What Your Agent Can and Can't Do
(Financial Powers of Attorney Explained)
Imagine a parent moves into assisted living and no longer has the capacity to handle her own affairs. Someone has to clean out the house, sell the items, maybe sell the house, and put the proceeds into her bank account where they can be managed. If she signed a financial power of attorney, her adult child or whoever she named can do all of that. If she didn't, there is a much less pleasant plan B waiting, and we'll get to it.
Today's episode kicks off a series on the estate planning process. It's late fall as I record this, and I've noticed that a lot of people put "get a will" or "get an estate plan done" on their New Year's resolution list and their Q1 goals. So I want to give you bite-sized chunks of knowledge leading up to that, so you can feel more empowered when it's time to get it done.
First up: financial powers of attorney, unpacked.
A quick disclaimer. I'm only licensed in Texas, so I'm speaking from that vantage point, but my goal is to give you solid information that applies no matter what state you're sitting in. Financial powers of attorney are persnickety about the details, so do get your own legal advice. What I can do is give you enough knowledge to move forward with confidence.
“Financial powers of attorney are a huge deal because it is in essence giving someone the keys to your financial kingdom.”
Full stop. That's why you need to think through what the document says, be clear on what the person can and cannot do, and ask who you're choosing and whether they have the skill set to carry things out the way you want.
Start With the Terms
Principal, agent, and attorney in fact
The principal is the person making the power of attorney: the one signing it and granting the power. The person receiving that power is the agent, or the attorney in fact. Those words get used interchangeably. And no, you do not have to be an attorney to be named an agent. I don't know why they use that term, since most agents are not attorneys, but they are attorneys in fact if they're named in a POA.
Financial powers of attorney also don't get to make medical decisions for you. That's a whole other document, and you choose your agents based on their skill set and the things they'll need to do on your behalf.
General or limited
A general power of attorney means the person can handle any and all financial matters for you. A limited power of attorney covers a specific transaction or a specific time frame. Title companies draft limited powers of attorney all the time so one person can sign for another only at the closing on a particular property. That person can't go deal with the bank accounts or pay the bills.
For today I'm assuming a general power of attorney, because that's usually what we sign. We don't know what the agent will need to deal with, so we err on the side of giving them power over every type of financial transaction we can imagine, so their hands aren't tied if we later become incapacitated.
Durable
Durable is good. Most financial powers of attorney you'll see have that word in the title or somewhere in the document. It simply means your agent does not lose the power to act for you if you become incapacitated. That makes a whole lot of sense, because incapacity is generally when they're going to need to act, so why would we cut that power off?
Immediately effective or springing
An immediately effective power of attorney is just that. The day you sign it, your agent can technically deal with your finances and enter into transactions on your behalf. Do they need to let you know they're doing it? Absolutely. Should they be acting unless you're incapacitated or otherwise unavailable? Probably not. It's a matter of convenience. If you're out of the country and can't get to a closing or pay a bill, your agent can step in.
A springing power of attorney only becomes effective upon your incapacity, as evidenced by a doctor's letter or two, depending on what your document says. Doctors are generally familiar with the short letter we request. The note travels around with the financial power of attorney and shows the world that yes, it's a springing power of attorney and it has sprung. Here's the proof.
In my practice it's typically been 50-50 on which one people choose. Some people like the convenience of never needing a doctor's letter. Others like the added confidence that no one can act until and unless they become incapacitated. It's generally a personal preference.
Whichever you pick, giving authority to an agent does not take away the principal's decision-making rights. If you can still conduct the business of your life, your agent shouldn't be doing it unless you ask. Giving someone that power doesn't usurp your ability to make your own choices about your own assets.
What an Agent Can Do
It always depends on the four corners of the document, but a general power of attorney usually covers a handful of big buckets.
Banking and investments. Making deposits and withdrawals, paying your bills, managing household expenses, communicating with your advisors, making trades, and handling overall investment management.
Real estate. Buying property on your behalf, selling property you own, or otherwise managing it. This is the assisted living scenario from the top of the episode.
Business interests. Your agent basically steps into your shoes as a full or partial owner, subject to the agreements you've signed.
