Financial Power of Attorney: Everything You Need to Know

Sometimes it’s just not possible for a person to manage their own finances. When this happens, preparation makes all the difference. Empowering someone you trust to step in can keep you and your loved ones protected no matter what happens. That’s precisely what a financial power of attorney does.

What is a financial power of attorney?

Financial power of attorney is when you authorize a person to manage your finances. This can include managing accounts, investments, bills, taxes, real estate, etc. They can be customized to specify exactly what’s allowed, when they can be used, and more. But the general idea is to enable your finances to be handled by someone in case you’re incapacitated or otherwise unable to yourself.

What does a financial power of attorney do?

Financial Powers of Attorney (FPOAs) are powerful tools that put you in control even when you’re incapacitated. It enables you to authorize an agent to act on your behalf based on specific instructions you set. But more than that, it also offers protection. Agents have to act in your best interest, keep detailed records, maintain your privacy, and generally operate within strict professional standards.

Some common duties and responsibilities of an agent include:

• Act in the best interest of the Principal (you)
• Keep detailed records of all financial actions they take on your behalf
• Keep your funds and assets completely separate from those of the agent
• Maintain privacy and confidentiality around your finances
• Operate with honesty, integrity, and due care
• File and pay taxes on your behalf
• Manage any investments, assets, or properties you may have
• Pay bills, utilities, and generally handle ongoing financial obligations
• Manage bank accounts
• Handle retirement, estate planning, insurance, and social benefits

Types of financial POA

There are two ways to divide FPOAs: by scope or authority. They can be general (giving broad authority to handle financial matters) or limited (where only specific actions are authorized). The other two categories you should know are durable and non-durable based on whether the FPOA terminates or remains in force if you become incapacitated. Here’s a breakdown to help you understand these differences.

Durable FPOA

Durable powers of attorney remain in effect regardless of whether you’re incapacitated or not. For example, you may decide to authorize an agent to manage your taxes on your behalf and have a durable FPOA so they can continue that work even if you get lost wandering the upper peninsula for weeks.

Durable FPOAs can also be immediate or springing. An immediate FPOA takes effect as soon as you sign the agreement. A Springing FPOA only takes effect when under specific conditions, for example if you become incapacitated.

Nondurable FPOA

Unlike Durable FPOAs, non-durable variants are designed to remain in force only while you are able to make decisions. As soon as you become incapacitated for any reason, the agent can no longer act on your behalf. Like Durable FPOAS, these can be limited to specific actions or general.

Non-durable FPOAs are useful in cases where you only need an agent to assist you on a temporary basis. For example, if a relative passes away and you need assistance with executing their will and managing their estate, you might use a limited non-durable FPOA.

Why do you need a financial power of attorney?

While you may assume they’re only for people in very specific situations, many people can get a lot of value from using an FPOA. From going on vacation to selling assets, they can help give peace of mind while ensuring your financial affairs are handled responsibly. Here are some common examples of ways they can be used and which types are most appropriate:

• You’re going on vacation and won’t be reachable: If you know you’re going to be unreachable for a time and want to ensure your financial affairs are handled in your absence, you might use a limited non-durable FPOA.
• You may become incapacitated: If you have a condition that may result in incapacitation, or simply want to be extra careful, a general springing durable power of attorney can take effect as soon as you’re no longer able to manage your affairs on your own.
• You want help with financial management: You may simply not want the responsibility to manage some aspect of your finances like handling taxes. Here you can use a limited non-durable power of attorney to authorize an agent to handle that on your behalf.
• You want to avoid needing a conservatorship: In some situations where there’s a risk of you or another loved one requiring a conservatorship, an FPOA can be a more limited option for ensuring finances are managed properly.
• You need to sell some assets: You may have a property you want to sell but not wish to be involved in the process. Here you could use a limited non-durable power of attorney to authorize an agent to handle that sale on your behalf.

Who should consider getting a financial POA?

