If you're confused about powers of attorney, this is the article for you. Take five minutes to learn about these documents before you make an expensive mistake.
Regular readers of Money Talks News have undoubtedly noticed that we mention powers of attorney from time to time. For instance, we’ve discussed them as being essential to estate planning and part of the 10 smart money moves that can make a big difference.
But what if you’re still not sure what a power of attorney is and whether you need one?
Well, you’re in luck. I talked to Nicholas Reister, a lawyer and counselor specializing in estate planning with Smith Haughey Rice & Roegge in Grand Rapids, Mich. He shared everything you need to know about this important legal document.
Handing over the keys to the kingdom
When asked to describe a power of attorney – we’ll refer to them as POAs – Reister offers this definition.
It is a document where a person, who’s called a principal, appoints an agent. [The agent] can do almost everything you could do for yourself.
Let me rephrase: a POA is a blank check. It’s handing someone the ability to do just about anything they want in your name.
Your agent can do all of the following and more on your behalf:
- Lend money.
- Borrow money.
- File taxes.
- Make business transactions.
- Open bank accounts.
- Close bank accounts.
- Apply for credit cards.
With very few limitations, such as making medical decisions, a POA lets your agent do practically anything in your name.
Now, I know you’re probably freaking out and wondering why on earth you would want to hand over that much power to someone else, but stick with me here.
Who needs a POA? You, that’s who
“I’m of the opinion everyone needs a POA, from a college freshman on,” Reister said.
And don’t make the mistake of thinking being married is the same thing. Reister related the story of a married couple with separate estate planning. A document needed to be signed by the husband in short order or they would be out a significant amount of cash. However, he was traveling and hadn’t given his wife POA, so she couldn’t sign on his behalf. That ended up being a costly mistake.
While you need a POA, you need to be careful about who you designate as your agent. Although criminal charges can be brought against someone abusing their power, you don’t need that headache.
“Only choose someone you trust implicitly,” Reister said. “Maybe hold on to the POA [document] and let the agent know where the papers are.”
That second bit of advice could be sage wisdom. It ensures you to have a POA designated in case of an emergency but provides protection from your agent turning to the dark side and draining your bank account.
Different types of POAs
Reister said there are several special types of POAs you can use:
- Durable power of attorney. This POA continues to be in effect in the event someone becomes incapacitated. Regular POAs end when the principal is no longer able to make legal decisions, such as if they were to slip into a coma or develop dementia.
- Limited power of attorney. A document that gives an agent POA abilities for a limited time or only for certain purposes.
- Medical power of attorney. This is the POA that allows others to make medical decisions on your behalf.
You don’t need to have the same agent for your medical and financial POAs. You can even name multiple agents on your durable POA or use several limited POAs to split up control of various parts of your finances so no one person has power over everything.
That said, multiple POAs or a POA with shared agents can make your finances more confusing and complex. If you plan to go that route, you may want to consult with a professional first and carefully weigh the pros and cons.
An IRS gotcha for POA agents
Finally, Reister told me that agents need to be aware of an IRS regulation that could cost them a huge amount of money.
The government is requiring POA agents to report whether their principal has money in a foreign bank account. The scary thing is this provision applies even if you don’t know that someone has appointed you their POA agent, and failure to report foreign assets comes with stiff penalties.
“The penalties for that are pretty frightening,” Reister said. “It’s 50 percent of the amount in the account per year plus criminal penalties.”
Reister knows of one case in which an agent was fined for failing to report for three years, meaning he owed 150 percent of the total amount in the account – and it wasn’t even his money.
The courts are currently deciding whether this is a case of government overreach, but for now Reister is drawing up POAs for his clients that exclude signature authority for foreign accounts. That seems to take care of the problem and eliminates the need to file an annual report with the IRS.
Be smart when it comes to planning
Although it may be scary to think a POA gives someone control over your finances, they remain an essential part of sound money management. In the event you are in accident or become ill, you’ll want a durable POA so someone can step in and man the ship while you are out of commission.
“It’s important for both the agent and principal to know how powerful these documents are,” said Reister.
The fact that they are so powerful is also the reason everyone with a job and money in the bank should have one. Without a POA, your family will need to go to court to get control of your assets, a long and stressful process, for sure.
Just remember that quote from “Indiana Jones and the Last Crusade” when picking your agent: “Choose wisely.”