Your financial power of attorney doesn't need to be complicated or difficult to make, but it's important that you do it correctly. Understanding the most common pitfalls will help you avoid mistakes and make the most of your power of attorney.
Here are six common mistakes in financial powers of attorney.
When creating your financial power of attorney, you might be tempted to give authority over just the types of property you currently own. That can be a mistake because you don't know what you'll own in the future.
When you make a financial power of attorney, you can give your agent a lot of authority or very little. Basic forms often list various types of property, requiring you to check or initial each one to give your agent that authority. That list might look something like this:
Looking at that list, you'll see some types of property you don't have. For example, you might not own "commodities and options." You might be tempted to skip that category, thinking it doesn't apply to you.
There are two problems with that:
The best approach is to grant general authority over all types of property, even property you don't currently own. It's best for your agent to have the authority, even if they never use it.
Exception: Do not grant any powers to your agent that make you uncomfortable. Specifically, if you have concerns about your agent's ability to manage certain types of property or if you think that your agent might take advantage of you financially, consider other options, such as limiting the power you grant, setting up a trust instead, naming an additional person to advise or supervise your agent, or relying on a court-supervised guardianship. If you have questions or concerns, get help from an attorney.
The most common task for agents is writing checks and paying bills from your bank account. To do this, you'll have to add your agent's name to the account. That's when you might mistakenly add your agent as a joint owner.
"Adding a name to the account" can mean two different things. It can mean the person is authorized under your power of attorney to manage the account on your behalf. Or it can mean the person is a joint owner with full authority to use the account as his or her own.
You might unknowingly add a family member's name to your account as a joint owner. It happens all the time. If you do this, that account will immediately become that person's property when you die—no matter what your will says. That will mean:
Avoiding this mistake is easy. After you complete your financial power of attorney, take it to the bank. Make it clear you do not want to add your agent as a joint owner, but under your power of attorney.
It's natural to assume that, like a power of attorney for health care, your financial power of attorney will be readily accepted by any financial institution or government agency. But that often isn't the case. Working with your financial institutions now can prevent delay in the future.
Financial institutions reject financial powers of attorney all the time. Some want to see specific things in a power of attorney document, such notarization (even though a financial power of attorney in many states does not have to be notarized to be valid). Others want you to use their own form or attach a lengthy form and certification. And for some companies, the process of receiving, reviewing, and approving your power of attorney can take weeks or even months.
Government entities aren't much better. Especially big agencies like Social Security, which have their own procedures you must follow.
It's best to anticipate these difficulties before time is short.
Your power of attorney doesn't just give your agent legal authority—it also imposes legal duties. For example, your agent has a duty to act according to your wishes. Your power of attorney should lay out a full list of your agent's duties.
Your state probably has a statute that defines these duties by default. Your agent must follow those defaults unless your document specifies different duties. Varying your agent's duties away from the statutory requirements can be useful in some situations.
For example, the default duty to keep detailed records isn't always needed. This duty can become a huge burden because it forces the agent to keep track of every receipt and document. Many agents don't have the time to be so meticulous. If you trust your agent, removing this duty could make the job much easier.
To get a better understanding of your agent's legal duties and which ones you might want to change, read this companion article: Understanding Your Agent's Duties.
Whether or not you choose to change your agent's default duties, you should know your state's default rules. And so should your agent.
If you look at a simple financial power of attorney form, you might not realize that there are significant powers it does not include. You should know about these possibilities so that you can decide whether to give your agent extra authority.
Basic powers of attorney usually don't include the authority to:
Many power of attorney forms don't include these powers because they are dangerous if given to the wrong person. If not exercised with care and good judgment, these powers can deplete your property and ruin your estate plan. But if you trust your agent without reservation and want your agent to have as many options for taking care of you as possible, these powers can be very useful.
Read more about the extra powers you can give to your agent in this companion article: Giving Your Agent Extra Powers.
Because these extra powers can be dangerous in the wrong hands, you should always talk to an attorney before including them in your power of attorney document.
The last common mistake is perhaps the simplest: not using it. Your power of attorney is probably effective as soon as you sign it. That means your agent can be added to your bank accounts and conduct transactions on your behalf right away.
It's a good idea to give a copy of your power of attorney to your bank, at the very least. Consider sending it to your life insurance, investments, and retirement companies as well. If you have a financial adviser, don't have to wait until catastrophe strikes, give him or her a copy too. That way your agent is ready to step in at a moment's notice.
You don' manage your own affairs. You can put your agent to work right now. For example, you might need someone to sign papers at a real estate closing while you're out of town. You can have your agent sign the papers for you. In fact, many people use limited powers of attorney just for these situations.