As long as you remain competent, you remain in control of your finances. With online banking and bill-pays, you don’t even need to be mobile. But what happens if you become temporarily or permanently unable to manage your financial affairs? Someone else will have to do it for you.
The magnitude of the task will depend on several factors:
- the length of time your affairs must be managed
- the amount of funds and assets you have and how much managing they need. For example, investment accounts often require active management; pension checks don’t. If one of your assets is your home, it may need to be sold in order to provide funding for caregivers.
- the nature and costs of the medical and custodial care you need
- where you’ll be spending your time (your home, an assisted living facility, a nursing home)
It’s hard to plan in advance for a series of question marks, yet the consequences of not planning can be the difference between a comfortable or a miserable end of life. If you don’t plan ahead, your assets may end up paying for lawyer and court costs, rather than home health aides and small luxuries in your final years of life.
Although everyone tells us to plan for the inevitable, action regarding incompetence is usually a hasty, last-minute business. The most important action you can take in advance is designating a financial agent, the person who’ll make financial decisions for you if you become incompetent. Of course, for people without spouses or children (or trustworthy children), finding someone to designate is an issue in itself.
The person you choose must be legally designated using a Durable Financial Power of Attorney document. Before finalizing your decision legally, you’ll need to discuss with your agent what you expect of him or her. (Preparing for this critical discussion will be useful for estate planning as well).
Who to Choose as Your Agent
Every website and article that addresses this question discusses issues like the proximity and reliability of offspring. If you have no offspring or other candidate to be your financial agent, your best option is a licensed private fiduciary (not available in all states). Other options
The fiduciary profession is not well known to the general public. Fiduciaries are hidden within firms that cater to the elderly (law, case management, geriatric care). Many also hold contracts with the courts, and serve as court-appointed guardians and conservators. Though well-versed in elder law regarding incompetence, they have fewer years of schooling and lower hourly fees than lawyers.
Although some fiduciaries have business websites, fiduciaries don’t generally advertise or promote themselves to private clients. I’d never heard of this profession before I started researching end-of-life planning and I certainly didn’t hear about it at any of the lawyer-led presentations I attended. So unassuming are fiduciaries that even after a careful examination of the Arizona Fiduciaries Association (AFA) website, I still wasn’t sure if I could hire a fiduciary without going through a lawyer or the courts. (I can.)
According to the AFA: “A fiduciary is someone who accepts the responsibility for taking care of the needs or property of another person for the benefit of that person.”
Whoever you choose, whether family or professional, must be formally designated as your agent while you’re still competent via a Durable Financial Power of Attorney (DFPOA) document. The same DFPOA is used to designate a family member, friend, or licensed private fiduciary. Failure to do this will result in a court hearing after you’re deemed incompetent to designate a surrogate.
You may wonder if your assets will be safe under the care of a professional fiduciary. While there are opportunities for abuse, it’s worth noting that by far the biggest source of elder financial abuse comes from family members acting as fiduciaries.
And there are additional benefits to having a professional fiduciary rather than a relative act as your financial agent. First, a professional has no personal stake in the management of your estate. (For example, they won’t be thinking about their children’s inheritance as they pay your nursing home fees.) Second, they won’t require a crash course in eldercare and elder law in order to make good decisions. Third, they won’t be juggling your needs with their regular jobs and family responsibilities. And finally, when you work with a professional fiduciary, you’ll discuss in depth how you want things to be done if you become incompetent. Important as this discussion is, for many reasons, parents and children often avoid it until too late.
What Your Financial Agent Needs to Know
Before you sign any DFPOA documents, be sure to have an in-depth conversation with your future financial agent, detailing the tasks you expect them to perform. The DFPOA will give your agent the right to manage your financial affairs, so make sure he or she thoroughly understands your wishes. Here’s a list of things to discuss with your agent:
- Your Financial Situation, i.e., your sources of income, accounts and credit cards, other assets, and any outstanding debts.
- Your Regular Bills and Payments, generally monthly for utilities, phone, cable, etc., semi-annually for property taxes and insurance payments. Don’t forget to tell your agent if magazine subscriptions, gym memberships, and services like cable need to be put on hold or cancelled. Be sure to include regular contributions to charities and other organizations.
