Weighing the Pros & Cons of the POA Decision
A power of attorney (POA) is a document that designates an agent or attorney-in-fact to act on a person’s behalf regarding his or her financial affairs. Without a valid financial POA, a person’s loved ones would need to seek court approval for the authority to make any decisions involving the accounts. Although it seems like an obvious solution, there are both pros and cons to the POA decision, and it’s our job, as your trusted financial advisor, to help our clients determine the best solution.
There are many different types of POAs, but the two primary types are the springing POA and the general durable POA. Both are designed and intended to give a person’s designated agent broad authority to make decisions on that person’s behalf when he or she is unable to do so. But there are also differences between them, especially as it relates to when and how they become effective.
The Springing POA
The springing POA takes effect after the person being cared for becomes incapacitated, at which point the POA “springs” into action. Although, as you’ll see, this document is a more limited option than the general durable POA, it is sometimes considered a dangerous planning tool; certain states (e.g., Florida) have even deemed it invalid.
If it’s such a “dangerous” tool, why would someone choose this option? Let’s look at the benefits and drawbacks to the springing POA:
Pros
The springing POA protects elderly clients by ensuring that someone else is available to manage their affairs in the event of diminished capacity.
It dictates who will determine whether the person is, in fact, incapacitated. Generally, this would be an unbiased third party, such as a physician, who doesn’t stand to benefit financially from the incapacitated person's situation.
For our clients who don’t want to grant others with authority to act on their behalf unless necessary, this is the perfect fit.
Cons
With the risk of elder abuse, banks and financial institutions charged with determining when the POA goes into effect have many factors to consider, which may delay or prevent the decision altogether.
Unless there is an authorization to disclose medical information or a HIPAA document on file at the doctor’s office, the agent could be stonewalled or delayed in obtaining proper certification of incapacity.
Because of the above issues, there could be a substantial delay in being able to access funds required to pay bills, facilitate Medicaid planning, or ensure business continuity).
Keep in mind that incapacity is not a universally defined term, and each state follows a different standard and method. When using a springing POA, it is critical to have a set and strict standard of incapacity within the document so that it is not subject to interpretation.
The General Durable POA
In contrast to the springing POA, the general durable POA does not require the individual’s incapacity to become effective; instead, it becomes effective upon signature (and sometimes upon acceptance of the role by the agent). This means that the agent appointed under the POA has the authority to sign documents as if he or she were the person being cared for, as of the date of the POA and continuing for life, unless the arrangement is revoked.
You may feel more comfortable with this approach, but it pays to understand the pros and cons:
Pros
The general durable POA can take some of the burden of financial responsibility off the person’s shoulders by designating someone else to make certain decisions, even if you are still in good health.
It protects elderly clients by ensuring that someone else is available to manage their affairs in the event of diminished capacity.
This type of POA is typically preferred if the client is comfortable with the proposed agent, as it reduces the likelihood of delays or rejection when it needs to be activated.
The client can put the POA in place ahead of time, while also having the option to revoke it if so desired.
Cons
Because this type of POA is effective immediately, the agent can make choices for the individual regardless of whether he or she is incapacitated. If the client does not want to grant authority to anyone unless absolutely necessary, a general durable POA may not be the right choice.
There may be an increased risk of elder abuse. Over time, an individual’s appointed attorney-in-fact could prove to be untrustworthy, and if the individual becomes incapacitated before appointing someone new, then it would be too late to make a change.
A Middle Ground
If a person has concerns about the POA becoming effective immediately but doesn’t want the risk of delays or worse that can come with a springing POA, there is sometimes a middle ground option. The estate planning attorney who prepares the POA may sometimes act as an escrow agent, whereby he or she will keep possession of the POA until it is proven that the client is incapacitated.
With this type of escrow agreement, the POA document itself does not condition effectiveness on incapacity. A separate agreement would be in place stating that the estate planning attorney retains possession of the POA and would have complete discretion of whether to release it. Since the lawyer knows your client’s intent and lacks the same concerns over liability for its release, this arrangement can give a person more comfort that their wishes will be fulfilled if they become incapable of making their own financial decisions.
Guiding the Decision
Of course, as a financial advisor, we cannot give legal advice, but by providing the various pros and cons to the POA decision, we hope this information guides a person to make the best decision for their situation.