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The role of a financial power of attorney

| Mar 17, 2021 | Estate Planning

New Yorkers are usually advised of the importance of advanced directives, such as a living will, to accompany their will or trust. But another important document that sometimes gets overlooked during estate planning is a financial power of attorney. A financial POA will oversee the financial health of the estate, including the estate’s income, assets and liabilities, as well as business or property transactions.

Understanding what a financial POA is can help explain what it does. It is a legal document authorizing one person, called the agent or attorney-in-fact, to act on behalf of another, called the principal. The agent can be a spouse, relative or friend, as well as a financial or legal professional. Most importantly, the agent should be trustworthy, organized and knowledgeable in the legal and financial matters of the estate.

The types of powers of attorney

In New York, the three types of POA’s that function under different situations are:

  1. A nondurable POA is limited in scope and duration, and is used for a specific purpose such as signing a contract by proxy, selling real estate or making investment decisions on behalf of the principal.
  2. A durable POA allows the agent to act on behalf of the principal during or surviving incapacity. It may be used immediately and is in effect until revoked by the principal or until their death. Once mainly the domain of conservatorships, the durable POA is a much more common and accessible estate planning tool now.
  3. A springing POA involves the medical opinion of the principal’s doctor in assessing their competency in financial matters, and it remains in effect until revoked by a court or on the principal’s death.

How does the POA take effect?

Depending on how it is worded, a financial POA can take effect immediately, or only when a certain event happens. For example, in the event of an emergency in which the principal is incapacitated, having the spouse as the agent allows them to make immediate financial decisions on behalf of the principal.

For those who wish to retain the power to make financial decisions for as long as possible, a medical event certified by the principal’s doctors, such as a coma, dementia or mental illness can allow a financial POA to spring into effect.

When choosing a financial POA, it is important to remember that as fiduciary, the agent is obligated to act in the best interests of the principal. The agent must abide by strict standards of loyalty, integrity and honesty, must also be highly organized and, in some cases, be able to competently manage complex financial transactions.