What are the advantages and disadvantages of a financial Power of Attorney?
There are a lot of differing opinions when it comes to estate planning but most experts agree that if you have the right person to serve as your agent, then an essential estate planning document is a “power of attorney” or “durable financial power of attorney”.
Let’s see why. . . .
What is a power of attorney?
This is a legal document where you give someone else (“agent”) the power to sign on your behalf. The power to, in essence, be you….
You specifically give certain powers — handle your bank accounts, sign off on lawsuits, buy or sell real estate, set up trusts, etc.
What are some of the advantages of a power of attorney?
One advantage is this let someone else make decisions if I’m not able to make decisions. This could be because of an injury (hit by drunk, fall down, etc) or sickness (dementia, etc.).
If we don’t have a power of attorney (and even better a revocable living trust — see future post on this) then to make these decisions, we have to get a guardianship or conservatorship set up.
A guardianship is a court process where someone (a guardian) is appointed to make decisions over you as a person but not your money.
A conservatorship is a court process where the conservator (appointed by the court) is in charge of your money and assets.
Either one of these (or both as is common) is time consuming, expensive, and the court will oversee all decisions. Now there is nothing wrong with having court oversight but it does limit the options and is an expense. If you don’t want to have to spend the thousands of dollars to set up a guardianship/conservatorship, then you need a power of attorney (and preferably a revocable living trust).
What is the biggest disadvantage to a power of attorney?
The disadvantage is someone has the ability to sign your name. To act on your behalf.
“Isn’t this an advantage?”
Yes unless you have the wrong person serving as your agent.
The solution is choose very carefully who you give a power of attorney to — make sure you trust them! If you wouldn’t give them a blank check, don’t give them power of attorney.
What can someone take with a blank signed check? Only what’s in your account — but with a power of attorney they can take everything.
So its a very powerful legal tool but in the wrong hands it is a dangerous weapon.
And if you are going to have this useful tool, make sure it does what you need it to do.
Why are most powers of attorney not any good when it comes to elder law (long term care planning)?
We often find that the typical “estate planning” power of attorney does very little to help us plan for, or react to, a long term care crisis. In that situation, we might as well not have a power of attorney.
This is because it typically limits the amount of a gift (to a trust or person) to the amount allowed under the gift tax rules — right now about $14,000 a year.
The power of attorney often does NOT give the power to set up an irrevocable trust which is essential for Medicaid or VA Pension (Aid & Attendance) planning if we have too many assets to qualify.
So make sure you understand fully what the power of attorney does for you, what it doesn’t do for you, and then make sure the one you get fits in with your overall plan.
If you have any questions about Estate Planning or Elder law (Medicaid, Special Needs, or VA Pension), feel free to give us a call at 205-879-2447 or contact us through our website.
John G. Watts
Watts & Herring, LLC
Birmingham and Madison Offices in Alabama
We represent consumers from all parts of Alabama