a guardian.  Also, an annual accounting must be provided to the court showing every dollar of income collected and every dollar spent.  It is much easier on friends and family to name them as the Principal in a POA rather than going through the process of having a guardian appointed by the court.

While financial POAs are relatively simple documents compared to a will or trust, they are nonetheless an important component of an estate plan.  It is best to have the POA drafted by an attorney to be sure the terms and conditions match the goals and objectives of the client.  Any adult who does not currently have a financial POA should get one at their earliest convenience to prevent their family and friends from having to deal with a guardianship.

In the next post we will discuss Health Care Power of Attorneys and Living Wills.