Estate planning involves both preparing for the inevitable and planning for the unexpected. Your plan should have detailed instructions for what happens when you are no longer around, but what if something goes wrong while you are alive?
If you can no longer manage your affairs, you will need somebody who is legally authorized 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 handle financial matters for you, paying your bills, managing your assets, collecting your mail, and so on. The financial POA can be drafted so that it can be used immediately, or so that it springs into validity upon a certain event, such as proof of your incapacity.
While every estate plan should include a financial POA, a springing financial POA requires a little more nuance to overcome its limitations. Additionally, even when carefully written, a springing financial POA can pose problems that may not be easily resolved.
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.
When, exactly, is a springing financial POA needed? Generally speaking, it is needed when you become incapacitated. Incapacity can mean a lot of 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. When they sign off that you are medically incapacitated, the springing financial POA takes effect.
What Happens When a Springing Financial POA Kicks In
After a financial POA springs, the person you have nominated to handle your affairs—known as the attorney-in-fact or agent—now is 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 only certain 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
When choosing who will act as your agent, you should be careful to choose someone you trust to act appropriately in your best interest. 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 has the ability, although not the authority, to abuse their powers and make decisions that are 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 probate 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.
With a springing financial POA, 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 are often careful 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. Michigan allows them, but 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 most important estate planning documents you can have. If you have concerns that an immediate POA is overreaching, a springing power of attorney may be considered, but often proves to not be a good alternative. For further peace of mind, your attorney can walk you through the other estate planning documents, such as a healthcare power of attorney and a revocable living trust, to ensure that you have both chosen the right people to manage your affairs while you are alive and unable to care for yourself, and have given them the proper legal authorities that they made need to use on your behalf. For help with your estate plan, please contact our office today.