Understanding the Two Financial Powers of Attorney
There is a document in your estate planning portfolio that is referred to as a financial power of attorney. This document gives an individual the right to sign your name as if they are you. When you appoint someone to sign your name, you are called the “principal.” The person you appoint is called your “agent” or your “attorney-in-fact.” This does not mean you are giving your attorney the authority to sign your name; it is simply the legal designation given to the person you have appointed to act on your behalf.
This document is different than appointing a trustee in a trust. First, a trustee signs their own name, not yours. Second, a trustee can only deal with assets owned by the trust. If your signature is needed on an asset not owned by your trust or on a transaction not related to your trust, you need a financial power of attorney.
Some examples of when the financial power of attorney is needed occur when an individual has Alzheimer’s disease. The agent should use this document to cancel the individual’s credit card, have the mail redirected to the trustee of the trust, address issues regarding retirement accounts and pension plans, and the list goes on.
A financial power of attorney is only valid while the principal is alive. Consequently, it is typically used when the principal becomes incapacitated but before the principal passes away. In other words, there is a “window” when the power might be needed, and when that window closes (death of the principal), the document is useless. Time is of the essence.
The reason this is so important to understand is because there are two kinds of financial powers of attorney. One is an immediate power of attorney, and the other is a springing power of attorney. The springing power of attorney is not valid until the incompetence of the principle is established. Often, this is done by going to court, having the principle examined by a doctor, or by some other method specified in the document. The challenge is dealing with the obstacle of proving the incompetency of the principal, because it takes time and often necessitates the cooperation of a person who is incompetent. The problem, again, is if the principal passes away before the incompetency can be established, and the power of attorney becomes useless.
Consequently, we do not prepare “springing” powers of attorney. We only prepare “immediate” powers of attorney. Furthermore, since the power of attorney is immediate, it is extremely important to specify exactly what the agent can and cannot do. This is the reason why this document is often over 30 pages long, to protect you and your family when the time comes.