Let's talk about power of attorney, or POA! What is a power of attorney for finances and why do you need one?

I'm sure you've heard of this term before, but if you haven't, don't worry, I'm here to help! Over the next few posts I want to share with you some helpful tips on two specific types of Power of Attorney – Financial POA and Medical POA.

Before I dive into those, I want to briefly talk about what a Power of Attorney is.

What is the purpose of a POA?

A Power of Attorney, or POA, is a document that creates an “agency relationship” between you and someone else.

Agency relationship: a relationship in which you have something and are granting someone else the authority to do something with it.

Then, your agent can use this document to act on your behalf. This is what POA is on the most basic level.

Within a POA, you can choose the degree of which your agent can manage certain items. You can allow them to have a very broad power to act on your behalf, or very limited power where they are only allowed to do one specific thing.

There are different ways to classify how your Power of Attorney documents are written.

Durable Power of Attorney

A Durable POA will endure even if you lose capacity. It will continue to exist even when you are no longer able to make decisions.

Non-Durable Power of Attorney

A Non-Durable POA will end once you become incapacitated. Your agent will lose their privilege to act on your behalf if you are no longer able to make decisions. Giving your stockbroker control over your day-to-day investments is an example of this. With a Non-Durable POA, they would lose this ability if you became incapacitated.

From an estate planning perspective, we create Durable Power of Attorney documents. The purpose of estate planning is to come up with a plan once you do become incapacitated. We will create POAs for our clients so that there is someone to make decisions on your behalf in this scenario – someone to handle your finances, pay your bills, take care of your property, etc.

Springing Power of Attorney

A Springing POA will create the agency relationship, but this relationship won’t start until some trigger “springs” it into action. This trigger could be when a specific event occurs or on a particular date. But, until then, your agent has no authority over your affairs.

Now that we've covered the fundamentals of Power of Attorney documents, let's look at one of the main types!

FINANCIAL POWER OF ATTORNEY

A Financial Power of Attorney will allow your agent to manage your finances, business matters, and/or property. In Illinois, this document is also referred to as a “POA for Property.”

Ok, so who really needs a Financial POA?

In estate planning, POAs are most commonly used for incapacity planning. Incapacity includes both mental or physical situations where you are unable to make decisions or complete tasks.

Mental Incapacity

Mental incapacity refers to situations in which you are not mentally able to understand and make decisions. This includes, but is not limited to, Alzheimer’s, dementia, coma, etc.

Keep in mind that you can’t create a POA document if you don’t have capacity. This is why it is so important to create one while you are healthy! Create the safety net before something happens!

Physical Incapacity

Physical incapacity refers to situations in which you are not permitted or unable to leave your home to complete tasks, but can mentally make decisions. Recently, a lot has changed regarding physical incapacity as a result of the pandemic. We can now accomplish a lot more remotely than we ever could before. However, there will still be times when you need to physically be in the location in order for something to happen.

Example 1:

My family moved back to Illinois in the late 2000s, but we still owned our home in California. I needed to sell this home but since we had already moved and no longer lived in the state, it was unrealistic, and quite costly, to fly to California just to sign the closing papers. Instead, I hired a real estate attorney to walk me through the transactions and gave him a Power of Attorney to sell the house on my behalf. This POA gave him permission, on this one day, to sign papers in my name and ensure that my house was able to close. After that, the document was no longer valid.

Example 2:

Another example where you may not be able to be physically present is when you have adult children. If your child is 18 or older, they are able to make decisions in their own name without your adult signature. However, in some instances your child may want, or need, extra help. This is particularly true for college aged students. So, it might be helpful to have a POA where you as the parent can call and make financial decisions on your child’s behalf – things like offering financial help, calling credit card companies in their name, etc.

These are just two examples of where you might need a Financial POA. There are so many more reasons why you might want to consider having one. It really just depends on your personal needs and circumstances!

Things to Keep In Mind

Powers of Attorney documents are only effective while you are alive.

The agency relationship is no longer valid after you die (you can’t give someone permission if you are no longer alive!). Once you pass away, the rules change; this is why you need an estate plan!

Whatever you allow your agent to do – you are bound by their actions!

Once that POA is signed, you agree that your agent has the authority to act on your behalf (within the parameters specified), regardless of how they choose to exercise that authority.

Take this example, you ask your adult child to help pay your mortgage payment through a POA document. Your child has the authority to write a check in your name.

Sounds pretty cut and dry, right?

While we all hope your child has integrity, legally speaking, with this type of POA, your child can also talk with your bank and renegotiate on your behalf. They can take out a loan in your name and sell your own real estate! And whether or not this was what you intended to happen, you are bound to your agent's decisions as long as it falls within the scope of the POA.

For this reason it is very important to understand exactly what power you are signing over to your agent!

Your agent is required to work in your best interest

With the previous example in mind, your agent does have a legal responsibility to fulfill your wishes and act in your best interest. If they do not, you have options for legal action. While this is not ideal, it is reassuring to know that agents are legally required to act in your best interests.

I hope you found this information useful! If you don’t have a power of attorney document in place, I encourage you to contact an attorney! Get the ball rolling on taking care of this because it can be very important!

If you have any questions about this post, or about estate planning in general, feel free to reach out!

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