It may not be immediately obvious how giving another person the potential to control your bank accounts and financial transactions will protect you. Granting someone else financial power of attorney may feel risky. In fact, there are risks associated with granting this type of authority, and those risks must be seriously considered and carefully managed in two ways:
- Choosing the right person
- Ensuring that the document you sign confers only the authority you intend
It is also important that you employ the proper terminology to ensure that the power of attorney will remain in effect when you need it most—when you are incapacitated in some way and unable to manage your own financial affairs.
What Protection Does a Financial Power of Attorney Offer?
While some people grant a trusted friend or family member power of attorney for other reasons, the key benefit is that creating an effective power of attorney while you are healthy and clear-headed ensures that someone you trust will be able to take care of your finances and financial obligations if you become unable.
Unfortunately, many people don’t think through the possible ramifications of falling ill or becoming mentally incapacitated without having made arrangements for someone to take charge of financial matters. Imagine, for example, that you’ve been paying premiums on a term life insurance policy for decades. Then, you fall ill, and no one has the authority to write a check from your account to pay the premiums. Your policy could cancel for non-payment, leaving nothing to show for your years of faithful payments.
The same principle applies across a wide range of financial obligations, including critical payments such as your mortgage and property taxes.
Alternatives to a Financial Power of Attorney
Of course, if you fail to make provisions for management of your finances, your family isn’t entirely without options. A family member or other third party could petition for guardianship and obtain a court order that would allow him or her to access your accounts, pay your bills, and attend to other important financial matters.
However, obtaining a court order takes time and money. A relative attempting to assist you while you were unconscious or otherwise incapacitated would have to initiate a legal proceeding, likely hiring an attorney and paying court costs out of her own pocket. And, account could be accruing late fees, going into default, or even canceling in the time it took to go through the court proceeding and obtain an order.
Talk to an Experienced Professional about Your Financial Power of Attorney
You can search the Internet and download a sample financial power of attorney, or pay a small fee to obtain a fill-in-the-blanks form to create your own. The problem with a do-it-yourself financial power of attorney is that an inexperienced person can easily make critical errors. For example:
- Specific language is required to ensure that the power of attorney does not terminate if you become incapacitated
- You must understand the difference between a standard financial power of attorney and a “springing” power of attorney, or you may inadvertently grant more authority than you intend
- You must make clear decisions about exactly what powers you wish to extend, and then express the scope of the authority in unambiguous legal terms
It can be difficult for a layperson with little experience of powers of attorney and similar documents to anticipate the issues that the appointed party may be called upon to resolve, or the possible abuses that may occur without appropriate limitations.
Working with an experienced estate planning lawyer will help to ensure that you fully understand what authority you are granting to a third party. A knowledgeable attorney can craft language to ensure that the document fulfills your specific goals, from choosing when the authority takes effect and what type of events might terminate the authority to defining the scope of the power of attorney.