When needing to authorize someone to act on your behalf with financial matters, the legal instrument that you’d use would be a financial power of attorney. Different types of this instrument can be used depending on your unique circumstances. The powers that are granted can either be broad or highly specific.
As you expand your operations, utilizing the power of attorney frees you up from having to attend every important business meeting or to sign every document personally. Those powers can be delegated to a trusted agent, enabling you to focus on more important matters.
What Is a Financial Power of Attorney?
A financial power of attorney is the legal document through which you, the principal, can authorize any person, the agent, to act on your behalf in financial matters. The document serves as proof for a third party that your designated agent has been given the power to manage your finances.
A standard power of attorney document will include the date from when it’s effective, details of the principal and the agent, powers and limitations of the agent, and the signature of the principal. It will also highlight the events which may lead to revocation. The document will require the signature of a witness and notary public confirmation.
3 Types of Financial POAs
As an instrument, the power of attorney ensures that your finances and investments are looked after, even when you’re unable to or simply don’t have the time to manage them yourselves. A financial power of attorney can be of three different types. You’ll need to choose the type that best aligns with what powers you want to give the designated agent.
A general power of attorney is an instrument through which you can authorize an agent to handle all of your finances and properties, subject to state law. It will empower them to operate your bank account, sign checks, and sell property on your behalf.
The instrument will remain in force unless it’s legally revocated. A general power of attorney will become invalid when the principal passes away or is deemed to be no longer mentally capable. Thereafter, the agent wouldn’t be able to exercise those powers.
A limited power of attorney is used to provide the agent with very specific powers and typically for a limited time. For example, you may authorize someone to collect a property’s rent and pay its bills for you. They won’t be able to do anything other than that, such as sell the property or bring in a new tenant.
It’s a suitable option for those who want to designate certain powers only for a limited period. This power of attorney will typically be time-bound and expire once the stipulated time has elapsed.
A durable power of attorney subsists even when the principal becomes mentally incapacitated. For example, the principal may be in a coma or have Alzheimer’s disease, rendering them incapable of making their own decisions. This is a suitable option for the elderly or those with life-threatening medical conditions.
The powers and limitations of the agent are defined in the document. A springing power of attorney can be created if you prefer that it doesn’t go into effect immediately. This will provide the exact definition of incapacity after which the agent will be empowered to act on your behalf.
Powers That Can Be Granted on a Financial POA
Defining what powers your agent can exercise is the most important part of creating a power of attorney. This will avoid confusion and enable them to do their tasks effectively. Here are a few examples of powers that can be granted on a financial power of attorney:
- Buy, sell, mortgage, or rent a property
- File returns and pay income tax
- Make charitable gifts and contributions
- Access safe deposit boxes and pay their fees
- Buy and surrender insurance policies and annuities
- Deposit and withdraw money from bank accounts
- Hire legal representation and sue on your behalf
- Manage and conduct transactions through your trusts
- Collect and use government benefits such as Social Security and Medicare
- Manage investments in retirement plans, mutual funds, stocks, bonds, etc
When Does an Agent’s Authority Begin?
You can decide when the agent’s authority is going to begin. A general power of attorney is typically effective immediately unless otherwise specified. An agent’s authority under a limited power of attorney starts and ends at clearly defined dates.
A durable power of attorney is also effective immediately unless it’s set up as a springing power of attorney that defines the events that must take place before the agent’s authority can begin.
When Does Financial Power of Attorney End?
When the authority delegated to the agent ends depends on the type of financial power of attorney chosen. A general power of attorney remains in effect until the principal dies or is otherwise mentally incapacitated.
The limited power of attorney will end at the date that’s defined in the instrument or upon the death or mental incapacity of the principal, whichever comes first. The durable power of attorney ends when the principal dies. The principal does retain the right to revocate the power of attorney.
How to Create a Financial POA
The process to create a power of attorney is quite simple. You can write one yourself or use any of the templates available online. Do keep in mind that a financial power of attorney is typically required to be signed before a notary public. It may also require the signature of witnesses and in some states, the signature of the agent as well.
