Why are they necessary?
There is a misconception that powers of attorney are for the rich only. The truth of the matter is - anyone can and should have a power of attorney. In the event you become mentally incompetent and cannot handle your financial affairs, the role of the power of attorney is to manage your funds and handle your expenses according to your instructions. By having a power of attorney, you eliminate the risk of mismanagement and ensure your financial picture remains intact. Most importantly, having a power of attorney will keep peace among family members.
There are many kinds of powers of attorney and each one plays a different role. The durable power of attorney is specifically for finances. Powers of attorney can be given for a specific time period or a specific power. If the power of attorney is not durable, however, it will not be effective if you become incompetent; in the realm of estate planning a durable power of attorney is the most important type of power of attorney.
Even in a trust-centered estate plan, the durable financial power of attorney plays an important role. In the event of your incapacity, your successor trustee will take over and manage your trust assets while your agent under the power of attorney will manage all non-trust assets. Assets such as life insurance, retirement plans, or annuities are not owned by the trust and therefore never managed by the trustee. Your agent will also sign tax returns for you.
While a comprehensive estate plan is the best way to ensure all your wishes are met, advance health care directives and durable powers of attorney for finances are documents everyone should have at the very least. Without them, a conservatorship over your person and/or estate may be necessary if you become incompetent to make health care decisions, manage your finances or if you become susceptible to fraud or undue influence. Conservatorships are overseen by the court and very expensive to set up and maintain.
When deciding on a professional to assist you in drawing up your health care directive and power of attorney, make sure you choose someone who specializes in estate planning.