Taxes, insurance, debts, and professionals. Paying your taxes, filing your annual income tax return, dealing with insurance and debts, and hiring a CPA. They might even hire an attorney and start a lawsuit against the person who caused your incapacity. And they can pay for your care.
What an Agent Cannot Do
This varies state to state, but most states agree that an agent under a financial power of attorney cannot make or rewrite a will for the person they're acting for. Making a will generally requires the specific intent of the person and their own signature.
That's interesting, because many powers of attorney can be drafted to let your agent make changes or amendments to a trust, or even create one. If someone lacks capacity, their agent can revise a revocable trust that may be the primary estate planning tool of the person, and yet not touch the will. I don't know why that is, but in many states it's the case.
The agent also can't simply help themselves to the money. They have a fiduciary responsibility to protect the principal's assets and make decisions that are right for that other person, with no conflicts of interest. The principal's money isn't for the agent's own benefit unless the POA specifically provides for that.
Another thing a financial power of attorney cannot do is handle someone's finances after they die. It terminates at death. There's usually a little gray area before an executor is appointed and takes over, or, if the person had a revocable trust, before the successor trustee slides in and starts managing assets.
That reminds me how important it is to remember which fiduciary has control over which assets. Think of two buckets. A financial power of attorney only grants authority over assets in the principal's individual name: bank accounts, real estate, business interests, all the things I ticked off earlier. Anything titled in a person's revocable trust, or any kind of trust, can't be dealt with by the financial agent during their lifetime. Those assets are handled by the trustee.
And just being named as someone's agent doesn't mean I can override what the principal wants if they have capacity. They still get first say. I'm over here in the wings, waiting until they need me or want me to handle something. You can't take their autonomy away.
The Hot Powers
Some powers sit outside the general categories of banking, investments, real estate, and business interests. In Texas we call them hot powers. The agent doesn't have authority over them unless the document specifically grants it, usually with the principal's initials.
Making gifts
The first is making gifts of the principal's property to anybody else. Sometimes gifts are restricted to certain amounts, sometimes they're not allowed at all, and sometimes the agent can make large gifts to individuals or charities, often for tax purposes. Either way, you have to follow the gift-making rules in the document and generally track what the person has already said in their will or trust. You can't just decide to start making gifts to every Tom, Dick, and Harry out there. The more words on the page to guide the agent, the better.
Say a grandmother has lost capacity, and historically she's made regular annual gifts to each grandkid. Unless the document says otherwise, an agent granted the gift-making power can continue those gifts. Grandma would have done it if she had capacity.
Changing beneficiaries
An agent who is given the specific power can also change beneficiaries on things like bank accounts, IRAs, 401(k)s, and life insurance policies, or put survivorship rights on bank accounts that are co-owned with someone else. These are pretty important things.
“Again, why can we not make a change to a will, but we can completely alter the beneficiary designation on a $2 million IRA? You got me.”
The agent still has to act in accordance with the estate planning documents in play and can't change the person's plan by changing beneficiaries. We rely on this power a lot as cleanup work. Say a husband has passed away and the wife never had an alternate beneficiary on her IRA. We track what she has in her will or trust and handle the designation that way.
The Agent Is a Fiduciary
I cannot drive this home enough: an agent has a legal duty to the principal, and the role comes with real work.
“The agent is a fiduciary, it’s not this honorary sash that they get to run around with, it is a job.”
If you've served as a financial power of attorney for an elderly parent, a sibling, or anybody else, you know it's a huge responsibility. You have to act loyally and in the principal's interest, keep your finances separate from theirs, and keep good records. Document reimbursements, caregiving payments, transfers, and professional invoices, with receipts, and assume that one day you'll be questioned over how you managed the money.
Avoid any kind of casual commingling, even where it seems convenient. "I'll move all of Mom's stuff over into my bank account and just manage it from there" is a no. Keep it separate.
What Surprises People
Banks may still give you a hard time
Even a valid POA can run into trouble. Say you take a Missouri financial power of attorney to a bank here in Texas. That may draw scrutiny, because banks like seeing powers of attorney from their own state. They can get freaked out and send it to legal. Your POA is only as good as that third party says it is. Can you sue them if they don't honor it? Yes. Is that hard? Yeah. You want to avoid it.
