Choose the right kind of power of attorney

A good financial plan aims to prepare for the unexpected – the bad as well as the good. Being suddenly incapacitated is an example that no one likes to think about, but a sudden accident or chronic illness could prohibit your ability to perform basic financial tasks like paying your bills and filing taxes.

Yet, you can protect your financial well-being as well as those of your loved ones if you plan for it. You may want to consider designating a third party to make all financial and non-health-care decisions on your behalf in case you’re unable to do so on your own. This requires executing a power of attorney document and it involves careful thought. After all, you’re granting this third party, also known as an “attorney-in-fact,” a lot of power over your life, including all financial decisions. You should know that your attorney-in-fact has a fiduciary duty to act in your best interests.

It stands to reason that your attorney-in-fact should be someone whose judgment you trust implicitly and who will not use the power of attorney until it is needed – perhaps your spouse, an adult child or a close friend.

You also need to decide what kind of power of attorney you want – a durable general power of attorney or a springing power of attorney. Let’s outline the differences.

A springing power of attorney only “springs” into effect upon a certain event, such as your incapacitation. If the event is incapacitation, the document often requires that one or two medical doctors certify that you’re incapacitated before the power of attorney goes into effect.

While this hurdle may seem an attractive option if you are concerned about ceding so many decisions about your life to someone else – even if you have complete trust in that person – the reality is that it can be difficult to obtain that certification.

While your attorney-in-fact, and likely, concerned family members, are waiting for doctors to declare you incapacitated, all your non-health-care decisions are unable to be made, including bill payments and investment matters.