A durable power of attorney (DPOA) is a valuable tool for almost everyone. It ensures the continuity of your financial affairs if you become incapacitated. It’s best to prepare your DPOA in advance, even though you may never need it, but there are a few caveats to keep in mind. Let’s take a look.
The choice is yours
In essence, a DPOA is a legal document that gives a person of your choosing the authority to act on your behalf if you are unable to take action on your own — if, for example, you experience a devastating illness, incapacity following a major surgery, a serious accident or the onset of dementia. Although these are unpleasant circumstances to contemplate, it’s important to remember that the inability to pay bills or sell assets could undermine the wisest financial planning.
While a court could appoint a guardian to act for you in the absence of a DPOA, that process can be costly, slow and traumatic. In most cases, creating a DPOA does not involve the courts at all. You can make your agent’s powers as limited or broad as you wish, including the authority to buy property, invest, sign contracts, engage in tax planning, make gifts and plan for government benefits. You may cancel or change your DPOA as long as you are not incapacitated, and you can even name the party or parties who will decide whether you are or not.
How to choose
Your agent — called an agent or attorney-in-fact, though they need not be an attorney — should be someone you trust to manage your affairs, protect your best interests, maintain accurate records and keep your property separate from his or her own. Some states allow multiple agents, but this can cause conflicts if they disagree. However, it is a good idea to name at least one alternate in case your first choice is unable to assume the role.
Some states require your attorney-in-fact to be a state resident. Because your agent may not be recognized across state borders, you may wish to execute a DPOA in each state where you live or work.
Standing or springing DPOA
A standing or standby DPOA becomes effective as soon as you sign it, which means that your agent has immediate power over your affairs. If you’re not comfortable with that, you may wish to create a springing DPOA, which “springs” into effect once you become incapacitated. This allows you to maintain control for as long as possible, but problems may arise if there is doubt or dispute about your incapacity. Neither type of DPOA substitutes for a will; in fact, any DPOA will terminate when you die.
Spelling out the details
While there are do-it-yourself DPOA forms available, an effective DPOA requires a thorough understanding of your state’s laws and other factors. For example, authorizing an agent to give away your wealth before you die may create tax advantages for your estate, but it can also be an invitation to fraud. Additionally, some third parties such as banks or insurance companies may be reluctant to honor a DPOA or may require customized paperwork. For these and other reasons, it is advisable to consult an attorney and financial adviser when drawing up your DPOA.
Erin Eddins is a chartered financial consultant, a member of the Financial Planning Association and is a certified financial planner with StanCorp Investment Advisers Inc. She specializes in Social Security maximization, pre- and post-retirement planning strategies and asset management. She can be reached at erin.eddins@standard.com or 425-212-5986.
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