1. Research Your State’s Requirements
The exact requirements vary by state so it’s important to figure out what they are. Your state may require a specific document format or the signature of the agent, for example. There could be a limitation on who can be a witness or specific guidelines for incapacitated principals.
A quick online search is usually all that’s required to find out what the requirements in your state are. It’s important to comply with those requirements so that the agent doesn’t run into any difficulty later on when the document is used to exercise authority.
2. Choose a Trustworthy Agent
You’d want to make sure that the person you’re empowering to manage your financial matters is reliable and trustworthy. It’s best to keep a few tips in mind when choosing the agent to ensure that you make the right decision.
- Someone who understands and wants to take up this big responsibility
- Someone who is organized and capable of making informed decisions
- Someone who has the same values and wishes as you
- Someone who you have a great deal of trust in
- Someone who is financially literate
- Someone who is located nearby
3. Decide on Your Agent’s Powers
The financial power of attorney is a legally binding document. There should be no confusion as to the intent behind it. Clearly defining the agent’s powers and limitations will help them do what they’re supposed to do.
Several examples of the powers that you can delegate to an agent have already been provided above. You can choose to make the power of attorney document as broad or specific as you prefer.
4. Create Regulations
A system of checks and balances can be put in place to ensure that you remain protected in case the agent makes a mistake or attempts to abuse their powers. These regulations must be clearly defined in the document.
For example, this may include restricting the agent from personally profiting from any financial transactions made on your behalf or placing a maximum limit on the funds that they can withdraw from your account in a month.
5. Determine the Start and End of the POA
Depending on the type of power of attorney you’ve chosen, the document must include a start and end date. This will remove any confusion as to precisely when the agent becomes empowered to exercise authority on your behalf.
As highlighted above, in case of a springing power of attorney, the document needs to detail the events or type of incapacity that must occur for the agent to become empowered.
6. Sign and Safeguard Your POA
After the power of attorney has been drafted and signed, you may also need to get the document notarized. Depending on the state you’re in, there may also be a requirement to file a signed copy with a government department. You’ll need to give a copy of the document to your agent so that they can produce it before a third party as and when required.
The original should be kept in a safe place and its location must only be disclosed to a trusted person, whether a friend or family member if you’re unable to retrieve the original on your own.
Do Your Agent a Favor and Use doola Bookkeeping
A financial power of attorney isn’t just a great tool for managing your property and monetary matters, it also helps you protect your estate by delegating key powers to a trusted individual. They can see to it that your wishes are respected and if you make them responsible for the finances of your business, you’ll need to make sure that they can access the books to make informed decisions.
Use doola Bookkeeping to accurately track and manage your business finances. With every single transaction recorded in the books, you’ll be able to more accurately track your cash flow, generate monthly reports, and close the books at the end of the year with complete peace of mind.
When the time comes for the agent to access the books, they won’t need to figure out where the money came from and where it went, as it would be all there and thus make it easy for them to carry out their tasks efficiently.
How to get financial power of attorney?
A financial power of attorney can be executed to delegate certain powers to an agent, whether to manage property or financial matters, either for a predetermined time or indefinitely, subject to certain limitations. The document can be typed up yourself or you can get an attorney to do it for you.
How to activate financial power of attorney?
A financial power of attorney will be deemed to be active once all of the necessary legal conditions have been fulfilled, such as signatures of the principal and the agent, notary public certification, and any other conditions that may be defined by your state.
Can my financial advisor be my power of attorney?
You can give your financial advisor power of attorney, however, some firms prohibit their financial advisors from becoming their clients’ agents due to a potential conflict of interest. It’s generally advised that someone else other than the advisor be chosen.
Does having power of attorney make you financially responsible?
Having someone’s power of attorney will not make you personally liable for their debt, unless you have other legal ties that make their debt your liability as well, such as a joint business venture with the principal.
Is a will different than financial power of attorney?
The primary difference between a will and a power of attorney is that the will is only valid after the person dies. The power of attorney is for the management of their affairs when they’re still alive but unable to handle the matters personally.