What is a Power of Attorney and why does that matter?
The following is a guest post by LegalWills.ca, a proud partner of My Own Advisor.
A power of attorney is a legal document that you sign to give one person, or more than one person, the authority to manage your money and property on your behalf.
This matters for many reasons, and you’ll read about all of those reasons in today’s post.
Back to basics – what is a Power of Attorney?
There are many different types of Power of Attorney (PoA). The one thing they have in common is that they legally appoint somebody to act on your behalf of make decisions on your behalf. It is important to note that any PoA is in effect while you are alive and is immediately cancelled the moment you die. You cannot have a PoA act on your behalf after you have died. At this point your Will comes into effect, and you are represented by your Executor.
There are two general classifications of a Power of Attorney: the medical (healthcare) PoA and the financial PoA.
A healthcare PoA names somebody to make medical decisions on your behalf if you are unable to speak for yourself. It usually works alongside an “Advance Directive” where you have described your general principles of medical treatment, and this serves as a guide to your healthcare representative, or “substitute decision maker” or “healthcare proxy”. If you name a single decision maker, then you prevent family disputes arising when different family members have different ideas for the treatment you should receive. These disputes can quickly escalate into the courtroom. This type of Power of Attorney is sometimes colloquially referred to as a “Living Will”.
For the purposes of this article, we are going to focus on the other type of Power of Attorney, your financial Power of Attorney.
What is a Financial Power of Attorney?
A financial Power of Attorney names a person to take care of your finances on your behalf. There are two general categories: a Specific Financial Power of Attorney and a General Financial Power of Attorney.
A Specific Financial Power of Attorney is set up to allow somebody to handle a particular transaction on your behalf. This is commonly used for example if you are overseas, and you need somebody to sell your car for you. You can create a Specific Power of Attorney that gives somebody the authority to sell your car but gives them no other financial authority over any other financial assets. As soon as the car is sold, then the Power of Attorney has served its purpose and no longer has a function.
A General Financial Power of Attorney is more of an estate planning tool. It allows somebody to take care of all of your financial affairs. This type of document can either be “immediate” coming into effect on the date it is signed, or it can be “springing” which means that it only comes into effect if you were to lose capacity to handle your own affairs. This is also referred to as a “Durable” or “Enduring” Power of Attorney, meaning that it is still in effect even if you have lost capacity.
It is important to note that if you prepare an Enduring Power of Attorney, it must be written at a time when you have full cognitive capacity, to come into effect if you were to ever lose capacity.
Who needs a Financial Power of Attorney?
A “Living Will” and a “Financial Power of Attorney” are considered by most people to go with your Last Will and Testament to create a full “estate plan”. These three documents are the core components of an estate plan that everybody should have.
However, although it is a certainty that you will die, and that you need a Will, it is quite possible that your Power of Attorney may never come into effect. You may never need somebody to take over your finances on your behalf. But if you are ever in that situation, then it is a critical document.
Like a Last Will and Testament, a financial and medical Power of Attorney are documents that should be written when you become an adult. They can be updated from time to time throughout your life and stored with your other important documents. You should not wait until you “need” a financial Power of Attorney, because at this point it can be too late.
When does the Power of Attorney come into effect?
There are many circumstances by which you can lose capacity. The most common is for an aging parent who faces cognitive decline through dementia or Alzheimer’s. A child may want to take over responsibility for the parent’s finances simply to protect them. It is very sad to hear of seniors being targeted by unscrupulous phone calls or visitors to the house. Not all senior exploitation is obvious, it can be extreme sums of money going to charities, or subscriptions, or investments.
This is where the invoking of a Power of Attorney can be tricky. When you see that your parent has signed up for something that in your mind is a complete waste of money. Have they lost the capacity to make rational decisions? Perhaps they have their cognitive faculties but are easily persuaded. They may be lending money to friends, perhaps they have a right to do this, or perhaps they need to be protected.
There are of course other unfortunate circumstances that can trigger the activation of a Financial Power of Attorney. If you are involved in an accident and hospitalized. You may go into an extended coma and need somebody to pay your bills on your behalf. You may have some cognitive decline as a result of the accident and struggle to keep your finances straight. It might make sense for somebody to take care of your financial affairs, even temporarily, until your cognitive capability is restored.
What happens if you do not have a Financial Power of Attorney?
At LegalWills.ca we frequently hear from many people with family members who left things too late. “My mother has dementia and has moved into a care home; can I create a Power of Attorney for her?”
