Financial Power Of Attorney Vs. A Last Will & Testament: What's The Difference?
Anyone trying to decipher the differences between a financial power of attorney and the last will and testament deserves kudos. Inquiring about their differences means a person is taking steps to organize their financial affairs.
After all, understanding legal documents can be tricky!
The following contains information to help answer your questions and help you move forward.
According to a 2021 Kaiser study, 90% of people who participated in end-of-life planning had their wishes carried through.
Without end-of-life planning, the death of you or a loved one may become a legal quagmire. By taking account of assets, responsibilities, finances, and applicable wishes, end-of-life planning makes the loss of a loved one less traumatic.
End-of-life planning often includes legal documents to ensure the appropriate execution of a person’s wishes. From medical decision-making to the distribution of property upon a person’s death, end-of-life planning reduces some of the confusion that can accompany such an event.
What is a Financial Power of Attorney?
A financial power of attorney (POA) is a legal document that grants another person the right to act on behalf of someone else (termed the Principal) in financial matters.
Depending on the wording of the document, a POA may be very specific with strict limits or have very broad powers. A POA is a legal document and is also known as:
Durable Financial Power of Attorney
Durable Power of Attorney for Finances
The POA typically outlines whether it takes effect immediately or can become active only when incapacity occurs.
What Are The Legal Obligations Of A Financial POA?
Keep in mind that a financial POA has its limits.
For example, the person who is assigned the financial power (also known as the Agent or Attorney-in-fact) is legally obligated to make decisions that align with the wishes and best interests of the person they’re providing care for.
The agent is also bound by the financial POA, and cannot take actions that are not outlined in the POA document. However, the agent also has the authority to make decisions without assistance until that ability is challenged (or revoked) in court.
The following are a few examples of what someone with a financial POA may have the legal authority to do:
General financial transactions and financial decisions (pay bills, transfer funds, etc.)
Access retirement accounts and retirement benefits
Managing bank accounts and investments
Apply for government benefits like Medicare and Social Security
How Do Real Estate Negotiations Work Under a Financial POA?
The negotiation of real estate assets is typically considered a financial matter, but some states require that a copy of the financial power of attorney form is provided to the local land and records office prior to executing any changes regarding real estate.
Furthermore, some financial institutions may ask for additional documentation, proof of identity of the financial agent, or a copy of the financial power of attorney document.
What Are The Time Limits Of A Financial POA?
A financial power of attorney does not last forever. In many states, a financial POA is considered “durable.” The word durable means that the POA remains in effect even when the principal of the POA becomes incapacitated.
In some cases, a POA isn’t activated until the person is unable to manage their finances.
A financial POA is automatically stopped upon the principal's death. In short, a financial agent may only make decisions related to finances when the principal is alive.
What Is A Last Will & Testament?
Although they are both legal documents and are both drafted prior to a person’s death, a last will and testament is very different from a financial POA.
A last will and testament establishes a person’s final wishes regarding their monetary assets, personal property, and their dependents. The formal term, “last will and testament” refers to the most recent version of a person’s will. Unlike a financial POA that remains in effect while a person is alive, a last will and testament only go into effect when a person is deceased.
A last will and testament names another individual (the individual must be living) as an “executor” or “executor of the estate.” The executor is responsible for ensuring that the actions dictated in the last will and testament are carried out to completion. A probate court typically oversees the process.
Most last wills and testaments outline what to do with assets like money, real estate, jewelry, or other financial interests. Whether these items are donated to charity or disbursed to specific people named in the will depends on the wishes of the deceased person outlined in the will. In addition, a will also clarifies the custody and management of existing dependents.
Are Both a Financial POA and Last Will and Testament Necessary?
Most end-of-life and estate planners will say that both a financial POA and last will and testament are advised. Both plan for inevitables and make sure that the wishes of a person are followed through.
A financial POA and last will and testament make a difficult event — the end of a loved one's life — less distressing for those left behind. Furthermore, both these documents take most of the confusion away from intense situations.
Financial POA: Alive, But Incapacitated
Because life is unpredictable, there may come a time when an individual is incapable of managing their financial affairs.
A financial POA ensures that a person’s finances remain intact and accessible during the time they are incapacitated. If this person should recover and get better, then their finances remain in good shape when they regain control again.
Last Will and Testament: When a Loved One Passes Away
After a loved one's death, family members may be at odds over the disbursement of their assets.
Without a last will and testament, the courts take over settling a person’s estate. This can result in a long and painful process for the loved one’s family members.
Furthermore, without a last will and testament, the deceased person’s dependents are appointed a guardian decided by the courts. A will prevents the need for government intervention and is part of the process of estate planning.
A Few Points to Keep in Mind
Each state may have different laws for both POAs and last will and testament. A financial POA is just one type of POA.
Some examples of other POAs are:
General Power of Attorney
Durable Power of Attorney
Medical Power of Attorney for Health Care
Limited Power of Attorney
Although free software programs exist to create a POA or will, obtaining legal advice from a trusted professional or an estate planning attorney is always recommended.
Also, a notary public must witness the signing to authorize these documents.
How Does Knowing the Difference Help You & Your Loved One?
Understanding the differences between a financial POA and a last will and testament can help clarify which one is active at a particular time.
In addition, the person making the decisions may change depending on which legal document is in effect. Keeping these documents safe is vital, and using a safe deposit box is advisable.
Lastly, what’s important is that an individual’s wishes, both when they’re incapacitated or after they pass away, are respected and carried out as they would have wanted.