Good estate planning does more than prepare for the inevitable - it also considers the unexpected. Your estate plan may have detailed instructions for what will happen when you’re no longer around, but what if something goes wrong when you’re alive?
If for whatever reason you’re no longer able to manage your affairs, you’ll need somebody who can act on your behalf and make decisions for you. A financial power of attorney (POA) is a legal document that lets you choose a trusted person to make your financial decisions (sign checks, open a bank account, collect mail, etc.).
The financial POA can be immediate, meaning somebody else is authorized to act for you now and into the future. Or the financial POA can be “springing”, meaning it’s effective only if and when an event occurs (usually at the point you become unable to make decisions for yourself).
Every estate plan should have a financial POA. But a springing financial POA requires a little more nuance to overcome its limitations. And even when carefully written, a springing financial POA can cause problems that may not be easily resolved. But because many people dislike the idea of making a financial POA effective immediately, they like the idea of having it kick in only when absolutely necessary.
How Does a Springing POA work?
Unlike an immediate POA, a springing financial POA is conditional. It “springs” into action when you need it. An immediate financial POA is unconditional, and more like an active permission slip that gives another person broad legal authority over your responsibilities the moment it’s signed. But after a springing financial POA has been signed, it remains inactive until something happens where you need it.
When Is A Springing POA needed?
In general, a springing POA becomes active when you become incapacitated. Incapacity can mean a lot of things, including mental illness, mental deficiency, physical illness or disability, advanced age, drug abuse, or unusual events like being kidnapped or disappearing.
The financial POA will usually define incapacity. Your doctor—or depending on how you set it up, your doctor and a second physician—must then examine you to confirm that you meet that definition of incapacity. When they sign off that you are medically incapacitated, the springing financial POA takes effect.
What Happens When a Springing Financial POA Kicks In?
The person you chose to handle your affairs (known as your attorney-in-fact or agent) is now allowed to do what you otherwise would have done had you not become incapacitated.
With any financial POA, you can give the agent a wide range of discretion to act on your behalf. This can include managing your day-to-day affairs, handling your investments, filing your taxes, collecting your mail, and operating your business. But you can also limit their power to include only certain activities, like paying your monthly bills.
A financial POA can be revoked in the future when it’s no longer needed. The document should specify the exact language for revocation. For example, it might state that you have the authority to revoke the financial POA any time you are not disabled or incapacitated. Keep in mind that revocation may require medical verification. Any signed financial POA is automatically revoked when you die.
The Cons of a Springing POA
Any time you give someone else authority to make decisions for you, you’re taking a risk. With a financial POA, your agent typically won’t be subject to supervision by a court or third party, so they can abuse their powers or make decisions that aren’t in your best interest.
But not having a POA is also risky. If you become incapacitated without a financial POA, your family may need to petition the court for a conservatorship or guardianship, which can take months and cost thousands of dollars. So until a conservator or guardian is appointed for you, it may be impossible for anyone to manage your most important financial affairs, which could be disastrous.
Setting up a springing financial POA helps avoid issues related to incapacity without giving your agent premature access to your affairs, but be aware of the following issues:
It could have a lag in effect. A springing financial POA doesn’t take effect until you have been medically determined incapacitated. This process takes time even when no one is disputing your incapacity.
Uncertainty about incapacity. While there may not be disputes over your incapacity if you’re in a coma, there could be problems if you’re experiencing a slow decline and have good days and bad days. Doctors, family members, and the agent could disagree about whether you’re actually incapacitated. Until the uncertainty about your incapacity is settled, the agent has no authority to act.
Financial institutions. Banks may be nervous about granting access to a customer’s account and have been known to decline financial POAs. In the case of a springing financial POA, the bank may want to see the financial POA document, the physician’s letter, and other documents to verify that the financial POA has been activated. Even then, they may refuse to honor the financial POA if it is more than a couple of years old. Some banks have their own forms for appointing an agent to manage your accounts with that particular bank. To avoid future trouble, it is important that you ask your bank about their specific requirements. In addition, you may wish to consult your estate planning attorney about how a revocable living trust can serve your needs if you become incapacitated.
State laws. Each state has its own laws about springing POAs. For example, as of 2011, Florida no longer permits springing POAs. Your POA must comply with state law and be legally enforceable in your state. If you move to another state, consider reviewing and updating your POA to ensure that it complies with that state’s law.
A financial power of attorney is undoubtedly one of the most important estate planning documents you can have. If you’re concerned that an immediate POA is overreaching, a springing POA might be your solution. For even more peace of mind, we can walk you through other estate planning documents, such as a medical power of attorney, an advance healthcare directive, and a revocable living trust.
For help with these important decisions, contact our office. Call Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton & the Tri-Valley area, at (925) 831-4840.
Read more about power of attorney documents here:
Frequently Asked Questions About Estate Planning From Seniors
Why It’s So Important For Your Family to Have an Estate Plan