Your loved one has entrusted you with financial power of attorney, giving you the legal right to handle their finances, including taxes, bills and real estate transactions, if they are unable to do so. It’s a big responsibility. But what does power of attorney mean?
It’s possible to be named financial power of attorney, also known as agent or attorney-in-fact, and not have any immediate power of attorney responsibilities. You’ll only take on these duties if something happens to the principal, which is the legal term for the friend or family member who granted you power of attorney.
1. The Paperwork Rules
Wondering what a power of attorney can do and not do? Your duties should be spelled out in the legal documents. A financial power of attorney is most often responsible for financial management and would have access to the principal’s bank accounts, safe deposit boxes and estate documents. A power of attorney could make decisions about purchasing insurance, acquiring government benefits and filing tax returns. There are three categories of financial power of attorney:
You can act on behalf of the principal in any matters as allowed by state laws.
You can act on behalf of the principal in specific matters, or within a specific time frame. For example, power of attorney limits might include making decisions about only the principal’s retirement funds or managing their investments only while they are overseas.
You can act on behalf of the principal in specific financial, legal or property matters as spelled out in the agreement, even after they are no longer able to make decisions on their own.
2. Avoid Conflicts of Interest
A financial power of attorney must make decisions in the best interests of the principal, which means acting in accordance with their expectations; acting in good faith; and limiting your role to the scope of the responsibilities you were granted. Financial powers of attorney have fiduciary responsibilities, and violating those duties can result in criminal or civil charges. Conflicts of interest could include:
- Transferring assets to your name
- Borrowing or lending money
- Making changes to their estate
3. Sign on The Dotted Line
The only person legally authorized to sign for your loved one is the named power of attorney — in this case, you. When it comes time to sign documents on behalf of them, remember to sign as their agent. It needs to be clear that you are acting as power of attorney, which could mean signing in a specific format. Examples of how to sign include:
- Jane Smith under POA for John Jones
- John Jones, by Jane Smith, agent
- John Jones, by Jane Smith, attorney in fact
- John Jones, by Jane Smith, POA
- John Jones, by Jane Smith, power of attorney
Ask about any preferred format for your signature before signing — and remember to bring your power of attorney documents when conducting transactions in this role.
4. Keep Careful Records
You’ll need to document all financial transactions, including receipts of bills paid, income collected and assets sold or traded. Maintaining a paper trail reduces your liability. Keeping records is especially important if you are claiming compensation for taking on the role. You’ll need to document how much you were paid and justification for the compensation. For example, if you made a 50-mile round trip to conduct a transaction, you’ll need to document the mileage, save gas receipts and document the standard IRS mileage rate.
5. Ask for Help
If you’re unsure about your financial power of attorney responsibilities or need guidance in carrying out your fiduciary duties, call a professional. The lawyer who created the power of attorney is a good place to start. Your job is to protect your loved one’s best interest while protecting yourself from liability.