Financial power of attorney is a potent estate planning tool, but you might encounter dire repercussions if you forget to identify a backup and provide overly wide gifting powers.
Estate planning professionals concur that financial power of attorney is one of the most crucial documents. It permits you (the “principal”) to appoint a trusted someone (your “agent”) to manage your property and funds if you become incapacitated.
A financial power of attorney can be an effective estate planning instrument. But you might suffer severe repercussions if you fail to use care when producing this paper.
Read on to discover the five most common errors to avoid when drafting a financial power of attorney.
#1 Failure to Name a Substitute Agent.
You may ask why you need a backup if you want your first pick to be your agent.
Although it’s fantastic that you’ve picked the person you believe would be most suited to handle your affairs on your behalf, the most comprehensive plans account for contingencies, such as if your primary agent is unwilling or unable to serve.
You can specify an alternate agent in case your first choice dies, becomes disabled, resigns, or refuses to act, among other circumstances. It can also prevent the court from appointing a new agent, who may not be someone you would like.
#2 Establishing a “Spring” Agency.
Your agent will unlikely act on your behalf until becoming unable to manage for yourself. An agency contingent on the principal’s incapacity is commonly referred to as a “springing” agency since it comes into existence upon a triggering event. If your state recognizes springing agencies (not all jurisdictions do), they might be a feasible choice if you determine that one is the greatest fit for your case.
Nonetheless, springing powers of attorney might have disadvantages. For instance, they might result in unwarranted delays, confusion, and conflict, as the agent must jump through hoops in a moment of necessity.
Additionally, financial institutions are more reluctant to accept springing powers of attorney since they are unsure if the triggering event has occurred.
These problems can be avoided by establishing powers with immediate effect. In this situation, you may request that your agent refrains from acting on your behalf until or unless you become disabled. Until then, you can just retain the paper in a secure location until the agent requests it. If you’re afraid that your agent may disobey this instruction and attempt to conduct transactions on your behalf, it’s likely time to reevaluate your choice of representative.
#3 Granting Overbroad Gifting Authority
The ability to dispose of the principal’s property is one of the most significant authorities that may be delegated to an agent under a power of attorney. There are several reasons to delegate gift-making authority to an agent. For instance, you may like to ensure that your agent sends birthday and holiday gifts to your family as you normally would. Or you may choose for your agent to make charitable contributions on your behalf to certain organizations you have been supporting. The ability to make donations can also be utilized to manage Medicaid eligibility and reduce inheritance taxes.
By granting your agent the authority to make donations with your assets, you endow them with significant influence over your estate. Before providing this authority, you should examine the associated dangers, such as financial misuse and fraud.
Consider restricting your agent’s ability to make gifts if you feel safe delegating this responsibility to them. Specify to whom your agent is authorized to give presents, including if the agent is entitled to give to themself.
You should also mention the total value of gifts your agent can make within a calendar year. Failure to establish a restriction on the maximum dollar amount of gifts an agent can make to themselves in a particular calendar year may have tax implications. Frequently, principals restrict by basing it on the yearly federal gift tax exclusion level ($16,000 in 2024).
#4 Not Informing Existing Agents of a Change.
Most powers of attorney contain an explicit declaration that all previous powers of attorney are revoked or voided if the document is revised or changed.
To minimize misunderstanding — or worse — all agents functioning under a revoked authority must be notified immediately in writing. If an outdated power of attorney is on file with your bank or other financial institution, you should also contact them and request that they replace the obsolete form.
#5 Not Considering Real Estate Authorities.
Real estate management is one of the most typical responsibilities principals delegate to agents. This may involve renting or selling real estate, paying for repairs or improvements, or using a real estate agent to assist with transactional assistance.
If you wish to provide this authority to your agent, you may need to file the appropriate paperwork with your local land records office. Contacting your county’s land records office to determine if it has any special criteria to guarantee your power of attorney paperwork is compliant is a smart idea. For example, certain workplaces demand certain margin sizes for documents to accommodate filing stamps.