It's hard to imagine that there could come a time when you won't be able to make important financial decisions on your own.
Unfortunately, there's a chance that day will come.
One in nine people aged 65 and older in the U.S. has Alzheimer's disease, according to the Alzheimer's Association. Dementia, other ailments, an accident, or other circumstances, could leave anyone unable to handle his or her finances.
For those who wish to plan ahead, there's an option: a power of attorney.
A financial power of attorney is a document that empowers someone of your choosing to handle your financial matters -- such as paying your bills, managing your investment accounts, or selling your property -- if you are unable to do so on your own.
You, the "principal," choose an "agent" to step in and act on your behalf. You specify which powers you want your agent to have. The agent has a fiduciary responsibility to act in your best interests, and you generally have the right to revoke your power of attorney at any time.
If you were to become incapacitated and you didn't have a power of attorney in place, then someone seeking to handle your affairs may have to go to court to get permission to do so.
"The power of attorney is one of the most important legal documents to have at any age," said Melissa Negrin-Wiener, a partner at Genser Dubow Genser & Cona, a law firm that specializes in elder law and estate planning.
While the topic might not be pleasant, the following is some important information you need to know about a financial power of attorney.
Don't let anyone pressure you into signing a power of attorney
Unfortunately, there are people who abuse their power of attorney privileges, so it's important to keep your guard up.
As the Financial Industry Regulatory Authority (FINRA) warned in an alert, you should never feel pressured into signing a power of attorney.
If you feel like someone is urging you to sign a power of attorney for your investment assets, take a break and don't sign right away, FINRA advised.
Contact other professionals to get a second opinion, such as your lawyer or your financial advisor. If you have concerns you can also contact FINRA's Securities Helpline for Seniors at 844-574-3577.
There are different types of financial power of attorney
There are several types of financial power of attorney, and it's important to consider the differences before you commit to one.
A durable power of attorney goes into effect at the time that it's signed. Unless the principal cancels it, a durable power of attorney remains effective throughout the principal's lifetime, even if he or she becomes incapacitated.
A springing power of attorney only "springs" into effect when a specific event occurs, such as when the principal hits a certain age or becomes mentally incapacitated. A springing power of attorney may require a determination by a medical professional that you can no longer manage your affairs. This can take time and delay the process.
Some people might feel more comfortable with a springing power of attorney exactly because of that delay, perhaps due to concerns around the agent. Negrin-Wiener cautions, "If you're choosing to do a springing power of attorney because you don't trust the person you chose as an agent, you shouldn't choose them as an agent to begin with."
It's worth noting that one thing all types of power of attorney have in common is that they expire at the time of the principal's death. So while power of attorney can provide clarity on how your affairs will be managed while you are still living, it does not replace the need for a comprehensive estate plan that takes effect when you die.
Choose your agent wisely
This person will have authority over your financial dealings, so you want to pick someone you trust.
In addition, your agent should understand your short- and long-term goals. If this person will be in charge of your investments, he or she should have some basic knowledge of investing in order to make decisions about your accounts and communicate effectively with your broker or advisor.
Be specific about the authority you're granting
Your power of attorney document should spell out the types of authority you are handing over and how long you want the power of attorney designation to last.
For instance, when it comes to your investments, you can include anything from limited trading authority in a brokerage account to total control over your investment portfolio.
Be sure to note which accounts and which asset types are included. If there's confusion regarding what your agent can do, financial institutions might choose not to honor your power of attorney.
To learn more about making wise decisions regarding a financial power of attorney and your investments, click here.