Estate Planning is probably the most ignored component of good stewardship and financial planning. In fact it is not unreasonable to say that ‘Estate Planning’ is most likely your last act of stewardship.
Furthermore, when we think about estate planning we tend to only think of putting in place a ‘Will’ so that we can determine who will get our assets when we pass away. Hence we overlook some of the other aspects such as ‘Powers of Attorney’ or ‘Guardianship” that can be vital tools whilst you or a family member are still alive.
WHAT IS A POWER OF ATTORNEY?
A “Power of Attorney” is a legal document designed to provide written authorization for one person to act on behalf of another in financial matters. These arrangements can be for an indefinite period or for a fixed period.
Below are some of the key terms:
Attorney – this is the person appointed to act for another
Donor – this is the person making the appointment
Ordinary Power of Attorney – used for property & financial transactions
Enduring Power of Attorney – continues after donor has lost capacity
The Donor can revoke a ‘Power of Attorney’ at any time. Generally speaking if the intention is for the ‘attorney’ to be in force for a long-time then an ‘enduring’ power of attorney would be better as it can continue even if you have lost mental capacity and are no longer able to make decisions about who and how you would like to be helped.
Note: the legal language used varies by nation
WHY GRANT A POWER OF ATTORNEY
The most common reason for granting a power of attorney is to help old age parents. At some age many of us struggle to pay bills and come confused by financial decisions.
In fact one of the saddest things I witnessed during my stockbroking career was an unscrupulous investor who would obtain the share register of companies listed on the Australian Stock Market. He would then send all the shareholders a letter offering to buy their shares at a price substantially lower than what was available on the market if they were to sell the shares through their stockbroker.
Sadly, many old people thought the letter was an official one from the company and so they signed it and returned it to him. He paid them for the shares at the low price and then sold them on the stock market for substantially more. He made millions at the expense of others. He never went to jail because he technically had not broken any law.
The point of the story is that as we age our judgement is more likely to lapse and having another responsible individual helping us can be invaluable.
IMPORTANT ISSUES TO CONSIDER
➢ Be Prepared: An Enduring Power of Attorney needs to be in force whilst you still have capacity. If it were not in force at time of losing capacity, your family members would have to apply to a court to be able to provide you with assistance. Failing that your affairs could be managed by a Government agency, which can be both expensive and lacking in proper service.
➢ Choose Wisely: The person (s) you appoint need to be someone without a conflict of interest. For example you may have a good relationship with your financial adviser or accountant, but the problem is they have a conflict because they already provide you with financial advice, but now they would have access to your money in a more direct capacity.
➢ They can be revoked at anytime – if you no longer want that attorney to operate on your behalf you can revoke it at any time in writing.
➢ Issues with children – you can certainly appoint your children as a ‘power of attorney’, however there are some considerations here:
• Will you give it to one child or all your children? (how will this be perceived?)
• Do you expect your children to act in your best interest or will they use the money for their own lifestyle? (legally they have to act in the best interests of the donor, however I have seen this misused and adult children squander their parents money on lifestyle)
➢ Your parents – do your parents need help? Do you have a power of attorney over their affairs? How can you help them prepare for old age?
CHOOSING A POWER OF ATTORNEY
In theory you can appoint any adult to have ‘power of attorney’ over your affairs however before doing so you should consider these questions:
➢ Do they have a conflict of interest? A financial planner who manages your money has a conflict because they could manage your money in a way that leads to behaviour that earns them higher fees and greater risks for you.
➢ Are they reasonably financially savvy? Do you believe that they are likely to be able to make wise financial decisions based on facts, proper research and diligence? Just because someone means well does not make him or her suitable.
➢ Your Spouse. For most people this is the obvious and natural choice. A ‘power of attorney’ can be drafted such that you appoint you spouse and in the event they are unable to, it can then fall to the next person on the list.
➢ Will they act in your best interest? A Power of Attorney is a very powerful document, so you need to be certain that the person will act in your best interest.