You probably learned the value of the buddy system early in life. And while your finances are personal and private, some help can be valuable. That’s especially true as you grow older, but having a buddy can be a lifesaver at any age.
There are several ways to enlist somebody to help you manage your finances. Two methods that often get confused are a trusted contact and a power of attorney (POA).
So, what’s the difference, and which is best?
We’ll discuss the basics of each strategy in this article. But this is just the beginning. You’ll learn how this generally works with my clients, but doing more homework is critical. Consult with an attorney licensed in your state, and read your disclosures and service agreements carefully.
A trusted contact is somebody your financial advisor or financial institution can contact with questions. However, a trusted contact cannot provide investment instructions, request withdrawals, or complete other transactions in your accounts.
To use a trusted contact, you must authorize your advisor or custodian to contact somebody else. Generally, you do that by signing an agreement (often electronically). The agreement collects contact information for your trusted contact and outlines situations when the advisor can contact that person.
In most cases, you name a trusted contact when you open an account. If you didn’t add a trusted contact and you’d like to do so now, it’s generally easy. And if you ever change your mind, you can generally remove a trusted contact from your accounts.
Why Would You Want a Trusted Contact?
Trusted contacts can be helpful in a variety of situations. As just one example, assume you’re injured in an accident, and your financial advisor is unaware of the event. Your advisor tries to contact you, but you don’t respond. What is the advisor to do?
Or, you move, but you’re so busy with everything that you forget to notify your financial institution. Mail gets returned, and this can cause domino effects.
With a trusted contact authorization, your advisor can reach out to the trusted contact. That person might be a family member or close friend, and they are more likely to know about events like accidents, sickness, and relocation.
Your trusted contact can inform your advisor about your location and condition, and the advisor can take any appropriate next steps. For example, the advisor might contact you at the hospital or take other actions based on the situation.
Note that a trusted contact authorization only applies to specific service providers. For example, you can name a trusted contact for an IRA custodian or a financial advisor. However, that authorization does not apply to other custodians or advisors.
In some cases, your trusted contact is the same as your POA. However, a trusted contact authorization alone does not enable somebody to make decisions on your behalf. Again, the trusted contact cannot provide instructions to your advisor or custodian. A POA is generally required for more powers.
Power of Attorney (POA)
A POA is a legal authorization enabling somebody to take action on your behalf. For example, they might buy and sell investments, make payments, open and close accounts, or conduct other transactions in your name.
A POA does not impersonate you. Instead, they use a legal document that you sign granting them the authority to take specific actions. To use a POA, it’s critical to sign documents before you need them and verify that your service providers will accept instructions from your POA (don’t assume the document will always work).
In some cases, it’s best to use POA forms from financial institutions (as opposed to a legal document from your attorney). That way, you can be more confident that the institution will allow somebody else to act on your behalf. Advisors and custodians are not necessarily required to honor a POA document if they have concerns about validity.
A POA can be helpful when you trust somebody, and you want them to manage your affairs for you. That’s especially useful if you’re incapacitated or geographically unable to complete transactions (on an extended vacation far away). However, it’s essential to know that a POA ends at your death.
Why Would You Want a POA?
A POA can take care of business for you. If you’re incapacitated—which can happen to anybody at any age—a POA can manage your finances until you recover or until other actions are necessary.
You may be incapacitated due to an accident, illness, cognitive decline, or other causes. If that happens, bills may go unpaid, your investments might continue in places that aren’t ideal, and many more complications can arise. But a POA can potentially manage your accounts to avoid things spiraling out of control.
A POA can potentially buy and sell investments, pay expenses, cancel services, and more.
Why Not Both?
You can use both POAs and trusted contacts on the same accounts, as they serve different purposes. You don’t need to choose one or the other.
You may have heard of healthcare POAs, medical directives, trusts, and other estate planning tools. There are a variety of ways to deal with incapacitation and major life events.
With trusts, a trustee of your choice can manage assets that are part of the trust. You might include bank and investment accounts in a trust, making it easy for somebody else to handle those accounts.
Healthcare decisions are also important. What type of care do you want, and what don’t you want? You can provide instructions so that loved ones and medical professionals know what to do. You can also name somebody who is authorized to provide instructions on your behalf. Of course, you need to trust that person and believe that they will actually follow through with your wishes.
An estate planning attorney can help you get all the documents that might make sense for your situation, and it’s wise to explore all the options. If it’s been more than three years since your last estate planning review (or if anything has changed), it’s wise to check in with your attorney.
This information is only a general introduction to the topic, and you need to do more homework before making any decisions (or avoiding/taking action) on these topics. I am not an attorney, and I do not have the qualifications, experience, or authorization to provide specific legal advice. Speak with an attorney licensed in your state who specializes in estate planning to get detailed advice and legal documents.