The Financial Spare Tire

A financial power of attorney is like a spare tire—easy to forget about until it saves the day. But not all POAs work the way you expect when the time comes. This post walks you through what a financial POA can (and can’t) do, common pitfalls, and how to make sure yours will actually work when it matters most.

A colleague of mine, Ken Robinson, JD, CFP®, says a Financial Power of Attorney is “like carrying a spare tire in your car. If you need it, you’ll be very glad you have it. But there are some problems it won’t fix—even though you did what everyone said you should to prepare.”

This blog post will answer your questions—some you might not know to ask—about these “spare tires.”

What is the Financial Power of Attorney (POA)?

It is a legal document that says who can act when you can’t. It gives your agent the right to act on your behalf and spells out what and when.

When would I need it?

Two examples: I was the financial POA for my parents. They were out of the country when a large bill came, and funds needed to be transferred between accounts to pay it. This is the document I presented to carry out that task.

Later, I stepped up as their power of attorney to reallocate their investments when my dad was on hospice and lacked the ability to give those instructions.

What can go wrong?

In the decades since the above examples occurred, things have changed.

The power of attorney my parents drafted was the original one done when they wrote up their wills, at the time at least ten years old. The increase in fraud, particularly around check writing and signing, has changed the extent to which they are scrutinized and the procedures around them.

Today more than likely I would need to have an institution-specific power of attorney to access their accounts, a requirement Schwab and Fidelity both have. And if it’s more than three years old, it’s highly likely it would be rejected.

Finally, my parents named both my sister and me in the document. Let’s say instead of me as first agent, my sister was first and I was successor, but she was out of the country with them, so I stepped in to claim the power. In this situation, it’s not uncommon for institutions to reject the document because they don’t want to be responsible for verifying that the first person appointed is not able to serve.

What might it not cover?

In addition to the examples given above, that it could be outdated, not custodian-specific, or you can’t prove your right to the successor role, one big issue is with “springing” powers of attorney.

These require something to happen before the agent can act. They are different from “durable” ones that take effect immediately. You might want to place this limitation to avoid granting these powers as soon as you sign it because it makes you uncomfortable.

You think, “I’ll name the person, but they won’t have the power until X or Y happens,” such as I am incapacitated in an accident, suffer a stroke or am in a coma.

It is often time-consuming and burdensome for your agent to meet the requirements of proof, at a time when they’re scrambling to figure out how to pay for your care or get into your house to feed your cat or get your wrecked car towed to the shop.

The bottom line here is that you need to choose the right agent, someone who is trustworthy, financially competent, available and has good communication skills. If you don’t trust the person, you need to find someone else. Perhaps this is when a professional fiduciary can be a suitable choice. And if you want to name more than one person, create separate documents so each agent has his/her own.

What else?

If you are incapacitated without one, the court may appoint a conservator to make decisions for you. This is a lengthy and expensive process. Everyone, even a healthy 18-year-old, should have one.

The powers granted are in force as long as you are alive; it dies with you. The right to manage the affairs of someone after they pass is appointed in a will, or a trust if there is one.

Make sure to update your power of attorney every 3-5 years and after major life changes.

If you are an adult child caregiver and one of your parents has been the money manager, this is a sensitive and important topic to bring up, to make sure the less-involved parent has a financial power of attorney. If relocation to another state is likely, that needs to be part of the planning.

Imagine this scenario: the parent with the password and important documents knowledge dies, and the parent left to manage is cognitively declining. She (it’s more often than not a she) needs to demonstrate competence to name a power of attorney. In this circumstance you have a limited window of time to get this done. So much better to have the tender and possibly uncomfortable discussions before a crisis to avoid the chaos that can ensue.

Finally, Social Security is a federal program, and as such doesn’t recognize state-specific powers of attorney. You need to become a representative payee to handle Social Security on behalf of someone else.

LifeCraft Financial Planning does not provide tax or legal advice. The appropriate professionals should be consulted on all legal and accounting matters prior to or in conjunction with the implementation of any strategy.