Power up your financial plan

Key takeaways

  • All adults should consider having a properly executed power of attorney.
  • A person granted power of attorney can act on your behalf if you become incapacitated.
  • Without a power of attorney, a court proceeding might be necessary if you get too sick to handle your own finances.

Most people don't think they need to worry about their estate plans until they are old and have significant assets, but there's one document you should have in place as soon as you are a legal adult: a financial power of attorney.

If COVID-19 has taught society anything, it's that serious illness can strike anyone at any time no matter how invincible you feel, and you might not have time to prepare your affairs.

What is power of attorney?

A power of attorney (POA) is a document granting authority to another person to make certain decisions on a person's behalf. POA authority ends when the person granting authority revokes authority or dies. The requirements for a valid power of attorney vary by state.

For medical decisions, you can set up a health care proxy, but for financial matters, if you become incapacitated and are unable to manage your own money, your agent (the person granted power of attorney) can do things like access your bank accounts and pay your bills. Without an agent, it is likely that a court proceeding will be necessary in order to have a guardian or conservator appointed over your property. This is true even for married couples.

However, setting up any kind of estate planning is a step that most skip because it's too daunting. A study by Caring.com in 2023 found that only 34% of adults have any type of estate planning document.*

The biggest reason cited for not acting: They just haven't gotten around to it.

Thinking about advanced planning can, indeed, be overwhelming. There are myriad approaches, from writing out a simple will to creating a complex trust. There's cost involved. And at the end of the day, nobody really wants to think about getting sick or dying.

Setting up a power of attorney, however, is one of the most important steps to take and one of the easier ones. Here are some things to consider.

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How to get power of attorney established

1. Assess your needs

A general power of attorney designates you as the "principal" and you appoint an agent (known as your "attorney-in-fact") who could be granted the authority during your lifetime to make and carry out financial decisions you are unable to yourself.

Here's how it typically works: Say one member of a couple were to have a stroke and become unable to handle financial matters or sign paperwork. The other spouse cannot simply take over every financial responsibility. If, for instance, the couple wanted to sell their jointly owned 2-story home in order to purchase one without stairs, they would need a court proceeding to be appointed as guardian or conservator over the sick one in order to sell.

It might take a few months and a few thousand dollars in legal fees, and also the court might not pick the spouse to fill that role.

But if the well spouse were agent for the other and had a properly signed and notarized document to prove it, that person could record it with the county and sign the closing documents for both of them, depending on the requirements of the state.

2. Limit the powers

If you prefer more limitations on your agent, you can specify in the document which actions the agent can take and when, and define the scope of the authority. Among these limitations are:

  • Durable power of attorney, which remains in effect even if the person granting the authority becomes incapacitated, but ends if that person dies or formally revokes power.
  • Limited or special power of attorney, which might have certain restrictions or permissions, like only dealing with specified accounts or giving the authority to title particular assets in a revocable trust.
  • Springing power of attorney, which would only "spring" into effect upon a described future event or date—such as your "incapacity."

For example, your estate lawyer might craft a power of attorney document for you that says you are only incapacitated when a doctor certifies that you cannot manage your own affairs.

Third parties presented with such a "springing" power of attorney may naturally be concerned about possible fraud, and may have trouble understanding whether all the conditions set in the document have been met. What's more, not all financial services firms will accept a springing power of attorney, or those with special or limited powers. That may be a reason for deciding to use a durable power of attorney that becomes effective immediately upon execution, particularly since you have the ability to limit (and modify) the scope of the authority you grant.

3. Pick your trusted person

The key decision in any power of attorney is picking somebody you trust to be the agent. For a young, single person, a parent can be a logical choice, as can a spouse or domestic partner for couples. But if they can't serve for some reason, you will want to name someone to serve as a backup agent in the document as well.

You may also name multiple persons as attorneys-in-fact. However, if 2 or more people are named to serve concurrently as attorneys-in-fact, the document should specify if they are authorized to exercise powers individually or only jointly. Not all financial services firms will be able to support such requirements or may have their own required documentation as well.

Requiring 2 or more persons concurrently named as attorneys-in-fact to act jointly is generally discouraged. That's because if one is unavailable, or they disagree on a course of action, that could result in the court appointing a guardianship over property—despite the existence of a power of attorney.

4. Work with a professional

With so many options and different state rules, be cautious of "boilerplate" forms available on the internet. There are significant decisions to make in the drafting and structure of a power of attorney, and it may be important to consider the particular laws of your state of residence.

Successful estate planning requires more than just having signed the initial documents. Working with your Fidelity advisor, you should revisit your plan every 3 to 5 years and it should evolve as your circumstances do.

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*Caring.com 2023 Wills and Estate Planning Study

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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