“Hope for the best but prepare for the worst” is a motto many people live by. Having a plan for protection against unknown future possibilities can be comforting. Common measures to help prepare for a future calamity include building an emergency savings account and purchasing insurance. Although these measures are helpful in paying for potential future expenses and providing for family members, they do not provide the legal authority that may be required for a loved one or trusted financial professional to manage your finances or property if you become unable to manage them yourself because, for example, you are ill or incapacitated due to an illness, accident or dementia.
Some types of accounts or property that you own jointly with another individual (like a spouse) can be managed by the co-owner because they share ownership in the assets. Other types of accounts, like an IRA, cannot have a co-owner and cannot be managed by anyone other than you during your lifetime unless you take steps to delegate your authority or a state court assigns a conservator to look after your financial affairs. Instead of putting your loved ones through the process of petitioning a state court to gain access to your accounts in case of an emergency, you can prepare for this scenario now while you’re healthy and of sound mind by assigning Power of Attorney to someone.
A Power of Attorney or POA gives another individual limited control over your property and financial affairs.
• The person being given authority to act on another person’s behalf is referred to as an “agent” or “attorney in fact.”
• The person making the appointment is referred to as the “principal.”
• The POA is the document used to make the appointment and outlines the specific powers being granted to the agent.
Creating a POA
There are generally two types of POAs:
• Non-durable power of attorney – ceases to be effective upon the incapacity of the principal. This type of POA is commonly used in situations where the principal will be unavailable for an extended period (e.g., traveling out of the country), but expects to return and assume control over their property again.
• Durable power of attorney – stays in effect even after the disability or incapacity of the principal. This type of POA is commonly used to prepare for possible future medical emergencies.
A POA can authorize very limited powers to the agent and apply to only specific types of property or it can provide broad powers to the agent. For example, a limited power might assign only the authority to manage the principal’s IRAs and IRA investments. In this case, the agent has no authority with respect to the principal’s other financial accounts or property held outside of the IRA.
When assigning powers to manage an IRA, the POA should be as specific as possible as to the powers the agent will have to avoid challenges for the agent in carrying out their duties. A POA drawn up specifically for an IRA could include some or all of the following powers:
• Making IRA contributions
• Distributing assets from the IRA
• Transferring IRA assets to a new IRA
• Naming or changing beneficiaries for the IRA, including whether the agent may name themselves as beneficiary
• Selecting or changing investments
If the POA is limited to making IRA investment decisions, for example, the agent can buy and sell investments within the IRA but cannot request distributions.
Terminating a POA
As the principal granting power of attorney to an agent, you may terminate or revoke the POA at any time. If you need to do this, make certain the documentation is clear and provided to custodians and trustees of your IRAs, if necessary, to avoid questions as to whether a prior POA has been properly revoked or you were of sound mind when you executed or revoked a POA. All POAs expire upon the death of the principal.
For More Information
If you want to give someone the legal authority to handle your finances should you ever become incapacitated, you may want to consider executing a POA. Some state statutes include sample formats for a POA and you may be able to find POA templates online. But you may find the greatest peace of mind by engaging legal counsel to draft your POA so you can be sure it is valid, grants only the powers you intend, and meets all requirements under your state’s laws.
If you have any questions about STRATA Trust’s requirements for agents acting under the authority of a POA, please contact us at 866-928-9394 or Service@StrataTrust.com.