Do You Need a Durable Power of Attorney for Finances?

by Nolo.com
From the Nolo.com Wills & Estates Planning Center

Most, but not all, people can benefit from a durable power of attorney for finances.

Almost everyone with property or an income can benefit from a durable power of attorney for finances. It's particularly important, however, to have a durable power of attorney if you fear that health problems may make it impossible for you to handle your financial matters.

Making a durable power of attorney ensures that someone you trust will be on hand to manage the many practical, financial tasks that will arise if you become incapacitated. For example, bills must be paid, bank deposits must be made and insurance and benefits paperwork must be handled. Many other matters may need attention as well, from property repairs to managing investments or a small business. In most cases, a durable power of attorney for finances is the best way to handle tasks like these.

Avoiding Conservatorship Proceedings

The main reason to make a durable power of attorney for finances is to avoid court proceedings if you become incapacitated. If you don't have a durable power of attorney, your relatives or other loved ones will have to ask a judge to name someone to manage your financial affairs. These proceedings are commonly known as "conservatorship" proceedings. Depending on where you live, the person appointed to manage your finances is called a conservator, guardian of the estate, committee or curator.
Conservatorship proceedings can be complicated, expensive and even embarrassing. Your loved ones must ask the court to rule that you cannot take care of your own affairs -- a public airing of a very private matter. Court proceedings are matters of public record; in some places, a notice may even be published in a local newspaper. If relatives fight over who is to be the conservator, the proceedings will surely become even more disagreeable, sometimes downright nasty. And all of this causes costs to mount up, especially if lawyers must be hired. (Conservatorships are discussed further in the Conservatorship FAQ.)

If You Think You Don't Need a Durable Power of Attorney

You may not think that you need a durable power of attorney for finances if you're married, or if you've put most of your property into a living trust or hold it in joint tenancy. But the truth is that in all of these situations, a durable power of attorney can make life much easier for your family if you become incapacitated.

If You Are Married

If you are married, don't assume that your spouse will automatically be able to manage your finances if you can't. Your spouse does have some authority over property you own together -- for example, your spouse may pay bills from a joint bank account or sell stock in a joint brokerage account. There are significant limits, however, on your spouse's right to sell property owned by both of you. For example, in most states, both spouses must agree to the sale of co-owned real estate or cars. Because an incapacitated spouse can't consent to such a sale, the other spouse's hands are tied.

And when it comes to property that belongs only to you, your spouse has no legal authority. You must use a durable power of attorney to give your spouse authority over your property.

Example: New York residents Michael and Carrie have been married for 47 years. Their major assets are a home and stock. The home is owned in both their names as joint tenants. The stock was bought only in Michael's name, and the couple has never transferred it into shared ownership. Michael becomes incapacitated and requires expensive medical treatment. Legally, Carrie cannot sell the stock to pay for medical costs. She could take a loan against her interest in the house, but doesn't want to. And as a practical matter, a bank would probably be very reluctant to grant a mortgage that wasn't signed by both spouses.

If You Have a Living Trust

The primary purpose of a revocable living trust is to avoid probate. But the trust can also be useful if you become incapable of taking care of your financial affairs. That's because the person who will distribute trust property after your death (called the successor trustee) can also, in most cases, take over management of the trust property if you become incapacitated. Usually, the trust document gives the successor trustee authority to manage all property in the trust and to use it for your needs.

However, the successor trustee has no authority over property that the trust doesn't own. Most people transfer into a living trust assets that are expensive to probate, such as real estate and valuable securities, but few people transfer all their property to a living trust. So although it's helpful, a living trust isn't a complete substitute for a durable power of attorney for finances.

If You Own Joint Tenancy Property

Joint tenancy is a way that more than one person can own property together. The most notable feature of joint tenancy is that when one owner dies, the other owners automatically inherit the deceased person's share of the property. But if you become incapacitated, the other owners have very limited authority over your share of the joint tenancy property. For example, if you and someone else own a bank account in joint tenancy and one of you becomes incapacitated, the other owner is legally entitled to use the funds. The healthy joint tenant can take care of the financial needs of the incapacitated person simply by paying bills from the joint account. But the other account owner has no legal right to endorse checks made out to the incapacitated person. In practice, it might be possible -- if not technically legal -- to get an incapacitated person's checks into a joint account by stamping them "For Deposit Only," but that's not the easiest way to handle things.

Matters get even more complicated with other kinds of joint tenancy property. Real estate is a good example. If one owner becomes incapacitated, the other has no legal authority to sell or refinance the incapacitated owner's share.

By contrast, with a durable power of attorney, you can give your attorney-in-fact authority over your share of joint tenancy property, including real estate and bank accounts

When You Shouldn't Rely on a Durable Power of Attorney

The expense and intrusion of a conservatorship are rarely desirable. In a few situations, however, special concerns justify the process.

You Want Court Supervision of Your Finances

If you can't think of someone you trust enough to appoint as your attorney-in-fact, with broad authority over your property and finances, don't create a durable power of attorney. A conservatorship, with the built-in safeguard of court supervision, is worth the extra cost and trouble.

You Fear Family Fights

A durable power of attorney is a readily accepted and powerful legal document. Once you've finalized yours, anyone who wants to challenge your plans for financial management will face an uphill battle in court. But if you expect that family members will challenge your document or make continual trouble for your attorney-in-fact, a conservatorship may be preferable. Your relatives may still fight, but at least the court will be there to keep an eye on your welfare and your property.

If you expect family fights and feel uncomfortable making a durable power of attorney for finances, you may want to talk with a knowledgeable lawyer. He or she can help you weigh your concerns and options, and decide whether a durable power of attorney is the best option for you.

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Do You Need a Durable Power of Attorney for Finances?