You’re creating your estate plan. Part of it outlines how you want your estate handled when you die. But there’s another part giving instructions about what happens if you become incapacitated and can’t make your own decisions. In that case, it’s imperative that you have a financial power of attorney document.
In the financial power of attorney (FPOA), you name someone you trust, referred to as your agent, to make decisions for you about property and finances. But there are common mistakes people make when drafting their FPOA that open the door for consequences you don’t want and never intended.
Mistake # 1 – Failing to Name an Alternative Agent
You’ve named a primary agent. Why do you need a backup? Lots of things can happen. Your primary agent may die, become incapacitated, life events may force them to resign, or it’s discovered that your primary agent isn’t doing the job. In any of those instances, the alternative agent takes over to fulfill your wishes. Having a contingent agent can also avoid the time and expense of having a court appoint a new agent, who might be someone you would not have picked.
Mistake # 2 – Creating a Springing Agency
Another mistake is creating a springing agency in your financial power of attorney. A springing agency takes effect when you become incapacitated and that’s when the plan springs into existence. It can be a viable option, but not all states recognize springing agencies.
The downside of a springing agency is the possibility of delays and chaos at a time when you need your agent to act immediately. The agent has to jump through a series of legal hoops before taking on the task of acting on your behalf. Also, financial institutions are more reluctant to accept springing powers of attorney because they want to know for sure that the triggering event, your incapacitation, has occurred.
To avoid all those issues, you want to specify that the powers granted your financial power of attorney begin immediately upon your incapacitation and not before.
Mistake # 3 – Granting Too Broad Gifting Powers
One of the most powerful authorities you can give a financial power of attorney is giving away your property to other people. Giving away your stuff while you’re still alive may sound odd, but during your incapacitation, you may still want relatives to get presents from you on their birthdays or at Christmas. You may want charitable donations to continue going to causes that are important to you. Making gifts can also help manage Medicaid eligibility or minimize estate taxes.
With that kind of authority, there’s always the possibility of financial abuse or fraud. So, how do you limit your agent’s gifting powers?
- Specify who your agent is authorized to make gifts to
- Specify whether your agent can make gifts to themselves
- If the agent is allowed to make gifts to themselves, specify how much they’re allowed to receive in any calendar year
- Specify the total value of gifts your agent is authorized to make during any calendar year. One solution is setting a limit on gifts based on the annual federal gift tax exclusion amount.
Mistake # 4 – Not Notifying Current Agents of a Change
So, you’ve changed your mind. Whether you’ve lost confidence in the agent you named in your FPOA or it’s not feasible for them to be your agent anymore, most financial powers of attorney include a statement that says all old powers of attorney are revoked or canceled.
Don’t rely on that statement alone. If you make a change to the person(s) you named as agent, notify them in writing immediately. Also, send copies of the new financial power of attorney to your bank, investment firm—every institution that has an old or outdated FPOA on file.
Mistake # 5 – Not Planning for Real Estate Powers
It’s not uncommon for a financial power of attorney to be given the authority to handle your real estate transactions. That can include renting or selling real estate, paying for repairs, handling renovations, or even hiring a real estate agent.
If you want your financial power of attorney to have real estate powers, you may be required to file your FPOA document with the local land records office. Some of them have specific requirements for your FPOA to be in compliance, so it’s a good idea to contact them and avoid any confusion or problems in the future.
This article is presented as information only and should not be considered tax, financial, or legal advice.