It is extremely difficult to assume responsibility for somebody who has lost capacity. As you can imagine, there may be other family members with an interest in this situation, and how would anybody know that you were the preferred choice for managing these financial assets. This type of situation can quite quickly become desperate with nobody able to pay bills, cancel utilities, manage investments. Everything is so much easier with a financial Power of Attorney in place.
You may think that if all assets are jointly held, then a financial PoA is unnecessary, but issues can still arise when both signatures are required for a particular transaction. For example, as a couple age, and one partner moves into a care home with cognitive decline. The other partner may wish to downsize their home, but the sale of the home requires both signatures. This would be possible with a Financial Power of Attorney in place, but extremely difficult without.
A word on Power of Attorney abuse
Power of Attorney abuse is a significant issue. Your financial representative has very wide-ranging powers. They have unfettered access to your bank accounts and investments. It is not uncommon for money to disappear. There are countless news reports of children stealing money from parents, and even lawyers stealing money from clients.
(you can find many, many of these….I just googled it and found this one.)
This is why it is very important to prepare the document when you are young and capable, and to choose your Power of Attorney representative wisely.
How to prepare a Financial Power of Attorney
There are a few different options for preparing a Financial Power of Attorney. There are some free downloadable forms available, you can speak to a lawyer, or you can use an online service like the one at LegalWills.ca.
No matter the approach you decide to take, and which Province you are in, the signing requirements are similar (but not always the same). At a minimum, you need to sign the document in the presence of two witnesses.
Manitoba has a unique signing requirement whereby a witness must be one of:
- a person registered or qualified to be registered to solemnize marriages in Manitoba
- a judge, justice of the peace or magistrate in Manitoba
- a qualified medical practitioner in Manitoba
- a notary public for Manitoba
- a lawyer entitled to practice in Manitoba
- a member of the R.C.M.P. or a police officer in a municipal police force in Manitoba
In 2020 the signing requirements for New Brunswick changed. The Enduring Powers of Attorney Act requires a lawyer to sign your Power of Attorney for Property document and provide a written statement that they witnessed you sign it.
For all other Provinces the law requires the document to be signed in the presence of two adult witnesses, however, because the document grants wide ranging powers to your representative, some banks have established additional requirements over and above the legal requirements; notably the need for a sworn, signed affidavit of execution signed by a witness in the presence of a Notary.
What is a Power of Attorney and why does that matter summary
Needless to say, creating and maintaining an up-to-date Power of Attorney document is a critical part of good financial management. Here are some closing thoughts on this subject, and why it matters:
Advantages of Power of Attorney:
- This document makes it clear who will be responsible for your money and property if you can’t manage them on your own, even temporarily.
- It can be as general or specific as you need it to be.
- You can choose to appoint two or more attorneys. You can require that your attorneys make all decisions together (“jointly”), or to act together or separately, if one of them is unavailable (“jointly and severally”). You can also appoint alternate or successive attorneys. Note: having two or more attorneys could reduce potential fraudulent use of a power of attorney.
- A general financial power of attorney allows your attorney to look after your affairs if you are away temporarily or if you need help managing your affairs.
- An enduring power of attorney allows your attorney to continue looking after your affairs if you lose your mental capacity. If you lose your mental capacity and do not have a valid power of attorney document in place, someone will need to get authority from the court to manage your money and property. This can be time consuming and expensive.
Disadvantages of Power of Attorney:
- None that we can think of however there are always risks with anything in life: not enough information or limitations in the document could lead to the mismanagement of your finances or to your finances being managed in a way that you do not agree with.
- If you appoint more than one attorney to act jointly, disagreements between them could cause problems and lead to delays in the management of your financial affairs.
- If you do not have this document updated/reviewed regularly, your power of attorney document might not meet your current needs or the requirements of the law. This also means the person you previously selected to be your attorney may no longer be the best choice or may no longer be available.
A PoA (along with your “Living Will”) are essential documents are part of a holistic financial plan. These documents among others make up some of the core components of an estate plan that everybody should have.
Check out this Government of Canada estate planning to-do list.
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Thanks for your readership and drop me a question in the comments section. The team from LegalWills is also ready to provide their subject matter expertise and answer questions.
Disclosure: My Own Advisor was not compensated for this post. Should you need support for any estate planning, consider seeking the guidance of a lawyer. This is not professional advice. All information above was shared for awareness and educational purposes.