Five mistakes to avoid when creating a financial power of attorney

Financial power of attorney is an effective tool to include in your estate planning, but it’s important to choose a backup agent in case your primary agent is unable to fulfil their duties. Failure to do so could result in serious repercussions.

According to estate planning professionals, a financial power of attorney is a vital document that should be part of your estate plan. It empowers you, as the “principal,” to appoint a trusted individual, your “agent,” to manage your property and financial affairs in the event that you are unable to do so yourself.

1. Failing to Name an Alternative Agent.

You might be asking yourself why it’s necessary to have a backup agent when you’ve already chosen someone you trust to manage your affairs. While it’s commendable that you have identified someone who you believe is the best fit for the role, a comprehensive estate plan should take into account potential contingencies, such as if your primary agent is unable or unwilling to serve.

Selecting an alternative agent enables you to name a specific individual to manage your affairs in the event that your primary choice is unable or unwilling to serve due to reasons such as death, incapacity, resignation, or refusal to act. This can prevent the court from appointing a new agent on your behalf, which may not align with your preferences.

2. Granting Overbroad Gifting Powers.

Granting gift-making authority to an agent under a power of attorney can be a highly influential decision. There are several reasons why someone may choose to do so, such as ensuring that the agent provides gifts for loved ones during special occasions or making charitable donations on behalf of the principal to specific causes they support. Additionally, gift-making authority can aid in managing Medicaid eligibility and reducing estate taxes.

Allowing your agent to make gifts using your assets gives them significant control over your estate. It is crucial to carefully assess the potential risks associated with this power, such as financial abuse or fraud, before granting it to your agent.

If you decide to grant this authority, it is recommended that you limit your agent’s gift-making power and clearly define who is authorized to receive gifts. This includes specifying whether the agent can make a gift to themselves or not.

3. Creating a “Springing” Agency.

It is reasonable to assume that your agent will only act on your behalf if you become incapable of managing your own affairs. A “springing” agency is a type of agency that only comes into effect after a specific event, such as the principal’s incapacity, and is only recognized in some states. While this type of agency can be useful, it can create delays and uncertainty for the agent and financial institutions.

To avoid these issues, it may be more practical to grant your agent immediate powers, with the understanding that they will only act on your behalf in the event of your incapacity. If you are concerned that your agent may disregard your wishes and use their powers prematurely, it may be necessary to reconsider your choice of agent.

4. Not Planning for Real Estate Powers.

Granting an agent the power to manage real estate is a common authority given by principals. This can involve renting or selling property, paying for repairs or renovations, or hiring a real estate agent to carry out transactions.

If you plan on granting your agent this power, it may be necessary to file your power of attorney document with your local land records office. It is recommended that you contact your county’s land records office to obtain information on any specific requirements that must be met to ensure your document complies with their regulations. For instance, certain offices may require specific margin sizes on documents to accommodate filing stamps.

5. Not Notifying Current Agents of a Change.

When updating or replacing a power of attorney, it is common to include a statement revoking or cancelling any previous versions. It is important to notify any agents who may have been authorized under the old power of attorney of the cancellation in writing to prevent any misunderstandings or negative consequences. Additionally, if the old power of attorney is on file with a bank or other financial institution, it is important to inform them of the revocation and have them replace it with the new document.

Conclusion

As a result of our experiment, we found out that a financial power of attorney is an important document to include in your estate planning, as it allows you to designate someone you trust to make financial and property-related decisions on your behalf if you become unable to do so. However, it is important to carefully consider the powers you grant to your agent, including gifting and real estate management powers, and to select a backup agent in case your first choice is unable to serve. Additionally, it may be wise to avoid using a springing power of attorney to prevent unnecessary delays and complications. Finally, it is important to revoke or cancel any old powers of attorney when updating or replacing the document to avoid confusion or unintended consequences.

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