Have you thought about what would happen if you were no longer able to manage your financial affairs? Many people prepare a will but they don't give the same consideration to handling their finances in later years.

But it's an important issue with the ageing of Australia's population and the increased diversity of asset ownership.

A simple solution is to set up a power of attorney, but only if it is executed correctly.

Paul Prindable, national estates and trusts product manager with Perpetual Private Clients, says a power of attorney can come in several forms.

"Powers of attorney can be general or enduring, and within those headings you can have limited or unlimited versions,'' he says.

A limited power of attorney is established to cover a particular transaction or period of time. For instance, it could be used to allow someone to bid at an auction on your behalf while you are overseas.

A general power of attorney, on the other hand, gives the appointed person the power to handle all of your financial arrangements. But even this has its limitations.

"A general power of attorney will lapse if you lose [mental] capacity,'' says Prindable.

In that case an enduring or protected power of attorney needs to be in place if you are to have any say in who manages your financial affairs.

A recent University of Queensland study found that many people run the risk of financial abuse because they do not realise the need for an enduring power of attorney (EPA) in that situation.

An EPA is effective as soon as it is signed and certified but it may lie dormant until you the donor decide the attorney can use it or until you become incapable.

The EPA also has safeguards. For instance, the attorney must sign the document and acknowledge he or she accepts the appointment, and it must be witnessed by a specialist witness such as a solicitor or a justice of the peace.

With a general power of attorney, it can be witnessed by anyone aged over 18 and the attorney does not have to sign the document.

"A lot of extra responsibilities are made apparent under an EPA,'' Prindable says. "[The attorney] must clearly understand they are in a fiduciary relationship.''

That means they must acknowledge they cannot intermingle their financial affairs or cash with those of the donor and they cannot give away the donor's assets.

But it is still important to think carefully before giving someone the power to handle your finances.

Robert Blunden, a solicitor at Phillips Fox, says: "It is a simple, but powerful, document, particularly in the wrong hands.''

He is involved in a case where an ageing man gave his son a power of attorney. When the man moved into a nursing home, the son sold his father's house and used the proceeds to pay out his own mortgage and buy himself a bigger house.

His actions were discovered only when the man died and there was nothing left in his estate. The beneficiaries of the man's will which included several charities are trying to recover several thousand dollars in assets, says Blunden.

Unfortunately, there are very few ways that such abuses can be prevented.

There is no requirement to register a power of attorney, unless it is going to be used in relation to the transfer of property. Even then, as the example shows, it may not stop someone from abusing their authority.

Banks and share registries should regularly check that a power of attorney is current but there is no guarantee that will happen. For instance, Blunden says a power of attorney ceases upon death but the bank could continue to honour cheques from the donor's account if it has not been notified.

Appointing more than one attorney can help guard against misuse, suggests Blunden.

In addition, people should take the time to formally revoke in writing any previous power of attorney. Unlike a will, a new power of attorney will not cancel out an earlier one.

On the other side of the equation, if a power of attorney is going to be effective, the donor must make a commitment to keep his or her attorney informed.

Prindable says often children holding a power of attorney for their parents end up having to "ferret around'' to find out the extent of their assets.

"Without giving them every dollar-and-cent detail, the attorney must have a firm indication of what is involved,'' he says.

If changes are regularly made to the assets held by the donor, a yearly meeting with the attorney is advisable, concludes Prindable.

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