In addition to the needs and demands of their personal financial affairs, many people accept the responsibility of managing financial affairs on behalf of a loved one. The situation may arise either as the result of a sudden incapacity, like a car accident, or as a part of a long-term transition plan as we age, like a progressing illness such as Alzheimer’s disease or dementia.
You may be very experienced in managing your own money, but the person you are helping could be in a different part of their financial life, have different financial complexities, or have different goals and objectives. You want to be comfortable that you have the knowledge and experience necessary to be an effective fiduciary. In this article, I will share some steps that we take with clients to help prepare them to make financial decisions for their loved ones as their power of attorney.
Types of Power of Attorney
The most common way to accept the responsibility of managing another’s affairs is by using a power of attorney (POA). This written legal document is usually included as a part of a broader estate plan and is an authorization for a person (the agent or attorney-in-fact, also referred to as the POA) to act on behalf of another (the principal) in a legal capacity. A POA is governed by a fiduciary standard for a person, just like investment advisors are for investment portfolios: as a steward to make decisions in the best interest of the principal. This role comes with a great deal of trust and responsibility. Generally, there are powers of attorney for financial matters and for healthcare matters in estate planning, which are subdivided further based on when the power of attorney is active:
- A durable power of attorney is effective immediately and lasts until the principal passes away. It can be revoked if the principal changes their mind.
- A springing power of attorney becomes active under a specific condition, usually the incapacity of the principal. Note that there could be delays for this to be effective as the agent must get someone, usually a doctor, to certify that the person is unable to make their own decisions.
Regardless of when the power of attorney becomes active, when you accept the duty of POA, there are steps that you can take to make it easier and give you the confidence that you are acting effectively and responsibly.
Many states have standardized POA forms, and the laws surrounding POAs can vary from state to state, so it’s best to consult with an attorney versed in the law of your state to get sound guidance on the document.
How Will I Know What To Do?
Your biggest consideration when acting as POA is acting in the interest of the loved one or friend you are helping. The easiest and best way to do this is to discuss the wishes, goals, and needs of the principal. These can be tough conversations, but doing so before the need arises will give you the confidence that you are indeed acting in the best interest of the person you are acting on behalf of.
When discussing financial matters, you will want to have a full understanding of the bills and cash flow needs of the principal, where they bank, where they invest, where the money comes from, and where it needs to go. Furthermore, understanding the financial goals of the principal will help you make financial and investment decisions consistent with their needs and wishes.
I’ve Accepted a Power of Attorney. Now What?
Financial institutions often have their own forms that are required before you will be able to act on the accounts, and this can take longer than anticipated. In an ideal world, you will have the time to get the necessary authority registered before it is needed.
You and the principal should reach out to all financial institutions that you will need authority over in order to manage the principal’s financial affairs. These can include:
- Checking and savings accounts
- Investment accounts
- Retirement plans
Each institution may have its own unique requirements to recognize you as the POA, so if you have the opportunity, you should reach out well in advance of a need. This is not always the reality of the situation, but you can be prepared by having a list of the institutions where the principal does business.
Coordinating With Advisors
One of the benefits of working with trusted professional advisors is the continuity they can provide when you are called to duty as POA. Even if the authority is not immediately active, you should be aware of (and ideally introduced to) the professionals working on behalf of the principal. The most important financial professionals to work with as POA are:
- Estate planning attorneys
- CPA or tax professionals
- Wealth advisors
A close relationship with professional advisors who are fully abreast of the unique complexities of your principal’s financial affairs can help you have the confidence needed to be an effective POA. As financial planning first advisors, we coordinate with the client’s other advisors to make decisions in their best interest, and we can facilitate discussions, share important details, and help you execute on your fiduciary duty to your loved one or friend.
So, you’ve become a financial power of attorney, and you now have the added responsibility of managing financial affairs on behalf of someone else. While it is certainly a stressful time, you and your principal can take steps to make the transition easier for you.
This is by no means meant to be a comprehensive to-do list for the power of attorneys, but whether it’s putting a plan in place for future incapacity or an emergency that necessitates it, please feel free to contact us to see if we can help facilitate a discussion and build a plan to help you be the best POA that you can be.
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