Is a ‘Springing’ Power of Attorney Worth It?

Editor’s note: Cathy Sikorski is a columnist for Rethinking65. Read more of her articles here.

As the population hungers for investment and retirement education, one of the most important tools in our toolbox to assist them is the power of attorney (POA). The 30-second definition: It’s a document you sign giving some measure of financial authority and/or healthcare authority to a person you choose. This “agent” you select is then allowed to act as if they are you.

There are many permutations of financial POA. The most common and most useful one in elder care planning is the durable financial POA. Durable means the document endures even if the person who signed the POA (the principal) is now incapacitated.

Authorizing a financial agent is unfortunately on the back burner for most older Americans and an even smaller consideration for the younger age groups.  While 83% of people age 72 and older have designated a healthcare power of attorney, only 48% of older Americans have designated a financial power of attorney. This is where the trouble begins.

First Things First

My immediate advice to everyone: Get powers of attorney — financial and healthcare. If you are a financial advisor, lawyer or insurance advisor and haven’t drawn up these documents for yourself, please do; you can protect yourself and set a fine example for your clients. No one knows when incapacity will strike. You can have a car accident, a traumatic brain injury, or just need help. POAs are not just for old people.

Now that we’ve settled that, let’s discuss one of the most critical choices when drafting a durable POA: when its powers should be enacted.

Timing is Everything

An immediate POA grants powers to your agent as soon as you sign it. In other words, your agent can immediately begin handling your financial affairs. This powerful document places much trust in the chosen agent. Choose wisely, but you must choose. If you become incapacitated, you may need someone to handle your finances permanently. And if incapacity is triggered unexpectantly, say through a stroke or accident, your agent will need to act immediately.

A springing power of attorney “springs” into action when some incapacity happens. Often, the language is something like, “This authority is granted and becomes in full force when the principal is deemed incapacitated and such incapacity is confirmed by at least two physicians.”

This means that the agent under the authority cannot act in the capacity as an agent unless and until two physicians a) examine your loved one, and b) take the time to dictate a report that is send to each and every financial advisor and institution that the agent needs to work with. Not an ideal situation.

A Matter of Trust

As you can probably tell, I am not a fan of springing powers of attorney. But in order to contain my bias, I contacted Marie Burns, CFP, a financial advisor at Focus Point Planning, an independent RIA firm in Phoenix. I knew Marie was likely helping clients in crisis deal with the horrors of either a lack of a POA or the restrictions of a springing POA.

Marie is originally from Wisconsin, where springing POAs seemed to be the default. Her past conversations with estate attorneys there confirmed her suspicions. One attorney used a springing POA as the default in order to protect his clients from financial abuse. His concern was that providing immediate POA powers to an agent could effectively give that agent a blank check to his client’s finances.

Checks and Balances

While all of that is true to some extent, checks and balances can be put in place, even in an immediate POA. Any POA requires a high level of trust in the agent from the outset. But the main drawback of a springing power is the delay in activation due to the need for proof of incapacity. Additionally, potential ongoing disputes about the principal’s capacity can indefinitely delay any ability to act.

In contrast, Marie had a conversation with a local attorney in Arizona, who serves senior couples in long-term trusting relationships. That attorney always prefers using an immediate POA with this population in order to avoid the complexities and delays associated with proving incapacity. It can minimize the paperwork “hoops” a spouse/family member has to jump through during an already stressful time.

A Conversation That Must Be Had

Marie’s frustration was similar to mine. Often, the way a client discovers they have a springing POA is when the crisis arrives. It becomes painfully evident that there was no discussion with the client about the option of springing vs. immediate.  In fact, clients are generally unaware that there is a choice between these two options.

Marie added that whether she is reviewing current documents with clients or conducting educational workshops for groups, a majority of the time people get a “deer in the headlights” look. They have no idea what she means by springing or immediate POA. And they often have no idea which one they have in place.

It is time for all of us in the retirement business to get much clearer with our clients. We must educate them fully not only about the need for a POA, but how it actually works. We must take them through the document and explain exactly what it can and cannot do, and when it can and cannot do those things.

5 Critical Questions

Whether you are creating or reviewing the POA with your clients, these questions will them make a better decision — and it is their decision:

1. Do you trust the agent you are appointing to be completely honest with your funds?
2. Do you feel the need to put in some restrictions on your agent’s powers?
3. Do you want your agent to be able to do this job immediately?
4. Do you want to delay your agent’s ability to do this job by confirming your incapacity with a physician before the powers are available to him/her?
5. Are you satisfied that with an immediate POA, we can put some parameters in place to limit your agent’s authority?

4 Checks and Balances

Next, it’s time for you or the expert you are consulting with to explain some situations that will help guide a client’s decision (I’ll share my experiences in a minute). Then let them know that the following measures can limit an agent, even with an immediate POA:

• Don’t actually give them the document until it is needed.
• Limit their power to gift assets.
• Limit their power to use assets for anyone but the principal.
• Require them to have robust recordkeeping that can be checked by your accountant or attorney.

These checks and balances ultimately depend on the level of trust your client has with their agent.

My Story

When I speak with my clients, I explain that as a caregiver for eight different family members and friends — sometimes as the POA, and sometimes not — I never experienced a time when I wished these individuals had springing POAs. This is because in every situation the POA was greatly trusted, regularly conversed with the incapacitated person or their loved ones, and kept very good records.

I was the POA for my mom. I did not draft the document, as I wanted my seven siblings to know that mom made her own decisions. But as her agent, I often did banking or financial transactions for her when she was not incapacitated. My mom was in her 90s and just didn’t want to go the bank, call her advisor, or cash out savings bonds. She wanted her POA to do it. She did all her own recordkeeping; she just wanted physical help that required me to be her agent. If she had had a springing POA she would never have “qualified.”

A Living, Breathing Document

One thing I caution people about is that these documents are not written in stone. As long as you or your client have capacity, you can change things when you need to. Things change, people change, people die, move away, do terrible things that show you they aren’t trustworthy. If you must rethink your choice of agent, then do so.

While we’re at it, here’s an important aside: A diagnosis does not equal incapacity. This may be an article for another day, but I want you to understand that if, for example, a spouse is diagnosed with early onset dementia, that doesn’t mean they are incapacitated from that moment onward.

In the early stages, they likely still understand legal documents and what they are signing. If that’s the case, check the documents immediately and make certain they are in order. Or get to a lawyer to draft these documents. This is a perfect example of why you don’t want a springing POA, because a slow decline to incapacity would be hell on the person trying to get a diagnosis to effectuate that POA.

Every one of us should have powers of attorney in case of a crisis. By providing clients with detailed education, either directly or through an expert, you can help your clients make informed decisions. Spring into action, regardless if opting for a springing or immediate POA, because one never knows when they will need it!

Cathy Sikorski, Esq., is an elder attorney, speaker and author who unravels the complex financial and legal problems of caregiving and aging. She has been a caregiver for eight people. Cathy uses her experience to educate, entertain and elevate the conversation at work and in the corporate setting around money, retirement, aging and caregiving. Her third book, “12 Conversations: How to Talk to Almost Anyone about Long-Term Care Planning,” is available on Amazon.