Estate experts agree that a financial power of attorney is one of the most important documents to include in your estate planning. It allows you (the “principal”) to name a person you trust (your “agent”) to make decisions about your property and finances if you cannot.
A financial power of attorney can be a powerful tool in your estate planning tool belt. But if you don’t take careful consideration when creating this document, you could face serious consequences. Read on to learn five of the biggest mistakes to avoid when writing your financial power of attorney.
1. Failing to Name an Alternative Agent.
You may be wondering: Why do I need a backup agent since I really want my first choice to act?
While it’s great that you’ve identified the person you think would be best suited to manage your affairs on your behalf, the most protective plans consider contingencies — including if your primary agent is unable or unwilling to serve.
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Designating an alternative agent allows you to specify who will manage your affairs in the event your first choice passes away, becomes incapacitated, resigns or simply refuses to act, among other reasons. It can also help avoid having the court appoint a new agent, as it may not choose someone you would have picked.
2. Creating a “Springing” Agency.
It’s reasonable to expect that your agent will not act on your behalf until you become unable to manage your own affairs. When an agency is conditioned on the incapacity of the principal, it’s sometimes called a “springing” agency,” because it springs into existence upon a triggering event. Provided your state recognizes springing agencies (not all states do), they can be a viable option if you ultimately decide one is best suited for your situation.
However, springing powers of attorney can have certain drawbacks. For example, they can create unnecessary delays, uncertainty and strife, since the agent must essentially jump through hoops at a time of need. Financial institutions are also more reluctant to accept springing powers of attorney, because they are concerned about whether the triggering event has occurred.
These frictions can be avoided by setting powers that are effective immediately. In this case, you can ask your agent to not act on your behalf until or unless you become incapacitated. Until this time, you can simply keep the document yourself in a safe place, until the agent needs it. If you’re concerned that your agent may disregard this request and try to engage in transactions on your behalf, it’s probably time to reconsider if you’ve chosen the right person for the job.
3. Granting Overbroad Gifting Powers.
One of the most powerful authorities that can be granted to an agent under a power of attorney is the power to give away the principal’s property to others. There are various reasons to grant your agent gift-making authority. For example, maybe you want to make sure your agent provides birthday and holiday presents to your relatives, just as you normally would. Or maybe you want your agent to make charitable donations on your behalf to particular causes that you’ve been supporting. The power to make gifts can also help in managing Medicaid eligibility and minimizing estate taxes.
Granting your agent the power to make gifts using your assets gives them powerful control over your estate. Before granting this power, you should carefully consider the potential risks involved — including financial abuse or fraud.
If you’re comfortable granting your agent this authority, consider limiting your agent’s gift-making authority. Be sure to specify who your agent is authorized to make gifts to, including if the agent should be permitted to make a gift to themselves.
You should also specify the total value of gifts your agent will be authorized to make in a given year. Failing to set a limit on the maximum dollar value of gifts an agent can make to themselves in any given calendar year could have tax consequences. Often, principals simply impose a limit by setting that cap based on the annual federal gift tax exclusion amount (in 2022, that’s $16,000).
4. Not Notifying Current Agents of a Change.
Many powers of attorney include an express statement that all old powers of attorney are revoked or canceled whenever the document is updated or replaced.
Any agents acting under a previously authorized power that is now void should be notified in writing right away to avoid any confusion—or worse. If an old power of attorney is on file with your bank or other financial institution, be sure to reach out to them, as well, and have them substitute out the superseded document.
5. Not Planning for Real Estate Powers.
One of the most common powers principals grant their agents is the power to manage their real estate. This can include renting or selling real estate, paying for repairs or renovations or hiring a real estate agent to help carry out transactions.
If you want to grant your agent this power, you may need to file your document with your local land records office. It’s a good idea to contact your county’s land records office to learn about any specific requirements it may have to ensure your power of attorney document is in compliance. For example, some offices require documents to have specific margin sizes to make room for filing stamps.
A financial power of attorney is an important part of a comprehensive estate plan. To make yours work for you, it’s important to take into account your needs and objectives and plan with them in mind. By carefully planning today, you’ll be prepared for life’s unexpected moments.
This article was written by and presents the views of our contributing advisor, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab).