Why a Durable Power of Attorney is Part of Your Financial Safety Net

Last week, we introduced the series on Financial Safety Nets that Mr. SixFiguresUnder will be hosting on Wednesdays.  Our first topic is one that might not even be on your list– your Durable Power of Attorney.

There are three reasons I chose to start here.  First, it expands the idea of the financial safety net beyond the simple elements to which it might be easily limited: emergency funds, insurance, and retirement savings.  We’ll be considering several other items in this series as well, so we’ll set the tone with part of the expanded definition.

Second, creating your durable power of attorney is something you can do immediately, earning a quick, meaningful win with minimal effort.

Third, it’s an area in which I have broad professional experience, and I hope that sharing some lessons from experience will be helpful for you.

So put on your legal thinking cap.  We’ll get back to the more traditional topics later.

What is a Durable Power of Attorney?

In your Durable Power of Attorney (DPOA) you give someone else, who you name as your agent, permission to act in your name—to sign and enforce contracts, to do whatever you could do if you were acting for yourself.  The “durable” part means that the power lasts even if you become incapable of acting for yourself.  Your agent then continues to act for your benefit without further direction from you.

What Can My Agent Do With My Power of Attorney?

You can choose how much authority to give your agent.  The most commonly used DPOA for financial matters allows your agent to do almost anything you could do financially.  Your agent can access your bank accounts; file your taxes; manage your insurance policies; buy, sell, or lease real estate; collect money owed to you; and buy or sell personal property, all in your name.

If you want to limit your agent’s authority, you can grant a subset of these comprehensive powers instead.  It’s up to you.  The potential problem in granting only a limited power is that there may come a day when you are incapable of managing your own affairs and it would be really convenient for your agent to be able to do the thing you have not given her authority to do.

Who Should I Name in My Power of Attorney?

Most (but not all) people who are married name their spouse as their first agent in their DPOA.  Other than that, there are no rules.  You can name your brother, cousin, mother, granddaughter, neighbor, friend, or a professional fiduciary.  It’s a good idea to name a primary agent and an alternate agent, in case something happens to your primary agent and he can’t help when you need him.  You can name as many successive agents as you want, so that if one is unable or unwilling to serve, you have a list of next choices.

The most important thing is that you choose someone you trust implicitly to do what’s best for you.  Your agent could take the money and run  or sell your home out from under you, and might get to the Bahamas before anyone discovers what happened.  Choose someone you trust and someone competent in the financial matters you’ll need them to help with.

Isn’t It Dangerous to Have a Power of Attorney?

There is a risk in having a power of attorney out there.   You are granting broad authority to someone to act in your name, and even if you trust someone now, people can change.

One thing you might do to protect yourself is to include a “springing” provision in your DPOA.  That means that the authority only becomes active upon a certain condition, usually a declaration by one or two physicians that have evaluated you and reached a professional conclusion that you are unable to manage your own financial affairs.  Until you become incapacitated, no one can act under your power of attorney.  The DPOA “springs” to life when the condition is met and your agent has the physician’s declaration in hand.

Where Can I Get a Durable Power of Attorney?

The requirements to create a valid durable power of attorney vary between states and countries.  Some require a notary acknowledgment.  Some require a fingerprint.  Some require two signatures from witnesses not related to you and not named as agents.  Most require some specific language.

Because of the variation, you cannot simply Google power of attorney form and find what you need.  However, many states have actually created their own state-specific power of attorney form by law.  These are known as “statutory power of attorney” forms.  If you search California statutory power of attorney near the top of the results you’ll see a link to saclaw.org, the Sacramento County Law Library site, where you can download the form.  When searching, look for links to public law libraries, universities, courts, or state or county bar associations.  If there is a statutory power of attorney for your state, you’ll likely find it at one of those sites.

The statutory power of attorney in California is just okay; it’s not as comprehensive as the DPOA I prepare for my clients, but it’s far better than nothing.  I’m not familiar with the statutory forms for any other state so can’t speak to their effectiveness.

If your state doesn’t have a statutory form, or the form doesn’t seem to fit your situation, or you have questions and want additional assurance that you really have things set up right, you can also go see an estate planning attorney.

What Does Any of This Have To Do With My Financial Safety Net?

In the case of incapacitating injury or illness, a DPOA can help stem the serious financial consequences of being unable to take care of your own affairs.  Let me introduce you to three of my clients.  The names and personally identifiable facts have been changed.

1. Nanette is a single woman in her 40s and a successful electrical engineer. A year and a half ago, she was diagnosed with an advanced malignant brain tumor.  In hospitals and rehab for over a year, she was unable to think clearly or manage her affairs.  Now recovering, she has returned home to a financial disaster.  Among other things, her home is moving through foreclosure, she has bills piled up with fees and penalties on top, she failed to file last year’s tax return, and it will be many months before she can be employed again.

If Nanette had a durable power of attorney, her financial affairs need not have become so bleak.  Nanette’s problem was not that she didn’t have savings, it was that she had no one to apply the money to her bills or file her taxes.   A DPOA would not have prevented the cancer or made her employable again, but it could have kept things from falling apart while she was unable to take care of her own affairs.

2. Amanda and Brent have been married for ten years and have two little boys, ages 8 and 6. Four months ago Brent was hit by a driver who was texting and ran a red light.  Last week he moved his fingers for the first time since the accident, but he still cannot communicate and the doctors don’t know if he can understand when spoken to.  His basic physiological systems seem to be holding steady after a series of emergency surgeries, but no one knows if he will ever speak or sit up or walk again.  The insurance company has offered a settlement to pay for Brent’s injuries, but Brent is incapable of signing the settlement papers.

If Brent had signed a DPOA before the accident, his agent (probably Amanda) could sign the settlement papers for him, and obtain the funds the family urgently needs for his care.  Because Brent had no DPOA, Amanda has to go to court and petition to be appointed Brent’s conservator (adult guardian).  This costs thousands of dollars and takes months, and the court becomes a permanent partner in the family’s affairs unless/until Brent recovers.  In addition to a DPOA, a Power of Attorney for Healthcare (sometimes called an advance healthcare directive or a living will) would have made these last few months much simpler for Amanda.

3. George and Ermiene have lived in the same home since their marriage 61 years ago. Ermiene has advanced dementia associated with Alzheimer’s disease.  George is finding it difficult to take care of his wife and their property, and wants to move to a smaller home in another state near one of their daughters.  Because both spouses are named on the title of their home, both would need to sign the deed to sell the home.  Ermiene’s dementia leaves her unable to sign any legally binding document.

George is stuck in the home for now.  He could go to court and ask for the authority to sell the home without Ermiene’s signature, but that’s an expensive and time-consuming option, and he is neither financially nor mentally prepared for it.  If Ermiene had created a DPOA before her dementia, George could have signed his own name to the deed, and then her name as her power of attorney, and there would be no difficulty in selling the home and moving.

Unfortunately, these folks make up only a small sample of those who come to my office in a desperate situation that could have been so much better if a DPOA were in place before the event causing incapacity.   A DPOA does nothing to solve the illness or injury, and except for the savings in court costs, it doesn’t actually give you any more money.  It does, however, allow someone to continue to manage your affairs and act for your benefit when you are already suffering from a traumatic event.  It makes the whole bad situation a little less bad, and that’s what a safety net is all about.

• Do you already have a durable power of attorney?  What prompted you to create it?

Disclaimer:  This is a general discussion of legal principles and resources.  Nothing in this post should be taken as personal legal advice.  If you have a legal question, you should consult a legal professional in the state where you live.

-Mr. SixFiguresUnder

Other posts in the Financial Safety Net Series

• Intro to Financial Safety Nets
• Creating a Cash Buffer
• Insurance We Do and Don’t Carry– Our Cost, Coverage and Reasons

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