If you were suddenly incapacitated or unable to make decisions on your own due to injury or illness, how would you continue managing your finances? This isn’t an easy situation to think or talk about, but it’s absolutely necessary for most adults to consider because you never know if/when it could happen to you and you should be prepared no matter how small the likelihood of it occurring may be.
When an adult is incapable of managing their own finances – oftentimes due to dementia, brain injuries significantly impacting the individual’s judgment, etc. – they need a trusted, responsible individual to assume financial management duties for them. This is often referred to as a financial power of attorney.
As much as we don’t like to think about the possibility of our own cognitive declines and subsequent dependency on others to maintain our lives, it’s critical that you establish a financial power of attorney early on just in case. After all, financial power of attorney isn’t just for elderly folks – incapacitation could happen at any point: after a car crash, a stroke, a degenerative disease or other uncommon but still possible causes.
Here’s everything you need to know about what power of attorney is and how a financial power of attorney can help you keep your finances on track, no matter what happens to you:
What is Power of Attorney?
The broader term “power of attorney” refers to a legal authorization for someone to act on your behalf if/when you’re unable to act independently. There are many different types of power of attorney, including:
- General POA: authorizing someone to have many/all of the powers and rights you have yourself, even if you’re fully capable of doing certain tasks yourself
- Limited POA: authorizing someone to act on your behalf for a very specific purpose and/or for a very specific period of time
- Durable POA: a general or limited form of power of attorney that remains in effect from the moment you sign the document until your death (or if you rescind it prior to incapacitation)
- Springing POA: a form of power of attorney that only takes effect if you’re incapacitated (with strict criteria establishing a threshold for incapacitation)
What Does a Financial Power of Attorney Do?
For a financial power of attorney specifically, you authorize someone to manage your financial matters. If you have a durable financial power of attorney, you’re able to outline various tasks this individual is permitted to manage both before and after your [potential] incapacitation.
A springing financial power of attorney only takes over your finances if you’re incapacitated and unable to make decisions on your own at any point, per the incapacity criteria outlined in your POA legal agreement.
A financial power of attorney can generally do anything you specify, including: asset management, paying for expenses, buying/selling/managing real estate and other property, collecting government benefits, handling financial transactions (banks, investment accounts, other financial institutions), buying insurance policies, paying taxes, hiring legal representation, transferring property, operating your business, and more.
Clearly, this breadth of financial power makes incapacitated (especially elderly) individuals highly susceptible to financial abuse, which involves anything from monetary theft and embezzlement to check fraud, forgery and identity theft. Thus, it’s extremely important to take time to research, discuss and consider who you feel most comfortable designating as your financial power of attorney prior to signing any legal documents.
Who Should You Designate as Financial Power of Attorney?
In many instances, a financial power of attorney may be a spouse or trustworthy, adult-aged offspring (POA cannot be granted to minors). This person should also be of sound mind and have your best interests at heart, which requires careful record-keeping and avoiding conflicts of interest.
Unfortunately, there’s no guarantee your financial power of attorney will always act in your best interests (especially if you grant them sweeping powers over your money matters), but some progress has been made over the years, such as the Elder Justice Act of 2010.
How to Establish a Financial Power of Attorney
It’s best to establish a financial power of attorney as early as possible. There have been many anecdotal stories circulating about people in cognitive decline who were coerced into signing POA documents before a medical professional could determine whether they had the capacity to consent to these forms.
Power of attorney requirements differ from state to state, but there are plenty of free power of attorney resources available online to help you get started. These documents typically require notarization in order to protect the individual giving an agent the same powers and rights over their financial and medical decisions as they have on their own. But, it’s nevertheless an affordable, crucial legal decision that every adult should make prior to their [potential] incapacitation.