financial Power of Attorney - basics

If you have read any of the other posts here, you’ve probably gathered that an estate plan refers to more than just having a Last Will and Testament. The other two heavy-hitters you really need to have are a Power of Attorney, sometimes called a Durable or Financial Power of Attorney, and a Healthcare Power of Attorney with a Living Will. You can find more information on the Healthcare Power of Attorney and Living Will in another post.

But for now let’s focus on the Durable or Financial Power of Attorney, which we will just call the POA. Below is a brief and high-level overview. There will be more posts discussing specific issues and details surrounding POA’s.

What is a POA?

In very general terms, a POA is a legal document that allows someone you choose to make financial decisions for you. You, the person making the POA, are the principal, and the person you designate is called an agent (more specifically, in Ohio they are called an Attorney in Fact).

Principals and agents - it sounds complicated. But it really isn’t. We all deal with principals and agents all the time in our normal lives we just don’t notice it. For example, when a restaurant employee, at the direction of their employer, purchases groceries for the restaurant’s dinner service, the employee is the agent and the employer is the principal.

how do you make one?

A POA is a legal document. This means it has a specific format, language spelled out in the Ohio Revised Code, that allows a principal to choose what powers to grant their agent.

Like a Last Will and Testament, in order for it to have legal effect it has to be executed, i.e. signed, in a specific way. This varies by state. For example in Ohio a POA must either be witnessed by two witnesses (and there are some limitations as who may serve as a witness) or signed in front of a notary public. While it may be convenient to follow the minimum execution requirement, it may make more sense to use a belt-and-suspenders approach if the principal anticipates dealings in other states. Think, businesses that operate or property owned in other states.

How/when does a POA work?

This is the critical element to understand about POA’s. You may have heard the terms “durable”, “springing”, or even “temporary” to describe a POA. What this refers to is when a POA triggers, when it comes into effect. All POA’s end at the same moment unless otherwise specified: when you die. But they can START at different points in time.

In Ohio the default assumption is that a POA is durable, which means it is effective immediately. You read that right. When you execute a durable POA in Ohio, unless you state otherwise, the person you designate can make decisions for you right now, even if you’re still capable of making your own decisions.

You have the option to make a springing POA, which triggers only on a specified event. For example, you can make it trigger only upon your incapacity. A springing POA should specify how that incapacity determination is made so there is no confusion or undue delay.

There are benefits and drawbacks to each type of POA that you should discuss with your attorney. Sometimes it is more important for an Attorney in Fact to be able to act quickly, sometimes a POA is only necessary for a discrete period of time.

What does a POA do?

The Ohio Revised Code sets forth general powers that all Attorneys in Fact have. These are automatically granted unless you state otherwise in the POA. Then there is a second tier of powers you must specifically grant. The second tier are more involved and give the Attorney in Fact much broader powers. Because this second tier of powers is so broad, it is important to discuss with your attorney how much discretion you want and need your Attorney in Fact to have.

What Can’t a POA do?

Executing a POA does not mean the person you designate can do every finances-related act you need to have done. For example, there is a specific form that must be submitted to the IRS if you want your Attorney in Fact to file your taxes. And banking institutions often have their own internal authorization forms to allow another party access to accounts. It is important to discuss these issues with your attorney to assure that your Attorney in Fact will have no difficulty accessing your financial information.

Also, a POA cannot authorize someone to make healthcare-related decisions for you. That can only be done with a Healthcare Power of Attorney and Living Will.

The key takeaway

Everyone should have a POA. Hard stop. And everyone’s POA should designate a successor Attorney in Fact whenever possible. Thinking through how you want your POA to function and - most importantly - only choosing people you trust to act as your Attorney in Fact, is a critical element of your estate plan.