While most people understand the value of a long-term income strategy and estate plan, many fail to consider the importance of designating a power of attorney (POA) until a serious medical event occurs. And at that point, it may be too late.
This is an issue that should be addressed well in advance of when you need it. With a POA designation in place, somebody will be in a legal position to act on your behalf if you’re suddenly incapacitated and unable to make decisions. You can become incapacitated and unable to handle your own financial affairs at any age - say, in the case of an accident or an unexpected health issue - but the risk increases as you grow older, says Tara Ambrose, manager, Senior & Vulnerable Client Initiatives, at RBC Wealth Management-U.S.
A durable financial POA can step in to handle your financial matters when you’re no longer able to, or when you no longer wish to retain control. This is distinct from a health care POA, which only allows you to delegate important medical decisions.
“If you’re already retired or about to be, you should give serious thought to making a power of attorney designation,” Ambrose says.
Identifying the right designate
You can name a family member, friend or even a professional (such as an attorney) to take on POA responsibilities. The goal is to identify someone who will be able to act as a trusted and reliable surrogate.
“The trust factor is critical,” says Ambrose, “because you don’t want to be exposed to a situation where the person with the POA designation takes advantage of their position.”
Married couples may consider their spouse to be the potential surrogate they would trust the most, but as both grow older, each person could lose the capacity to make decisions. In such cases, it may make sense to name someone else, such as a trusted family member, to carry the responsibility. It is important when establishing a POA designation to name successors who can step in if the primary designate is no longer able to fulfill the role.
Roles and responsibilities
The two primary parties involved in the POA arrangement are:
- The principal, who identifies the individual or entity who will be responsible for making decisions if the principal is longer able to; and,
- The agent, the individual or entity designated to fulfill the POA role. This is also known as attorney-in-fact.
The principal should carefully consider the specific powers granted to the agent in the POA document. Should the agent be able to change beneficiaries or gift money to themselves or others? These powers, if exploited by an agent, may lead to abuse and family disputes. Carefully read through each section of the POA document before signing or discuss with your attorney how to create your POA document so that it limits possible exploitation.
The agent may not be familiar with the fiduciary role to which they’ve been appointed. It’s important the agent understands their four primary responsibilities:
- Make decisions in the best interests of the principal, superseding the agent’s own interests, or those of others.
- Manage money and property with care on behalf of the principal, ensuring that bills are paid, debts are collected and all investment decisions are prudent.
- Never co-mingle the principal’s money or property with anybody else’s, and avoid reimbursing yourself with the principal’s personal funds.
- Keep accurate records of all financial transactions, including payments, expenses and investments.
Be aware of your state’s laws
The ability to establish a POA designation is something individuals can take upon themselves without having to deal with courts. The POA designation is, however, a legal document, and in many states you’re required to complete appropriate paperwork and notarize all signatures.
“It’s important to comply with the laws of your state,” says Tara Ruedy, a paralegal with RBC Wealth Management-U.S. who regularly reviews POA arrangements. “There is general uniformity in the laws among different states, but some states are very specific in defining the power of attorney role, while others are less so.” Ruedy recommends that a POA designation outline very specific guidelines to direct the actions of the individual selected for the role.
A sense of urgency is appropriate
You never know when a health issue will arise that may leave you unable to manage your own financial affairs. That could be a physical issue, or, as is becoming more likely in recent years, a cognitive one; according to the Alzheimer’s Association, the number of Americans living with dementia could triple by 2050.
If a POA is designated prior to your becoming unable to manage your affairs, you’ll be prepared. But, with no such designation in place, significant issues can occur that may complicate your financial life.
“Try to avoid doing it at the last minute, or failing to do it at all,” says Ambrose, adding that it’s also important to keep the designation updated by reviewing it frequently. If a person no longer has the capacity to make a designation, she explains, other measures will be required that will make the process of managing financial matters more complicated.
Though an attorney isn’t required, Ruedy suggests working with one anyway to ensure documents are drawn up correctly and with appropriate specifications. “If an attorney is feasible for you to consider, it makes sense to enlist those services,” she says.
Planning for potential incapacity in the future should be part of your retirement and estate planning conversations. A POA designation can give you peace of mind that your interests will be protected if something unexpected happens.