As part of your estate plan, you may have considered what happens to your assets when you pass away, and subsequently established a will. Great job! But what about if you lose the capacity to make financial decisions or if you want to outsource the financial decision making to someone else? Who will look after your assets then?
This is where a power of attorney (POA) comes into play.
What is a power of attorney?
A POA is a legal document that gives a person(s) or trustee organisation the legal authority to act for you to manage your assets and make financial and legal decisions on your behalf. In other words, it’s your backup brain.
The person or organisation you nominate is the ‘attorney’.
Decisions made by the attorney
The authority of the attorney is limited to decisions about property and financial affairs. This may include operating a bank account, paying bills and debts and transacting on real estate.
For real estate transactions, most states and territories require the power of attorney to be lodged and registered with their respective land authority to ensure its validity and authority for property transactions. You should always check the specific requirements for your relevant state or territory as there may be additional documentation or procedures involved.
You can also elect to limit the decisions they may make for you. To do this, you simply need to outline in the power of attorney document exactly what the limitations are.
When does the power of attorney come into effect?
The POA will come into effect dependent on the terms specified in the document. This can be either immediately upon signing, at a specified date, or in a specified event / condition.
When does the power of attorney terminate?
There are a number of events that can terminate a power of attorney, and is dependent on whether it is a general (ordinary) POA or an enduring power of attorney (EPOA).
A general POA is often used for specific events and therefore will expire upon the completion of the event or at a specified date. If you lose mental capacity, the general power of attorney will automatically cease.
Alternatively, an EPOA is designed continue to operate even if you have lost mental capacity. When preparing an estate plan, we often recommend clients opt for an enduring power of attorney for this reason, as most people handle their own affairs unless incapacitated.
Assuming you have mental capacity, you can revoke a power of attorney at any time. If you don’t have mental capacity, and it is deemed that the EPOA is not operating in your best interest, the court can revoke their power.
How to prepare a power of attorney
When it comes to drafting your POA, there are essentially two ways you can do it. The most cost-effective way is to draft it yourself. You can get a DIY power of attorney kit for less than $50 and it comes with a template and instructions to write up your own document.
Before going down the DIY path, you should be willing to put time and effort into preparing your POA properly. You should read and follow the instructions that come with the kit. If you don’t execute your POA properly, there is a good chance it will be deemed invalid.
If your situation is a little more complex, or you simply just don’t trust yourself to write the POA, then you can get professional help. There are many estate planning companies which draft the document for you, some even allow you to do it online. There is also a public trustee in every state which is a government run estate planning agency who typically offer reasonable rates.
Storing your power of attorney
Once you have a valid POA, you should get certified copies made and give them to your nominated attorney(ies). This ensures they have it ready to go if ever needed.
You should also maintain a copy of the POA yourself. This can be at your home, preferably in a safe or locked cabinet, or you can also pay to have it stored by your estate planning agency. If you store your power of attorney in a safe or locked place, make sure someone trustworthy can access it should something happen to you!
Becoming incapacitated without an enduring power of attorney
If you have not signed an EPOA, and you become unable to manage your financial affairs, a person will have to make an application to the State Administrative Tribunal to manage your financial affairs.
This is not ideal as the person who applies may not be the person you would wish to have control of your financial affairs! Also, there will be time delays and further stress during an already tense period.
Guided Investor’s take
An EPOA forms part of Phase 1 of Wealth Creation: Establishing a Financial Foundation. It is part of our financial housekeeping to ensure that when things don’t go to plan, your financial affairs remain cared for appropriately. Such a simple, cheap document can save a whole lot of hassle!
