A financial power of attorney document could be the most important estate planning document that you have drafted for yourself. Without a power of attorney, no one—not your spouse, not your children—can make financial decisions for you.
Some people try and work around the need for a power of attorney by adding a child’s name to their bank accounts; however, this technique has some significant limitations and dangers. By adding a child’s name to a bank account, you are making that child a co-owner of the account.
The child-owner could remove all the money from the account for himself. If the child-owner is sued, the child’s creditors could attempt to attach the assets in your account. If you die, banking law dictates that ownership of the account passes to the child-owner, meaning the child-owner does not have to share the assets in the account with your other children. Adding the child to an account only grants the child-owner access to that one account; the child cannot perform the multitude of other financial transactions that may been to be performed for you—such as selling your house, signing contracts, accessing your retirement accounts, accessing your life insurance, etc.
There is no reason to avoid having a financial power of attorney drafted for you. The document can be drafted in a manner that covers all of your needs and that protects you and your family from the issues mentioned above. Here are some of the primary issues that I often discuss with my clients.
When should a power of attorney be effective? When a person signs a power of attorney document, the person signing the document is called the “principal.” The person named to make decisions for the principal is called the “agent.”
I typically recommend that the principal make the power of attorney document effective immediately—meaning that if the agent had the financial power of attorney document, the agent could make all of the financial decisions outlined in the document on behalf of the principal. This can be intimidating for a principal because a well-drafted power of attorney will grant the agent very broad powers. Many people signing a power of attorney would think I don’t want my agent [perhaps a child] making all of these decisions for me right now.
After signing a power of attorney, the principal retains the right to make his own decisions; he is not abdicating his right to make his own decisions by signing the document. The principal retains the right to revoke the power of attorney any time he wants. If the principal destroys the document or notifies the agent that the document is revoked, then the power of attorney is revoked.
A principal could make the power of attorney effective only when he cannot make decisions for himself; this is called a “springing power of attorney.” A springing power of attorney springs into effectiveness when the principal is unable to make decisions for himself.
As good as that may sound, I have had clients have issues with a springing power of attorney. Banks have sometimes refused to honor the document when the principal is disabled and needs the agent to make decisions for him. At this time, the principal cannot speak for himself or change the power of attorney, so the agent is stuck with the terms of the power of attorney as drafted. Because of this, I recommend in most instances that the principal make the document effective immediately.
I also recommend that the principal name one agent at a time—naming a primary agent, a successor agent, and, perhaps, a tertiary agent. As with he effective date of a power of attorney, I have had issues with banks honoring a power of attorney document when the principal names co-agents. I have never had a bank tell the agent that it wants co-agents.
Finally, as mentioned, I recommend that the principal grant the agent very broad authority in the power of attorney. An agent can only do what the power of attorney document says the agent can do. As the principal, you want to ensure that your agent can do anything that you can do financially.