- Your Instructions for Use of Financial Assets, including the names of financial advisors you want your agent to work with; the order in which resources should be tapped for paying bills, health aides and other health related expenses; the circumstances under which your house, car, and other material assets should be sold or distributed
- Your Instructions for Care of Non-financial Assets, including pets, plants, and home maintenance
- Your Preferences regarding Facilities and other Aspects of Long-Term Care, such as having a single room, having a mountain view, having all male or female attendants; your wishes regarding care management, such as paying for case management and regular reviews of medications; and anything else you can think of. (This information should also be given to your Health Representative.)
- Your Other Support People, especially your health representative and the executor of your estate, but also friends, relatives, and others (like pastors and rabbis). Your agent will likely consult with a geriatric care manager and other elder care professionals before making key decisions. You may want to identify people you trust (professional or otherwise) who can be consulted at such times.
The more specific you are, the easier the task for your financial agent, who is required by law to act in your best financial interests. An agent who doesn’t manage your financial affairs in a way that benefits you or doesn’t follow your instructions can be held liable in a court of law.
Along with handling your financial affairs, your agent must maintain accurate records of all transactions, keep your property separate from their own, and make sure there are no conflicts of interest. It’s a good idea to require your agent to report regularly to a third party about their activities. This person might be a financial advisor, a lawyer, your health representative, or the executor of your estate.
Establishing a Durable Financial Power of Attorney
What is a Durable Financial Power of Attorney?
A financial power of attorney is a document that gives another person legal authority to act on your behalf in financial matters. A “durable” financial power of attorney (DFPOA), sometimes called a “springing” DFPOA, is much more general and “springs” into effect after you’ve become incapacitated.
Many financial powers of attorney are limited and temporary. For example, power of attorney documents may be used if a financial transaction needs to be made and one party is unavailable or out-of-state. If you’re disabled and need to sign papers to sell your house, a financial power of attorney will give someone else the authority to sign the sales documents. If you expect to be out of commission for a few weeks or months after a surgery, you can designate someone to handle your affairs for that limited period.
On the other hand, unless specifically excluded, a DFPOA gives your agent broad authority to do all of the following:
- Write checks and pay bills
- Apply for government benefits on your behalf
- Fill out benefits paperwork
- Handle insurance and annuity policies
- Handle repairs to your property
- Make housing decisions for you
- Invest your money
- Make charitable contributions
- Handle transactions with banks and other financial institutions
- File and pay local, state, and federal taxes
- Manage your retirement accounts
- Transfer property to a trust you created before your incapacity
- Operate your small business and make business decisions with business partners
- Deal with inheritances
- Hire caregivers for you
- Conduct lawsuits and handle legal matters for you
Some things your agent can’t do on your behalf without specific authorization are listed below. However, if you have no family or friends as back-up, you’ll probably want to authorize your agent to pay himself/herself at an agreed upon hourly rate and to handle property transactions (if you own any property). You may also want to authorize them to select a successor if they become unable to act as your agent.
- Handle your real estate transactions
- Pay himself or herself out of your assets
- Appoint another person as an alternate or successor agent
Why is a Durable Financial Power of Attorney (DFPOA) Important?
If you become incompetent without having designated a financial agent, a court will do it for you. The person appointed by the court is variously called a conservator, guardian, or curator, depending on your state and county. In Arizona, a court-appointed financial agent is called a “conservator” while the term “guardian” is used when the agent makes medical as well as financial decisions. In other states, these words may be understood differently, or other words entirely may be used.
The court proceeding can be a costly and lengthy legal affair, since it involves making sure that you’re really incapacitated, reviewing your financial situation, evaluating potential agents, and developing a reporting schedule. There will be regular court hearings for the duration of your incapacity, probably requiring the assistance of an attorney. Most courts require the conservator to post a bond for the value of the estate they’re managing, which protects your assets if the conservator mismanages them. In addition to the fees for the conservator, the premiums for this bond will be paid out of your assets. Moreover, the conservator may be required to seek permission from the court before making any major decision (such as selling or refinancing real estate). This is another expense that will be charged against your assets.
