My parents are aging…do I need a financial power of attorney?
As our parents age, they have to consider what happens to their assets in the case they are mentally or physically unable to handle their affairs. Creating a power of attorney for finances allows someone they trust to manage not only their day-to-day business but potentially their entire estate. It’s not an easy conversation to have, but taking care of it before a crisis happens can simplify your parents’ lives and protect them.
And drawing up a power of attorney can lower costs. If there is no power of attorney and relatives or loved ones are forced to seek a guardianship through the probate courts, disagreements can occur over who should be granted those rights, lawyers are hired, costs rise and the proceedings are public.
Even marriage can’t guarantee an issue-free financial life. If your parents own property or vehicles in states that require consent from both owners to complete a sale (known as community property states: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin), the incapacitated spouse can’t consent and the other spouse’s hands are tied without a power of attorney. If the property is in the incapacitated spouse’s name only, a power of attorney is the only recourse.
Designing a power of attorney is up to each individual, but the person must be competent at the time it is created. Through a power of attorney, responsibility is given to an “agent” or “attorney-in-fact” – the person authorized to handle the financial affairs – to complete a range of duties or even a single transaction. This can include:
- Selling stocks
- Managing real estate
- Writing checks
- Signing income tax returns
- Opening, closing and accessing bank accounts
- Entering safe deposit boxes
- Managing bills and payments
- Selling property
- Receiving account information or reports
It also is up to the person creating the power of attorney to decide how long those powers last. A power of attorney can be revoked at any time.
One important thing to remember if a power of attorney is revoked – let the financial institution know as well. If the bank doesn’t know, it will continue to operate under the assumption the power of attorney is active.
According to the AARP, there are three types of powers of attorney:
A conventional power of attorney begins when a person signs it and ends when he or she becomes mentally incapacitated or its purpose is fulfilled.
A springing power of attorney begins only when a specified event occurs, such as when a person becomes incapacitated. A springing power of attorney must be carefully drafted to prevent any difficulty in determining exactly when the “springing” event has happened.
A durable power of attorney begins when it’s signed, and it remains in effect throughout a person’s lifetime, unless it is canceled. This is usually the best choice because it remains in effect even after that person becomes incapacitated. And unlike with a springing power of attorney, no one has to worry about determining when it becomes effective.
Your parents’ finances are theirs to control even with a power of attorney in place. And upon their death, the power of attorney expires and their chosen agent can no longer make decisions for them.
A lawyer can help establish a power of attorney. For examples of how a power of attorney should read, the state of Ohio offers sample forms here.
Here are a few more tips from the Consumer Protection Financial Bureau (CPFB) so your parents can avoid power of attorney abuse:
- Trust, but verify. Only appoint someone they really trust and make sure that person knows their wishes and preferences. They can require in their power of attorney that their agent regularly report to another person on the financial transactions he or she makes on their behalf.
- Have them tell other friends, family members and financial advisers about the power of attorney so people close to them can look out for them.
- Beware of someone who wants to help out by handling their finances and be their new “best friend.” If an offer of help seems too good to be true, it probably is.
The CPFB also offers free guides to help financial caregivers understand their roles.