As you create your estate plan, your main objectives likely revolve around your family, both current and future generations. Your goals may include reducing estate tax liability so that you can pass as much wealth as possible to your loved ones.
But it’s also critical to think about yourself. What if you become incapacitated and are unable to make financial and medical decisions? Thus, a crucial component to include in your plan is a power of attorney (POA).
What is a POA?
A POA is defined as a legal document authorizing another person to act on your behalf. This person is referred to as the “attorney-in-fact” or “agent” — or sometimes by the same name as the document, “power of attorney.”
A POA can be either specific or general. A general POA is broader in scope. For example, you might use a general POA if you frequently take extended trips out of the country and need someone to authorize business and investment transactions while you’re gone.
However, a specific or general POA is no longer valid if you’re incapacitated. For many people, this is actually when the authorization is needed the most. Therefore, to thwart dire circumstances, you can adopt a “durable” POA.
A durable POA remains in effect if you become incapacitated and terminates only on your death. Thus, it’s generally preferable to a regular POA. The document must include specific language required under state law to qualify as a durable POA.
Who Should You Name as POA?
Despite the name, your POA doesn’t necessarily have to be an attorney, although that’s an option. Typically, the designated agent is either a professional, like an attorney, CPA or financial planner, or a family member or close friend. In any event, the person should be someone you trust implicitly and who is adept at financial matters.
Regardless of whom you choose, it’s important to name a successor agent in case your top choice is unable to fulfill the duties or predeceases you.
Usually, the POA will simply continue until death. However, you may revoke a POA — whether it’s durable or not — at any time and for any reason. If you’ve had a change of heart, notify the agent in writing about the revocation. In addition, notify other parties who may be affected.
What About Health Care Decisions?
A durable POA can also be used for health care decisions. For instance, you can establish the terms for determining if you’re incapacitated. It’s important that you discuss these matters in detail with your agent to give him or her more direction.
Don’t confuse a POA with a living will. A durable POA gives another person the power to make decisions in your best interests. In contrast, a living will provides specific directions concerning terminally ill patients.
To ensure that your health care and financial wishes are carried out, consider preparing and signing a POA as soon as possible. Also, don’t forget to let your family know how to gain access to the POA in case of emergency. Finally, health care providers and financial institutions may be reluctant to honor a POA that was executed years or decades earlier. So, it’s a good idea to sign a new document periodically.