What is a Financial Power of Attorney?
March 26th, 2023 by Bunch & Brock
Financial Power of Attorney Dos and Don’ts
A financial power of attorney is a legal document that can ensure that a trusted person is handling your financial affairs when you are not mentally or physically capable of doing so yourself. This document can be used for a specific need or to grant a chosen individual durable (ongoing) financial authority. While no one wants to think about becoming incapable of handling their own affairs, designating an agent to manage your financial affairs in advance makes sure the person you want is doing so. It also prevents the uncertainties that can result if a court must appoint a guardian or conservator to make the decisions for you.
Your financial POA should be part of a carefully crafted estate plan that includes drafting a will, setting up a plan to make certain your health care wishes are followed, and protecting the assets you’ve worked hard for. Having an estate plan is a good idea for everyone, regardless of age or health status, and it is particularly important if you have children who are minors. The best time to start planning is now, while you have the capacity to do so. An experienced estate planning attorney can help evaluate your individual situation, determine what you need to do, and handle all necessary paperwork, including a financial POA.
How Does a Financial Power of Attorney Work?
A financial power of attorney is a legal document that works by allowing you to name someone to make financial and legal decisions for you if you can’t make decisions on your own, such as in a health emergency or if you develop dementia. These documents are highly customizable and can be drafted to address individual situations.
Laws regarding financial POAs are covered under Kentucky Statutes – Uniform Power of Attorney Act (§§ 457.010 — 457.460). In addition, Kentucky has adopted the Uniform Power of Attorney Act (UPOAA) which establishes universal rules for POA contracts across states and determines which powers are included in the document by default and which must be explicitly addressed in order to be bestowed on an agent.
When you create a financial POA, you are referred to as the principal. The person you name in the financial POA document is called your agent. It is important to choose an agent you can trust implicitly, as the agent will have access and control over your financial matters.
Most principals choose a trusted family member or close friend to be their agent. It is also a good idea to select a second person to act as an alternate in case your initial choice is unable or unwilling to serve. Qualities to consider include trustworthiness, sense of loyalty, assertiveness, location, availability and financial understanding.
The financial power of attorney must be put in writing and properly signed to be effective, and it should meet certain requirements:
- The person making a power of attorney must be of sound mind and have the mental capacity to know what they are doing.
- It should be notarized. While Kentucky does not technically require you to get your POA notarized, notarization is very strongly recommended. Under Kentucky law, when you sign your POA in the presence of a notary public, your signature is presumed to be genuine; many banks and financial institutions will require a POA to be notarized before they accept it, and notarization is required to transact real estate.
You should keep the original document in a safe place and give copies to the agent, the alternate agent, family members, and affected institutions such as your bank, brokerage firm, lawyer, and accountant. If you gave your agent the power to conduct real estate transactions, you should also file a copy of your POA in the land records office in the county where you own real estate.
How do I Get Financial Power of Attorney in Kentucky?
While you can get a financial power of attorney form online, working with an experienced estate planning attorney will allow you to define what powers you want your agent to have and make sure everything is done correctly, tailored to fit your needs, and complies with Kentucky laws. Your lawyer should create your financial POA as part of a more comprehensive estate plan that includes a health POA, and a will or living trust.
The financial POA will include either granting your agent comprehensive powers or selecting, from a list, the specific powers you want your agent to have. For example, you might choose to grant your agent the power to:
- Engage in real estate, retirement plan, banking and financial transactions
- Engage in stock, bond, and other securities transactions
- Operate a business or entity
- Receive government benefits and handle taxes
- Pay day-to-day expenses
- Provide for personal and family maintenance.
In Kentucky, your power of attorney is automatically durable (meaning that it remains effective after your incapacitation) unless the document explicitly states otherwise (Ky. Rev. Stat. § 457.040). Your POA is effective immediately unless it explicitly states that it takes effect at a future date or upon a future event.
Financial Power of Attorney Dos & Don’ts
Having another person take care of your financial affairs should not be taken lightly. There are things that both the principal making the POA and the agent acting on it should and should not do.
For the principal — When you make a POA, the most important thing to do is choose someone you trust implicitly and who has the capacity to handle your financial transactions. Do read the Power of Attorney and understand the powers and restrictions you are designating to your agent and when your POA becomes effective. Do put the financial POA document somewhere safe and provide copies to all appropriate parties. After naming a power of attorney, review and update the document every few years.
Do not delay making this document. If you develop dementia or have some other health issue that makes you mentally incompetent, it’s too late for a power of attorney to be drafted and signed.
If you are an agent entrusted by someone else to act on their behalf, here are some tips to follow:
- Understand that the Power of Attorney does NOT take away the power of principal to act on their own.
- Keep a detailed accounting of all your activities. This record must be provided annually to certain recipients, including the IRS.
- Contact the principal’s bank, financial planner, accountant, lawyer, and nearest relative to notify them that the principal is unable to manage his or her own affairs and that you have the legal authority to do so.
- Determine the principal’s debts, especially ongoing responsibilities such as the payment of rent, credit cards, mobile phone service, utilities, etc. Prepare a schedule of those bills and make sure they get paid. Monitor bank accounts for any suspicious activity.
- Consider canceling the principal’s credit cards and freezing the principal’s credit report to make it more difficult for criminals to take out fraudulent loans or steal the principal’s identity.
- Get advice from an accountant or lawyer if needed. All fees for the services of consultants relating to work performed for the benefit of the principal’s financial affairs are payable by the estate, so if you need help, ask for it.
As the agent, you are bound by the document which the principal signed. If the wording of the document does not clearly state whether a certain act is allowed, a court may have to decide the issue. Any questions of potential abuse are decided by looking at whether the agent actually performed his or her role with the utmost good faith, so be careful that any actions you are unsure of cannot be perceived as exploitative. Some things you should not do include:
- Don’t give gifts from the principal’s property or finances unless the power of attorney specifically allows you to do so.
- Don’t add your own name to the principal’s property or the principal’s financial accounts or combine your own property and money with that of the principal.
- Don’t manage the principal’s affairs for the benefit of anyone other than the principal. The principal’s best interests are your sole concern, and you cannot profit from your appointment under any circumstances.
- Don’t borrow money from the principal’s estate.
- Don’t try to change any of the principal’s testamentary designations.
- Don’t take a fee for your service unless the power of attorney specifically allows you to do so. If it doesn’t and you believe a fee is appropriate, seek court approval.
Get Help from Our Estate Planning Attorneys
At Bunch & Brock, we understand that each estate plan must be as unique as the person it serves, and so does a financial POA. With more than 35 years of experience in the state of Kentucky, we have helped many people understand their rights and responsibilities. We are committed to providing our clients with a high level of personal service, and we will walk you through each of the steps that must be taken. Whether you’re planning for your own future or for the future of a loved one, we can help.
To get started, schedule an initial consultation by calling 859-254-5522 today.