If you haven't taken the time to create a financial power of attorney yet, you might want to contact your lawyer sooner rather than later. That's because it's becoming increasingly common for longer-living Americans to suffer illness or injury that can leave them unable to handle even the most basic aspects of their finances, such as paying bills.
What's a financial power of attorney?
A financial power of attorney specifies who will have the authority to handle your finances if you become incapacitated. The two types of financial powers of attorney are a durable power of attorney for finances, and a springing power of attorney for finances.
A durable power of attorney for finances becomes active upon its signing, while a springing power of attorney "springs" into action upon a medical diagnosis that you're incapable of managing your money matters.
Why it's important
According to the Centers for Disease Control and Prevention, the likelihood of requiring hospitalization increases dramatically as we get older. While less than one in 10 Americans between age 55 and 64 reports having been hospitalized at least once in the preceding year, one in five Americans age 75 and older have been hospitalized in the preceding year.
In 2013, only 4.5% of people 75 or older were able to claim that they didn't have to visit a doctor, head to an ER, or require home healthcare in the previous year. Unfortunately, a growing amount of this care is associated with diseases that can significantly impact the ability of people to manage their finances. For example, 9.3% of people age 55 to 64, and 21.4% of people over 75, have been diagnosed with cancer, and a third of all Americans will be diagnosed with Alzheimer's by the time they reach their mid 80s.
Overall, one out of every three Americans over 65 report having at least one condition that limits their ability to care for themselves, socialize, or work.
The differences explained
There are various powers of attorney, but unless the power of attorney you have specifically includes finances, you may find that your loved ones have limited options if you end up incapacitated.
A durable financial power of attorney is the simplest and less-cumbersome variation of this document because the person entrusted gains the right to manage your finances immediately. Meanwhile, a springing financial power of attorney tends to resonate most with retirees because it doesn't give those rights to your trusted individual until its expressly necessary.
However, there is a drawback to a springing financial power of attorney that everyone should consider, and that's that it can be difficult to get a medical diagnosis showing that a person has become incapacitated. It can be difficult to get a doctor to release information regarding a person's level of incapacitation because of privacy laws, and there can be big differences in how caregivers and doctors interpret incapacitation.
As a result, a springing power of attorney for finances may not spring into action nearly as quickly as a person anticipates, and that could create delays in getting bills paid that can have serious consequences.
It's temping to think that our current good health will continue indefinitely, but illness and injury can strike anyone. If preparations aren't done in advance, it can lead to missed payments on mortgages, property taxes, credit cards, auto loans, and expenses associated with the caring of children or others who are relying on you for help. Those missed payments can lead to liens on property, repossessions, a big drop in your credit score, and family infighting, too.
In order to avoid some of those risks, taking the time to consult with a lawyer and craft a financial power of attorney that is right for you could be time very well spent.