POWER OF ATTORNEY AND ANNUITIES PROVIDE NECESSARY PROTECTION

The concept of Power of Attorney comes into play if a situation arises in which you are incapacitated. This power is for such debilitation that severely limits/eliminates your ability to manage your own affairs. Designating Power of Attorney provides clear, legal directions as to who will file your tax return, move your money from a lagging mutual fund to a more profitable alternative, sell securities to pay medical bills and living expenses, etc. Without this legal directive, either your affairs will be left unattended, or a judge may appoint someone, (sometimes a stranger), as a conservator to manage your assets.

Rather than let that happen, financial advisers recommend that while you're fully competent you sign a durable power of attorney with a so-called springing mechanism that specifies the circumstances under which the power becomes effective. For example, you might authorize an individual or institution of your choice to act as your financial agent after a doctor certifies that you can no longer make appropriate decisions because your mental capacities have been severely diminished by illness or injury. You can buy a power of attorney form from a stationery store for less than $5. But if you hire a lawyer to draft the document (typical cost: $200), you can have it tailored to your needs.

Each state has its own laws relating to powers of attorney. So if you have assets in more than one state, have a lawyer establish separate powers in each. In addition, you should execute a durable power at each of your financial institutions. Otherwise, a bank or mutual fund company may contest your agent's right to manage your account. When family members challenge an agent's activities, they often go after the financial institution to recoup the money.

The hard question is: Whom do you name as your agent? Most people choose their spouse. But some financial planners warn that a spouse may be too emotionally distracted by your illness or injury to make sound financial decisions. Naming a child can also lead to problems if you have several children with conflicting views about what should be done with your money.

The safest option, financial advisers say, is to name a family member jointly with a lawyer or accountant whom you trust. You'll then combine the pro's expertise with the relative's veto power.

CAUTION: A durable power of attorney generally gives your agent carte blanche in managing your finances. If you want to limit his or her authority, you can do so only with a living trust. Even with a living trust, however, you'll still need a durable power of attorney. The power will enable your agent to handle any assets not in the trust, as well as IRAs, which can't be put into living trusts, or mortgaged homes, which lenders often insist be owned by people, not by trusts.

Reprinted with permission from Retire with Money, April 1997. Time Inc. Subscriptions: 800-284-5300, $49.96/yr.