Financial powers of attorney aren’t just for the ultra-wealthy or severely ill. Even young and healthy people may consider an FPOA to help manage complex or difficult financial situations. Here you’ll need to weigh the costs against the benefits of getting that help. In particular, if you need a trusted third party to handle matters, an agent using an FPOA may be ideal.

Or, you may use a springing durable POA as a kind of insurance in case something unexpected happens to you or a loved one. In such cases the POA may never even come into force, but it still plays a role in creating peace of mind. This type of FPOA may be appropriate for a person of nearly any age or health status.

How do I choose the right person as my POA agent?

While all POA agents must operate under the same professional standards, there are still important differences you should consider. Specialization is one of the most important. If you need an agent to handle taxes alone, you should find a tax specialist. If you need more general financial services, you may hire an agent who works for a firm that can give them access to specialized advice when needed.

You should also consider finding an agent both you and your loved ones trust and work well with. Open communication is essential in order to work together and find the best type of FPOA for your needs. There may also be practical concerns like working with someone who works nearby. If you need advice or a public notary, we can help.

How to get a financial power of attorney

The first step is to use the criteria mentioned above to find the right person to act as your agent. Then, you can have an open discussion with them about your needs so you can decide on the right type of agreement. You’ll want to have an attorney involved to review the agreement and ensure you’re protected.

Once you’ve got an agreement everyone can work with you’ll need to sign it while meeting your state’s requirements. In Michigan this means getting the contract notarized with two witnesses. You may also want to consider finding a successor agent in the event your regular agent is unable to perform their duties.

Can I revoke or change my financial POA?

As long as you are of sound mind, you always have the right to revoke or change an FPOA. This is done through a written notice that lays out exactly what you would like to change. This notice is then presented to your agent and any relevant parties through something like certified mail to ensure there’s a record of its receipt.

In most cases, you’ll then prepare a new FPOA to replace the previous one. Or, you may simply not need it anymore. Often people will renew their FPOA annually, using it as an opportunity to make adjustments and ensure it evolves and continues to meet their needs.

What happens if I don't have a financial POA?

Without an FPOA, you can take on significant financial risk if you were to be incapacitated or even unreachable for some time. In such cases, your family or loved ones may need to go through the courts to have a legal guardian or conservator appointed. This can be a very expensive and time-consuming process.

In the meantime, bills can go unpaid, accounts can be frozen, investments may be neglected, etc. In these cases, your wishes may also be unclear, potentially creating conflict within your family or loved ones about the best actions to take. FPOAs, by contrast, provide clarity and ensure your finances are handled responsibly and according to your wishes without the need for lengthy legal processes.

Common mistakes to avoid with financial POAs

• Selecting an unsuitable agent: your agent should be well-versed in the kind of financial services you need from them. For example, if they will be responsible for managing real estate, investments, paying taxes, etc. they should be knowledgeable in that area.
• Not updating or revoking an FPOA when it becomes outdated: If your FPOA expires after one year and you forget to update it or create a new one, you can end up with serious problems. Alternatively, if your wishes change and that isn’t reflected in your FPOA, those wishes can’t be acted on.
• Failing to properly define the agent’s powers and responsibilities: A lack of clarity or incorrect information here can prevent your agent from acting according to your wishes or even open your FPOA up to legal challenges.
• Making errors in drafting, signing, or witnesses: If your FPOA is not written and legalized properly, it can be challenged in court and found not to be legally enforceable. This can create enormous headaches and complications.
• Failing to understand your FPOA: It’s vital that anyone signing an FPOA have a proper understanding of what they are agreeing to. Fortunately, the notary you use to sign the document should help ensure this is the case.

Let us walk with you

Financial powers of attorney are invaluable tools for ensuring you or those you love are financially protected. Whether for a planned or unplanned event, they help give peace of mind and ensure your finances are properly managed.

The trick is understanding all the options out there, finding the right agent, and ensuring your FPOA is handled properly. That’s where being an orsa member comes in handy. Our friends and partners at Trust and Will can help walk you through estate planning and power of attorney options, keeping you informed and protected each step of the way.