What is the right kind of Financial Power of Attorney for You?

A June 2020 Transamerica Center for Retirement Studies survey showed that a mere 28% of retirees have a financial power of attorney (POA)—and many people don’t understand that there are two types of financial powers of attorney that serve different purposes.

MarketWatch recently published an article “Does your estate plan use the right type of Power of Attorney for you?” that says knowing how both types work is crucial in the pandemic, especially in the event that you get sick with coronavirus.

A Durable Financial Power of Attorney can be either “springing” or “immediate.” “Durable” refers to the fact that this Power of Attorney will endure after you have lost mental or physical capacities, whether temporary or permanent. It lists when the powers would be granted to the person of your choosing and the powers end at your death.

An “immediate” Financial Power of Attorney is effective as soon as you sign the document. In contrast, a “springing” POA  means it is only effective when you cannot manage your own financial affairs, usually based upon the written opinion of two physicians.

Therefore, to begin paying your bills, your agent must have written proof of from the physicians, and he or she doesn’t automatically have the authority to ask for them.  When issues, such as doctors’ letters, are required before the agent you chose can serve you, ask your estate planning attorney for guidance.

An obstacle that requires a Durable Financial Power of Attorney can come upon you very fast and possibly include you and your spouse at the same time. For example, you may both become ill, or one could become ill and the other is absorbed in caring for their spouse.

The powers granted by a typical Financial POA are often broad and permit selling and buying assets; managing your debt, car and Social Security payments; filing your tax returns; and caring for any assets not named in a trust you may have, such as your IRA.

If you recover your capacity, your agent must turn everything back over to you when you ask.

Remember that your power of attorney documents are only as good as the people who implement them. You should also make certain anyone named knows that they’ll have the job, if needed. They must know where to find your POA and all other important information.  If you aren’t sure of the type of POA you currently have, it is worth checking as part of an estate plan update.  See our recent article for when it might be time to do that!  https://www.galliganmanning.com/when-to-update-your-estate-plan/ 

Reference: MarketWatch (Oct. 9, 2020) “Does your estate plan use the right type of Power of Attorney for you?”

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Different Kinds of Powers of Attorney

Many people know they should have a Will, but Powers of Attorney (POAs) may be even more important because they assist you during your lifetime.

Many people recognize they should have a Will.  But, in many situations, the most important planning document may be a well-drafted power of attorney as described in The Miami News-Record’s recent article entitled “Power of attorney options match different circumstances.”

When a person can’t make his or her own decisions because of health, injury, or other circumstances, a power of attorney (POA) is essential. A POA is implemented to help their loved ones make important decisions on their behalf. It helps guide decision-making, enhances comfort and provides the best care for those who can’t ask for it themselves. A POA permits the named individual to manage their affairs.  Unlike a Will, the client themselves are at risk if they don’t have a POA.

To know which type of POA is appropriate for a given circumstance, you should know about each one and how they can offer help. Now, keep in mind there more different kinds of powers of attorney than what I discuss here, but these apply to virtually everyone at some point.

Durable Financial Power of Attorney. This is the most common and is the default for most planning. These give a person decision making authority limited to the powers provided in it.  The term “durable” means that it continues to be in effect when you are incapacitated.

Some of the key issues to determine are whether you give the agent the ability to make gifts, including to whom they can gift, the ability to change beneficiary designations, change your estate planning documents and other issues.

Springing Power of Attorney. One key issue of the POA is when it starts.  For example, it can be effective immediately upon the execution of the documents, or it can start once the POA creator becomes incapacitated.  This is a “springing” power of attorney because it “springs” into action upon the event of incapacitated.   Some people may not feel comfortable granting someone else power of attorney, while they’re healthy. This POA takes effect only upon a specified event, condition, or date.

Medical Power of Attorney. Especially in a hospice setting, it permits another person to make medical decisions on the patient’s behalf, if they lose the ability to communicate. This includes decisions about treatment. In this situation, the agent takes the role of patient advocate and communicates with the physicians.

Limited Power of Attorney. This POA provides the agent with the authority to handle financial, investment and banking issues. It’s usually used for one-time transactions, when the principal is unable to complete them due to incapacitation, illness, or other commitments.  The most obvious example is a limited POA for real estate transactions.

Powers of attorney are far more complex and important than people realize, and the law changes on them frequently.  There are many other reasons to update your estate plan as well such as described here https://www.galliganmanning.com/twelve-reasons-to-update-your-estate-plan/   If you don’t have this document, ask a qualified elder law or estate planning attorney to help you create one.

Reference: The Miami (OK) News-Record (July 7, 2020) “Power of attorney options match different circumstances”

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The Biggest Estate Planning Mistakes to Avoid

Some of the biggest estate planning mistakes are easy to avoid, including having an up-to-date will, checking beneficiary designations and planning younger.

Nobody likes to plan for events like aging, incapacity, or death. However, failing to do so can cause families burdens and grief, thousands of dollars and hundreds of hours.

Fox Business’ recent article, “Here are the top estate planning mistakes to avoid,” says that planning for life’s unexpected events is critical. However, it can often be a hard process to navigate. Let’s look at the top estate planning mistakes to avoid, according to industry experts:

  1. Failing to sign a will (or one that can be located). The biggest mistake is simply not having a will. I’ve written on this often (see here for example https://www.galliganmanning.com/everyone-needs-an-estate-plan/), but unfortunately clients consistently say they didn’t think they needed a will. Estate planning is critically important to protect you, your family and your hard-earned assets—during your lifetime, in the event of your incapacity, and upon your death.  In addition to having a will, it needs to be findable. The Wall Street Journal says that the biggest estate planning error is simply losing a will. Make sure your family has access to your estate planning documents.
  2. Failing to name and update beneficiaries. An asset with a beneficiary designation supersedes any terms in a will. Review your 401(k), IRA, life insurance, and any other accounts with beneficiaries after any significant life event. If you don’t have the proper beneficiary designations, income tax on retirement accounts may have to be paid sooner. This may lead to increased income tax liability, and the designation of a beneficiary on a life insurance policy can affect whether the proceeds are subject to creditors’ claims.  In many cases where clients tried to avoid probate, one broken beneficiary designation becomes the sole reason to probate the will.

There’s another mistake that impacts people with minor children, which is naming a guardian for minor children and then naming that person as beneficiary of their life insurance, instead of leaving it to a trust for the child. A minor child can’t receive that money. It also exposes the money to the beneficiary’s creditors and spouse.

  1. Failing to consider powers of attorney for adult children. When your children reach age 18, they’re adults in the eyes of the law. If something unfortunate happens to them, you may be left without any say in their treatment. In the event that an 18-year-old becomes ill or has an accident, a hospital won’t consult with their parents if a power of attorney for health care isn’t in place. Unless a power of attorney for property is signed, a parent may not be able to take care of bills, make investment decisions and pay taxes without the child’s signature. This could create an issue when your child is in college—especially if he or she is attending school abroad. It is very important that when your child turns 18 that you have powers of attorney put into place.

If you have any of these estate planning mistakes in your plan, please contact us for a consultation to fix these mistakes for you and your family.

Reference: Fox Business (October 15, 2019) “Here are the top estate planning mistakes to avoid”

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