Choosing the Right Type of Financial Power of Attorney

In a previous blog, we covered the importance of having a financial power of attorney in place, but did you know that not all financial powers of attorney are created equal? There are several nuances to how a financial power of attorney can be drafted. In this edition, we will review the various types of financial powers of attorney and discuss which of these estate planning tools best serves you.

Durable Financial Powers of Attorney

Most financial powers of attorney documents are considered “durable”. Being “durable” simply means that the document remains in effect even if the person executing the document (known as the “principal”) later becomes disabled or incapacitated. One of the primary purposes of this document is to appoint a legal helper, called an “agent,” to manage your finances and make decisions on your behalf, especially in the event of your incapacity. As such, it is incredibly important to have a durable power of attorney. You want to have a document that is going to be helpful when you need it most.

Legally Valid Financial Powers of Attorney

You will want to ensure that your financial power of attorney is legally valid during your incapacity. If the document is valid, your agent will not need to go to court to obtain a conservatorship. These court proceedings are expensive, time consuming, and very public. By executing a durable financial power of attorney in advance, while the principal still has the capacity to sign documents, the need for a conservatorship can be avoided.

To ensure you have the correct type of financial power of attorney, make sure that it was executed after January 1, 2010. In Colorado, powers of attorney signed after January 1, 2010, are presumed to be durable unless the document states otherwise. If the document was signed before January 1, 2010, they are not presumed to be durable and specific language needs to be included.

It is best practice to review and update your powers of attorney frequently. We suggest updating every five years. If you executed powers prior to 2010, it would be best for you to do a thorough review and update of your estate plan. Why risk using old, outdated documents when this is an easy update to your existing plan?

Standing vs. Springing Financial Powers of Attorney

In addition to powers being durable, it is best if the document is drafted as a standing power of attorney. A standing power of attorney means that the agent’s authority takes effect as soon as the principal signs the document. If the document does not state that it takes effect immediately, then the document is considered to be “springing.” A springing power of attorney only becomes effective once a physician determines the principal is incapacitated to the extent that he or she can no longer manage assets. Since a physician’s letter would need to be supplied for the document to be fully effective, these types of financial powers of attorney are problematic since they are very difficult to implement.

Additionally, these documents can be very confusing if a person’s capacity changes overtime. For instance, individuals with severe mental illness may have periods in which they lack capacity, but they may also have long periods in which they do have capacity. This ebb and flow of capacity makes it very difficult to know whether or not the document is in effect. As such, banks are very wary to implement springing powers of attorney.

Best Practice

With these concepts in mind, it’s best to have a standing durable power of attorney that was executed after January 1, 2010. Do you have a durable power of attorney in place? If so, are your agents still available and willing to act? If not, give us a call and we can assist you in this process.