Estate planning is about more than preparing for the inevitable. A good estate plan should also consider the unexpected. Your plan may have detailed instructions for what happens when you are no longer around, but what if something goes wrong while alive?
If you can no longer manage your affairs, you will need somebody to act on your behalf and in your best interest. A financial power of attorney (POA) is a legal document that lets you designate a trusted person to make financial decisions for you (sign checks, open a bank account, collect your mail, etc.). The financial POA can be immediate, meaning somebody else is authorized to act for you now and into the future, or it can be springing, that is, effective only if and when an event occurs (usually when you become incapacitated or unable to make decisions for yourself).
While every estate plan should feature a financial POA, a springing financial POA requires a little more nuance to overcome its limitations. Additionally, a springing financial POA can pose problems that may not be quickly resolved even when carefully written. That said, some people dislike the idea of making a financial POA effective immediately. They prefer to have a financial POA kick in only when necessary.
How a Springing Financial POA Works
A springing financial POA is conditional. It springs into action when you become incapacitated. This is different from an immediate financial power of attorney, which is not conditional. An immediate financial power of attorney is like an active permission slip that gives another person broad legal authority to take over your responsibilities the moment it is signed. By contrast, after a springing financial power of attorney has been signed, it remains inactive until it is needed.
Defining Incapacity
When, exactly, is a springing financial POA needed? Generally speaking, it is required when you become incapacitated. Incapacity can mean many things, including mental illness, mental deficiency, physical illness or disability, advanced age, drug abuse, or unusual events such as being kidnapped or disappearing.
The financial POA will usually define incapacity. Your doctor – or depending on how you set it up, your doctor and a second physician – must then examine you to confirm that you meet that definition of incapacity. The springing financial POA takes effect when they sign off that you are medically incapacitated.
What Happens When a Springing Financial POA Kicks In
After a financial POA spring, the person you have nominated to handle your affairs – known as the attorney-in-fact or agent – is now allowed to do what you would have otherwise done had you not become incapacitated.
With any financial POA, whether immediate or springing, you can give the agent wide discretionary latitude to act on your behalf, including managing your day-to-day affairs, handling your investments, filing your taxes, collecting your mail, and operating your business. But you can also set up a financial POA so that the agent’s power to act is limited to particular activities, such as paying your monthly bills.
In addition, a financial POA can be revoked in the future when it is no longer needed. The document should specify the exact language for revocation. It might state that you have the authority to revoke the financial POA any time that you are not disabled or incapacitated. Keep in mind, though, that revocation may require medical verification. Any signed financial POA is automatically revoked when you die.
Potential Issues with a Springing POA
Giving somebody else authority under a financial POA involves some risk because they are typically not subject to ongoing oversight by a court or third party. The agent can abuse their powers and make decisions, not in your best interest.
Not having a POA is also risky. If you become incapacitated without a financial POA, your family may need to petition the court for a conservatorship or guardianship, which can take months and cost thousands of dollars. In the meantime, until a conservator or guardian is appointed for you, it may be impossible for anyone to manage your most important financial affairs.
Setting up a springing financial POA helps avoid issues related to incapacity without giving your agent early access to your affairs, but you should be aware of the following issues:
- Lag in effect. A springing financial POA does not take effect until you have been medically determined incapacitated. This process takes time even when no one is disputing your incapacity.
- Uncertainty about incapacity. Disputes may not arise about your level of incapacity if you are in a coma or suffer a serious, debilitating injury. But disputes could arise if you are in a state of slow decline where you have good days and bad days or alternating moments of clarity and confusion. Doctors, family members, and the agent could be in disagreement or outright conflict about whether you are incapacitated. Family members could challenge your incapacity in court. Until the uncertainty about your incapacity is settled, the agent has no authority to act.
- Financial institutions. Banks may be nervous about granting access to a customer’s account and have been known to decline financial POAs. In the case of a springing financial POA, the bank may want to see the financial POA document, the physician’s letter, and other documents to verify that the financial POA has been activated. Even then, they may refuse to honor the financial POA if it is more than a couple of years old. Some banks have their own forms for appointing an agent to manage your accounts with that particular bank. To avoid future trouble, it is important that you ask your bank about their specific requirements. In addition, you may wish to consult your estate planning attorney about how a revocable living trust can serve your needs if you become incapacitated.
- State laws. Each state has its own laws about springing POAs. For example, as of 2011, Florida no longer permits springing POAs. Your POA must comply with state law and be legally enforceable in your state. If you move to another state, consider reviewing and updating your POA to ensure that it complies with that state’s law.
A financial power of attorney is one of the essential estate planning documents you can have. If you have concerns that an immediate POA is overreaching, a springing power of attorney may be a good alternative. For further peace of mind, your attorney can walk you through the other estate planning documents, such as medical power of attorney, an advance healthcare directive, and a revocable living trust, to ensure that you have chosen the right people to manage your affairs. At the same time, you are alive and unable to care for yourself. For help with your estate plan, please get in touch with our office.
At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, which starts at a valuable and educational Family Wealth Planning Session. The Life & Legacy Planning Session will allow you to get more financially organized than you’ve ever been before and make all the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session (aka Family Wealth Planning Session) to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
To learn more about our one-of-a-kind systems and services, contact us or schedule a 15-minute introductory call today.