If you're confused about exactly how a power of attorney works, you're not alone. Much of the confusion stems from the several different kinds of POAs out there. Here's a summary and how a POA might work with your retirement plans.
What Is a Power of Attorney
The simplest explanation is that a power of attorney is a document that gives someone — called the agent or attorney-in-fact — one or more authorities to act on behalf of someone else. The person granting this authority under the POA is called the principal.
Powers of attorney can allow an agent to act in certain situations regarding the principal's health care, or they may authorize him to make financial transactions on the principal's behalf. They can be "durable" — they go into effect immediately and continue in effect if the principal becomes incapacitated. Or they may be "springing." They do not go into effect unless and until the principal becomes incapacitated.
Powers of Attorney and Your Retirement Plans
Many people have accumulated a significant amount of wealth in 401(k)s, IRAs and annuities. But the reality is that if you become mentally incapacitated and lose the ability to manage your finances, your loved ones won't be able to access these assets unless one or more of them have power of attorney.
To make matters worse, even if you do have a financial POA in place, chances are that it may not contain the appropriate language to allow your attorney-in-fact to manage your 401(k)s, IRAs and annuities if it's more than a few years old.
POAs and your Revocable Living Trust
If you have formed and funded a revocable living trust, you may mistakenly believe that all your assets are covered if you should become mentally incapacitated. One of the advantages of a revocable living trust is that the individual you name as successor trustee can take over for you as trustee and continue to manage your financial affairs for you if you become incapacitated.
Unfortunately, this does not apply to retirement plans like IRAs, 401(k)s and annuities. These plans can't be funded into a revocable living trust without becoming immediately subject to income taxation. You'll need a power of attorney in place that includes applicable language allowing your attorney-in-fact to manage these accounts for you if a time comes when you cannot do so yourself. Your successor trustee will not be able to access them.
What You Should Do
Meet with an estate planning attorney to get a POA in place that will allow your attorney-in-fact to manage your retirement accounts if you become mentally incapacitated. Make it clear to the attorney that you specifically want your agent to be able to manage your IRAs, 401(k)s and annuities so the attorney is sure to include the correct language that will allow your agent to do so.
If you already have a power of attorney but it's a few years old, ask your attorney to review it and confirm that it will work to manage your retirement accounts. Otherwise, your agent's hands may be tied during a difficult time.
It's also a good idea to check with the company acting as custodian for your retirement accounts to determine if it has its own power of attorney form. If so, complete this form as well and keep it with your general power of attorney.