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The Role of Financial Powers of Attorney in Estate Planning

by | Jun 10, 2024 | Estate Planning

Financial powers of attorney can be important estate planning tools, allowing individuals to designate an agent to make financial and legal decisions on their behalf in the event of incapacity.  Under Ohio law, properly drafted financial powers of attorney may help avoid the need for court-supervised guardianship proceedings if an individual becomes incapacitated.  However, financial powers of attorney also carry risks of abuse and misuse of the principal’s assets.  This post will examine the role of financial powers of attorney in estate planning and the potential for misuse of these documents under Ohio law.

 Overview of Financial Powers of Attorney

A financial power of attorney grants an agent broad authority over the principal’s financial and legal affairs.  The agent is typically authorized to manage bank accounts, pay bills, file taxes, buy and sell real estate, and handle other monetary matters for the principal.  The authority granted in a financial power of attorney is immediate, meaning the agent may act even before the principal is incapacitated.  However, the principal can revoke the power of attorney at any time as long as they have mental capacity.

In estate planning, financial powers of attorney are useful to avoid the need for court-supervised guardianship proceedings if an individual becomes incapacitated.  By planning ahead with a financial power of attorney, the principal designates their own agent to make financial decisions rather than having the court appoint a guardian.  This allows the principal to maintain control over their financial affairs even if they become incapacitated.

Risks of Misuse and Abuse

While financial powers of attorney are meant to protect the principal’s interests, there is potential for abuse if the agent engages in self-dealing or otherwise misuses their authority.  Under Ohio law, examples of power of attorney misuse include:

  • The agent using the principal’s money for the agent’s own personal benefit
  • The agent making gifts of the principal’s assets without authorization
  • The agent changing beneficiary designations on the principal’s accounts to divert money away

Unscrupulous agents may take advantage of the broad authority granted in a financial power of attorney.  Even well-meaning agents can inadvertently misuse their powers or fail to act in the principal’s best interest.

Best Practices to Avoid Misuse

Certain precautions can help minimize the risk of financial power of attorney abuse:

  • Carefully select an agent who is trustworthy – this is the most important safeguard. Only name someone you would trust fully with your finances.
  • Consult an attorney when creating the power of attorney to ensure it contains appropriate limitations on the agent’s powers. For example, the power of attorney can prohibit gifts or self-dealing by the agent.
  • Require regular accountings from the agent to monitor their actions.
  • Name a successor agent in case the original agent is unable or unwilling to serve.
  • Inform family members, financial institutions, and others that the power of attorney exists so they can help monitor the agent.

By taking prudent steps when creating a financial power of attorney, individuals can reduce the risk of misuse.  However, no safeguards are foolproof.  Engaging an attorney’s services can provide additional protections when drafting these important estate planning documents.

If you have questions about Financial Powers of Attorney (POA) contact John Tullio at 216-621-7860.

 

 

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