So redo your powers of attorney if you've moved states. And if yours was originally done 20 years ago, re-execute it. Dust it off, make sure the agents are who you want, and sign it again so it's a little fresher. In my experience, once a POA gets to be older than 10 years or so, banks start asking how they know it's still what the person wants, or whether there's a newer one out there.
Brooke's Tip: I like re-signing powers of attorney every few years to keep them fresh. You want to take away any reason a bank or financial institution has to push back. The laws change too. Financial powers of attorney don't expire, but in recent years here in Texas there have been additional powers you can list to give your agent more discretion on certain things.
Social Security and the IRS have their own rules
A financial POA does not itself make you the Social Security representative payee for the person. To handle Social Security benefits for someone else, you have to be listed as their representative payee, and SSA appoints that separately. They'll often let you show the financial POA and then name you as payee, but having the POA alone won't immediately give you access to negotiate Social Security business on the principal's behalf.
Similarly, to represent someone before the IRS you need what's called a Form 2848. Think of it as the IRS's own specific power of attorney for tax matters, with separate rules. That's another limitation of a financial POA.
Choosing Your Agent
Choose someone with integrity, reliability, good judgment, and good attention to detail. They should be super organized and know when they need help from a lawyer, a CPA, or another professional.
You may think right away of your spouse. But if they're suffering from some light dementia or are just really elderly, they may not want to handle all the business of your life. So folks often turn to an adult child or children.
You can absolutely name more than one person. You can even draft the document so that either of them can act on your behalf, and they keep each other informed and sort of divide and conquer. But the power of attorney needs to say that explicitly. Otherwise every check may need two or three signatures. If you appoint more than one person, think about whether they can act individually or have to act together. Maybe for real estate or investment decisions you want majority rule or unanimity, and for everything else they can act independently.
After your primary agent is named, you'll always want to name a successor agent if you have the opportunity. Maybe your first choice can't serve, wants to waive the role, or moves to Japan and it no longer makes logistical sense for them to handle things for you. Then boom, you've already got someone next in line. Once you've become incapacitated, you can't change your financial power of attorney or revoke it.
If you don't have one
If you have no financial power of attorney, or you're out of options (say you named two people and both have passed away or become incapacitated), we're typically looking at a court process called a guardianship or a conservatorship, depending on where you live. A judge appoints a guardian or conservator to start handling the assets of your estate.
It's a big bummer of a process. It requires ongoing court involvement, and usually a private attorney called an attorney ad litem is appointed to represent you. That attorney gives the judge an objective view on whether, say, the adult child is a good choice or the worst idea ever. It is expensive, time-consuming, and tedious, and we try to avoid guardianships and conservatorships at all costs by keeping up with our powers of attorney. That goes for medical decisions as well.
“I cannot stress how important financial and medical powers of attorney are and how easy they are to get in place.”
Your Five-Point POA Checkup
If you've already done a POA, here's what I want you to do.
Find it and check your agents. See who you listed as your agents and make sure you're still good with that order. Verify the primary and successor agents.
See when it takes effect. Is it in place now, so someone could act on your behalf without a doctor's note? Or does it require your incapacity and a doctor's letter?
Look for big powers. Check for any express gifting powers and any express powers to change, revise, or create a trust or change beneficiary designations. Do you have them? Do you want them? Does your state give you the opportunity to have them?
Ask your financial institutions. Send them the document and say, "This is the one I have in my life. Can you take a look?" Speak now or forever hold your peace, because if I become incapacitated, I don't want any pushback.
Tell your agent where it is. Maybe even give them a copy and let them know where the original is.
Copies are fine for financial institutions and investment houses. But if someone signs for you to buy or sell property, the power of attorney generally needs to be recorded in the deed records to show you had the power. Most clerks and counties will only record an original. So know where the original is, along with your will or trust and your medical power of attorney.
The Bottom Line
Get your financial and medical powers of attorney done, get them in place, and review them from time to time to make sure they still say what you want them to say and reflect the latest and greatest laws around those documents.
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This post is for educational purposes only and does not constitute legal advice. Laws vary by state and situation. For advice specific to your circumstances, consult a licensed attorney in your area.
