What is a Financial Power of Attorney? Exploring the Basics and Benefits

Introduction

A financial power of attorney (POA) is a legal document that allows an individual to appoint someone else to manage their finances. The individual, referred to as the principal, grants the agent they choose certain rights and authority to make decisions on their behalf. In this article, we will explore what a financial power of attorney is, the rights it gives, how to create one, who should be named as the agent, and the benefits of having one.

Explaining the Basics of a Financial Power of Attorney

What is a Financial Power of Attorney?

A financial power of attorney is a document that allows an individual to grant another person the authority to act on their behalf with respect to financial matters. It is also known as a durable power of attorney for finance, as it remains in effect even if the principal becomes incapacitated. A financial power of attorney may also be referred to as a POA or “general financial POA”.

Who Can Create a Financial Power of Attorney?

In most cases, any adult who is mentally competent can create a financial power of attorney. According to a study conducted by the American Bar Association, “The principal must have the capacity to understand the nature and consequences of the power of attorney and its execution.” However, some states may require the principal to be of a certain age before they are able to create a POA.

When Does a Financial Power of Attorney Take Effect?

A financial power of attorney typically takes effect immediately upon signing. The principal may also choose to make it effective at a later date or only under certain conditions. If the principal becomes incapacitated, the POA will remain in effect unless they specified otherwise.

What Rights Does a Financial Power of Attorney Give?

Making Financial Decisions

A financial power of attorney grants the agent the right to make financial decisions on the principal’s behalf. These decisions may include managing investments, filing taxes, paying bills, and more.

Access to Funds

The agent may also be granted access to the principal’s funds in order to pay bills or make other financial decisions. However, the principal can specify which funds the agent has access to, or limit the amount of money the agent can access.

Making Gifts

The principal may also give the agent the right to make gifts on their behalf. This could include making donations to charity or giving money to family members.

Managing Property

The agent may also be given the right to manage the principal’s property. This could include selling or transferring property, renting out property, or making repairs to property.

How to Create a Financial Power of Attorney

Gather Necessary Documents

The first step in creating a financial power of attorney is to gather all of the necessary documents. This includes the POA form, which can usually be found online or from an estate planning attorney. Additionally, the principal may need to provide proof of identity, such as a driver’s license or passport.

Choose an Agent

The next step is to choose an agent. This person should be someone the principal trusts to make decisions on their behalf. The agent should also be familiar with the principal’s financial situation and have the knowledge and skills to manage their finances.

Complete the Forms

Once the documents are gathered and the agent has been chosen, the principal can complete the POA forms. This includes providing information about the principal, the agent, and the rights and authority being granted to the agent.

Sign and Notarize the Document

After the forms are completed, they must be signed by the principal and notarized. The principal should keep a copy of the POA for their records, as well as provide copies to the agent, financial institutions, and anyone else who needs to be aware of the POA.

Who Should You Name as Your Financial Power of Attorney?

Considerations for Choosing an Agent

When choosing an agent for a financial power of attorney, the principal should consider several factors. These include the agent’s trustworthiness, their understanding of the principal’s wishes, their ability to follow instructions, and their availability. It is also important to ensure the agent is willing and able to take on the responsibility.

Commonly Named Agents

The most common agents named in a financial power of attorney are spouses, children, siblings, or close friends. The principal may also choose to name a professional fiduciary, such as an accountant or lawyer.

The Benefits of Having a Financial Power of Attorney

Avoidance of Court Appointments

Having a financial power of attorney in place can help avoid the costly and lengthy process of court-appointed guardianships. According to a study published by the National Center for Biotechnology Information, “A financial power of attorney can provide a cost-effective alternative to conservatorship proceedings in situations where an individual is unable to manage his or her own financial affairs.”

Peace of Mind

Having a financial power of attorney also provides peace of mind to the principal, knowing that their financial affairs are taken care of if they become incapacitated. It also ensures that the principal’s wishes are carried out, as they have chosen the agent and outlined their instructions in the POA.

Common Misconceptions About Financial Powers of Attorney

It Cannot be Revoked

A common misconception about financial powers of attorney is that they cannot be revoked. However, the principal can revoke the POA at any time as long as they are mentally competent. The revocation must be in writing and sent to the agent, as well as any third parties who have received a copy of the POA.

An Agent Can Act Without Consent

Another misconception is that an agent can act without the consent of the principal. This is not true. The agent must always act in accordance with the principal’s wishes and instructions outlined in the POA.

Conclusion

A financial power of attorney is a legal document that grants an individual the right to appoint another person to manage their finances. It is important to understand the rights and responsibilities that come with a POA, as well as the benefits of having one. By taking the time to create a financial power of attorney, individuals can rest assured knowing that their finances are taken care of if they become incapacitated.