Articles
A Simple Instrument For a Complex World
June 3, 2008
Here is the scenario: Mortgage and other bill payments are due, investment or other financial decisions need to be made and you are unable to carry out the actions necessary to accomplish them due to an accident, illness, or a prolonged absence. Your family wants to respond to these needs, but doesn't have the legal authority to do so. What is the solution?
A simple, proven tool available to handle situations like this is the Financial Power of Attorney ("FPA"). A FPA is a legally binding document authorizing the person you select (your "attorney-in-fact," or "agent") to make decisions for you with respect to your assets, ensuring that your finances are managed even if you are not able to do so.
A FPA can be done in anticipation of a future need, for a special purpose, and for a limited time depending on your situation and desires. In addition to providing peace of mind for yourself, it can prove a great blessing for your family should you ever become incapacitated and unable to make decisions for yourself. Without a power of attorney in place, your spouse, closest relatives, or companion will generally have to ask a court for authority over at least some of your financial affairs. The FPA empowers those you trust to act on your behalf to prevent loss of assets due to non-payment or inaction, to avoid the delay and expense of otherwise necessary court proceedings, and generally manage your finances in accordance with your instructions.
Creating a Financial Power of Attorney
Depending on your personal situation and the extent or limits on authority given to your agent, the FPA can be basic or customized to your specific intent and financial portfolio. In addition to preparing a general FPA, some banks and brokerage companies have their own specific preferred FPA forms. If you want your agent to have an easy time with these institutions, you may need to prepare two (or more) FPAs: your own form and forms provided by the institutions with which you do business.
In order to make a FPA valid under North Carolina law you must first ensure that the language used and specific powers granted by you to your agent are proper. You must then sign the document in front of a notary public, having demonstrated the competency and capacity to do so. You may also be required to record your FPA with the Register of Deeds of the counties in North Carolina where you reside or own real estate.
Duration of a FPA
A FPA only becomes effective when you say it will, and the language used therein determines if it will be effective immediately or only upon your incapacity. A FPA that goes into effect as soon as you sign it is called a "durable" FPA. With a durable FPA, there is no waiting period or any determination of incapacity required before your agent has the ability to manage your financial affairs. Many spouses have durable FPAs for each other in case something happens to one of them. Others, instead, specify that the FPA does not take effect unless your doctors certify that you have become incapacitated and thereby unable to manage your own affairs. This is called a "springing" FPA, as it only springs into effect when needed, and allows you to keep exclusive control over your affairs unless and until such an event occurs.
At death, a FPA automatically terminates and your Last Will & Testament becomes the controlling document over your assets and other finances. Unless your FPA agent is also appointed as the Executor in your Will, your agent will have no authority to handle financial matters after your death, such as paying your debts, making funeral or burial arrangements, or transferring your property to the people who inherit it.
Your FPA also ends if:
- You revoke it. As long as you are mentally competent, you can revoke a FPA at any time by performing certain acts of revocation required by state law and providing notice to your current agent that you have revoked his or her authority.
- A court invalidates your document. While rare, a court may declare your document invalid if it concludes that you were not mentally competent when you signed it, or that you were the victim of fraud or undue influence.
- No agent is available. To avoid this problem, you can name one or more alternate agents in your document if the first agent designated is unable to serve.
The Extent of an Agent's Authority
Commonly, people give their agent broad powers to handle all of their finances. However, you can give your agent as much or as little power as you wish. North Carolina law also provides limitations that may prevent certain activities from being carried out by your agent under your FPA. The best recommendation is to specifically state all actions and powers desired for your agent and consult with an experienced estate planning attorney to discuss any unusual or more restrictive powers desired to determine if they will be effective. Specific areas of concern which may require special attention and discussion are:
- transferring your authority to vote for business or financial affairs
- creation or modification of a Last Will & Testament or trust
- changes to beneficiary designations of life insurance and other retirement accounts
- gifting of funds to family members and others
- exercise any powers which would cause your assets to be taxable to the agent
- exercise any power of appointment given to you in someone else's Last Will and Testament or trust
However, there are also numerous actions you may want to specifically authorize your agent to do which are typically accepted within the general language used in an FPA. Some examples include:
- use your assets to pay your everyday expenses and those of your family
- buy, sell, maintain, pay taxes on, and mortgage real estate and other property
- collect Social Security, Medicare, or other government benefits
- invest and manage your money in stocks, bonds, and mutual funds
- handle transactions with banks and other financial institutions
- buy and sell insurance policies and annuities for you
- file and pay your taxes
- operate your business
Note that the agent is always required by North Carolina law to act in your best interests, maintain accurate records, keep your property separate from his or hers, and avoid conflicts of interest.
Selecting Your Agent
A FPA can be a simple solution to many potential problems and unforeseen circumstances that can arise during your life. However, with the inherent power and authority transfer a FPA delivers, it is of vital importance to carefully consider not only those aspects mentioned above, but who you should select to serve as your agent as well.
Only you can determine the best person to serve as your agent. However, your choice needs to be someone you trust, as well as someone who can competently carry out the tasks required. Many people select their spouse as their first choice, and a child or other relative as alternates. But, if your spouse is ill, inexperienced in financial matters, or for some other reason wouldn't be able to handle the responsibilities, it is best to select someone else.
Recommendation
The FPA is a tremendously valuable life planning tool for an individual. Like other estate planning documents, however, it should be implemented only after having given full consideration to all aspects of what you are signing and the effects it may have on your life. To ensure the full value of a FPA is realized, we recommend that it be incorporated as part of an overall estate planning strategy devised with the advice and counsel of a qualified attorney.
