Understanding when to use a power of attorney

Power of Attorney

by Rick Kahler

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Is it a good idea to give control of your finances to someone else through a power of attorney?

Maybe. Or maybe not. It's foolish to sign away complete authority to someone who may or may not be trustworthy. It's equally foolish to refuse to consider a power of attorney in circumstances where it could serve you well.

In a case a few years ago where a power of attorney might have been given too easily, best-selling author Patricia Cornwell charged a financial management firm with negligence, alleging that it cost her millions of dollars. She had hired the firm to take care of her financial affairs, authorizing its manager through a power of attorney to make decisions on her behalf.

At the other extreme, one of my clients was taking care of financial matters for her elderly father, who had Alzheimer's. Yet when she mentioned a power of attorney, her father refused to sign one. Even with his memory failing, he had retained the idea that giving control of his money to someone else was a really bad idea.

People don't necessarily realize that a power of attorney can offer a whole range of options between "go ahead and do everything" and "absolutely not." There are many situations where a limited power of attorney might be useful. Such a document authorizes someone to act on your behalf only for one narrow purpose. It spells out the boundaries of that person's authority and often expires after a given period of time.

One common use for a limited power of attorney is to facilitate the sale of a piece of real estate or other property from a distance. If you have to move to Ohio but your house back in Nebraska hasn't sold yet, you could authorize a trusted friend, relative, or financial professional to handle the transaction for you.

Another way a limited power of attorney is often used is to have someone take care of your affairs while you are temporarily unavailable or incapable. Suppose you're undergoing treatment for a serious illness or injury, or you're taking a three-month trip around the world. You might want to authorize a family member to pay your bills and make other necessary decisions. The authority you give them could be as broad or narrow as you deem appropriate.

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Many couples execute durable powers of attorney granting their spouses or children broad authority to act for them if they become disabled. This has become a common and helpful component of retirement/old age planning.

Yet I see far fewer people using limited powers of attorney. One reason for this may be the expense and hassle. You don't necessarily want to hire an attorney to draw up a complex document every time you go on vacation.

If you think limited powers of attorney might be useful for you, one possibility could be to look online. Several sites offer legal forms at reasonable rates. Just keep in mind these are "one size fits all." Be sure the forms are valid in your state and that you understand what you're signing.

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Another option might be to see if your attorney would draft one document as a template, including language to cover various situations. Then you could adapt it as needed for specific purposes.

Whatever the circumstances, remember that a power of attorney is a useful but potentially dangerous tool. It's a bit like a chainsaw. An expert can make beautiful sculpture with it, but an amateur can cut someone's leg off. Before you put that much power into anyone's hands, make sure you can trust the person to use it well.

Rick Kahler

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com or 343-1400, ext. 111.

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