Here at AgingOptions, through our partnership with Life Point Law, our staff has helped prepare thousands of estate planning documents. One of the most essential of these is what’s called a financial power of attorney, or FPOA. It’s a document that stipulates who will act as your agent in handling your finances if and when you become unable to do so.
Sounds simple enough in concept, but we’ve seen all too many cases in which someone’s financial POA had severe deficiencies. Some grant too many powers, and some too little. Some leave critical details unclear, creating confusion and delay. For this reason we were drawn to this recent article from Kiplinger in which an estate planning attorney named Allison Lee explains some of the pitfalls – she lists five in all – that y0u or someone you love can accidentally stumble into if you are careless in preparing your financial power of attorney. We think she offers helpful advice.
Serious Consequences When Financial POA is Inadequate
Lee begins her Kiplinger article with a brief definition. “Estate experts agree that a financial power of attorney is one of the most important documents to include in your estate planning,” she explains. “It allows you (the ‘principal’) to name a person you trust (your ‘agent’) to make decisions about your property and finances if you cannot.”
But she is quick to warn that while a financial power of attorney is a “powerful tool” in your estate planning tool belt, preparation of an FPOA needs to be approached with careful consideration, because the consequences for not doing so could very well be very serious.
Here are the five biggest mistakes that Lee sees people make when putting together their FPOA.
Mistake #1: Failing to Name an Alternative Agent
When it comes to choosing a trusted agent, your first choice – whoever that may be – is probably your first choice for a valid reason. You picked them because you feel that you can trust them to handle your affairs, and that’s significant. But Lee still encourages you to have a backup agent in mind, just to make sure that your estate plan is that much more foolproof.
She explains, “Designating an alternative agent allows you to specify who will manage your affairs in the event your first choice passes away, becomes incapacitated, resigns or simply refuses to act, among other reasons. It can also help avoid having the court appoint a new agent, as it may not choose someone you would have picked.” The old adage is true: don’t put all your financial eggs in one basket. Always consider a back-up agent.
Mistake #2: Creating a “Springing” Agency
Sometimes a well-intended contingency plan can end up creating more confusion that it solves, and so it is with what Lee calls a “springing agency.” She writes, “It’s reasonable to expect that your agent will not act on your behalf until you become unable to manage your own affairs. When an agency is conditioned on the incapacity of the principal, it’s sometimes called a ‘springing agency,’ because it springs into existence upon a triggering event. Provided your state recognizes springing agencies (not all states do), they can be a viable option if you ultimately decide one is best suited for your situation.”
But so-called springing powers of attorney can have downsides and drawbacks. “For example,” Lee explains, “they can create unnecessary delays, uncertainty and strife, since the agent must essentially jump through hoops at a time of need. Financial institutions are also more reluctant to accept springing powers of attorney, because they are concerned about whether the triggering event has occurred.” In other words, in a crisis, you may not want your agent being forced to prove your incapacity before they can act on your behalf.
The fix? According to Lee, it’s generally preferable to set powers that are effective immediately. “In this case,” she writes, “you can ask your agent to not act on your behalf until or unless you become incapacitated. Until this time, you can simply keep the document yourself in a safe place, until the agent needs it.”
She adds, “If you’re concerned that your agent may disregard this request and try engaging in transactions on your behalf, it’s probably time to reconsider if you’ve chosen the right person for the job.” Translation: don’t select someone you can’t trust.
Mistake #3: Granting Overbroad Gifting Powers
“One of the most powerful authorities that can be granted to an agent under a power of attorney is the power to give away the principal’s property to others,” Lee writes. Why would you want to do this? There are lots of reasons to grant your agent the authority to give gifts on your behalf.
“For example,” Lee explains, “maybe you want to make sure your agent provides birthday and holiday presents to your relatives, just as you normally would. Or maybe you want your agent to make charitable donations on your behalf to particular causes that you’ve been supporting. The power to make gifts can also help in managing Medicaid eligibility and minimizing estate taxes.”
But just like with any powerful tool, the risks of giving broad authority to make gifts from your assets must be assessed first before you offer it. Financial abuse or fraud are real dangers here. One way to avoid this is to consider restricting your agent’s gift-making authority, strictly limiting the list of persons to whom your agent is allowed to give gifts, including themselves.
Lee writes, “You should also specify the total value of gifts your agent will be authorized to make in a given year. Failing to set a limit on the maximum dollar value of gifts an agent can make to themselves in any given calendar year could have tax consequences. Often, principals simply impose a limit by setting that cap based on the annual federal gift tax exclusion amount (in 2022, that’s $16,000).”
Mistake #4: Not Alerting All Concerned When Your POA Changes
As they say, communication is key, and this is especially true for legal documents like a POA.
Lee writes, “Many powers of attorney include an express statement that all old powers of attorney are revoked or canceled whenever the document is updated or replaced. Any agents acting under a previously authorized power that is now void should be notified in writing right away to avoid any confusion — or worse. If an old power of attorney is on file with your bank or other financial institution, be sure to reach out to them, as well, and have them substitute out the superseded document.”
Mistake #5: Inadequate Planning for Managing Real Estate
Real estate management is one of the most common powers given to agents in a financial power of attorney, including the authority to rent or sell property, pay for repairs, or hire a real estate agent to assist with transactions. But the rules can be more complex than you might think.
Lee writes, “If you want to grant your agent this power, you may need to file your document with your local land records office. It’s a good idea to contact your county’s land records office to learn about any specific requirements it may have to ensure your power of attorney document is in compliance. For example, some offices require documents to have specific margin sizes to make room for filing stamps.”
To draw her article to a close, Lee finishes on a wise yet hopeful note. She writes, “A financial power of attorney is an important part of a comprehensive estate plan. To make yours work for you, it’s important to take into account your needs and objectives and plan with them in mind. By carefully planning today, you’ll be prepared for life’s unexpected moments.”
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(originally reported at www.kiplinger.com)