A court proceeding not only adds expense, it also turns your personal affairs into matters of public record. This is because a court hearing is necessary for a judge to rule that you’re incompetent. Since court documents are public records, anyone can read what the judge rules and it may even be published in your local newspaper (among all those legal notices at the beginning of the classified section). Moreover, your conservator must file regular reports which include detailed records of all transactions. Just as the appointment of the conservator is in the public record, all documents and proceedings related to your case will also be part of the public record.
How is a conservator chosen? It’s up to the court. If you have an estranged relative who might request guardianship against your desires and who would contest a friend’s or fiduciary’s petition to be so named, it’s especially important to have a formal document naming your chosen person as your agent. Without it, the court would be much more likely to favor your relative.
Absent a relative or other claimant, cases before the court are handled by lawyers appointed by the Public Fiduciary, a county office. (This same procedure is followed if you are referred to the Public Fiduciary through a hospital or Adult Protective Services.) By preparing a DFPOA, you can avoid the court process and choose a fiduciary you’re comfortable with.
Creating a Durable Financial Power of Attorney (DFPOA)
A DFPOA must be in writing. You can most likely find all the forms you need on your state Attorney General’s webpage (for example, Arizona Advance Planning Packet). If you work with a fiduciary, they’ll help you get the forms you need.
Many banks and brokerage firms have their own specialized DFPOA forms. If this is true of institutions you do business with, make sure you prepare these specialized forms as well as the general one. They’ll expedite your agent’s access to your accounts should the need arise.
In addition to specifying the person you want as your agent, it’s a good idea to name an alternate agent in case your first choice is unable to fill this role. If you use a fiduciary, you can authorize them to suggest a back-up.
All states require that you sign the DFPOA before a notary, especially if real estate transactions are included. Most states require that you sign it before one or more witnesses as well. The person named as agent may not serve as either witness or notary nor may the notary serve as a witness. However, wherever you have your form notarized, there are likely to be people who can serve as witnesses.
The document takes effect as soon as it’s notarized. However, the “springing” power of attorney won’t go into effect until a doctor certifies that you’ve become incapacitated. Your agent needs to sign the DFPOA before using it for the first time, but this doesn’t have to be done in your presence and the signature doesn’t need to be notarized.
Keep a copy for yourself and give one to your agent. If you’ve filled out specialized forms from financial institutions, make sure your agent has copies of those forms, and that the financial institution has a copy of your general form. This will expedite your agent’s access to your accounts.
When Does a Durable Financial Power of Attorney (DFPOA) End?
As long as you’re mentally competent, you can revoke your DFPOA at any time and for any reason. You can do this by tearing up the document after informing your agent in writing as well as any financial institutions you’ve given the power of attorney to. If you notarize a new DFPOA, the old one will be automatically revoked.
If you become incapacitated and the DFPOA is in force, it will end when you die or are no longer incapacitated. This document does not give your agent the authority to handle funeral or burial arrangements or transfer your property to those who’ll inherit it. If you want your agent to take on these responsibilities, he or she should also be named as the executor of your will.
A court-appointed conservator’s term of service ends when you die, you’re no longer incapacitated, your assets are all spent, or the conservator requests release from this responsibility. In the last instance, another conservator is appointed by the court.)
If your financial agent is being paid for their services, as in the case of a fiduciary or lawyer, their responsibilities will continue until they’re released by the court, even if you run out of assets.
Sad to say, the confluence of longer periods of incapacity and the huge costs of caretaking has resulted in an increasing number of well-off and moderately well-off people becoming poor in the process of paying for long-term care. Three to five years in a nursing home will deplete even a robust nest egg, so frugal, solidly middle-class people who’ve paid their own way their whole lives may be forced into “welfare” in their final years, becoming, in a Dickensian phrase, “wards of the state.”
As a result, fiduciaries often end up serving as agents to manage the “spending down” of a senior’s assets until the senior is eligible for Medicaid. Doing this in ways that enable you to receive the best possible care for the longest time possible takes knowledge and persistence. A fiduciary should be your ally in this process.