Your Financial Power of Attorney Might Need Upgrades

The financial power of attorney (POA) could be the most important document in your estate plan.

Yet, many people don’t have one, and a high percentage of those with POAs have inadequate documents.

Adverse results happen when you don’t have a POA or have a less-than-optimum document. The consequences can range from bills not being paid on time to trusted people committing financial abuse or theft.

The POA determines who manages your affairs when you aren’t able to do so. Without a POA, your loved ones might have to ask a court to appoint someone to manage your affairs, which can be a costly, time-consuming and embarrassing process.

A POA ensures bills are paid, investments are managed and other important tasks are performed.

When most of your assets are in a living trust, the trust agreement should name one or more successor trustees who will manage the property when you are unable to do so. Everything I say here about the POA applies to successor trustees. You still need a POA for assts not included in the trust.

The need for a POA became apparent to many during the pandemic when seemingly healthy people suddenly were disabled by the virus. Cases involving celebrities over the years also provide good examples of why the POA is so important.

In the first decade of this century, it was revealed that philanthropist and heiress Brooke Astor was subjected to substandard living conditions despite her wealth, while her son and attorney, who jointly held her POA, enriched themselves and looted her estate.

Donald Sterling, once owner of the NBA’s Los Angeles Clippers, and Sumner Redstone, majority owner of several publicly traded companies, had widely reported disputes over whether they were able to manage their affairs and who was in charge. See the September 2016 issue of Retirement Watch, available on the members’ section of the website, for some details.

To avoid such problems, take these essential actions:

Choose the agent carefully. The agent is the person who acts on your behalf under the POA. Choosing the agent (or agents) is the most important step but one that often is taken casually. Usually, the oldest child or another relative is automatically named.

Brooke Astor named her only son and attorney as co-agents, and they took advantage of her. Other people name agents who don’t have the time or skills to handle the responsibilities.

Don’t name someone simply because of status (your oldest child), or they might be offended if you name someone else.

You are trusting the person to diligently, intelligently and honestly handle your finances and other matters when you aren’t able to do so. When you have doubts about someone’s ability, commitment, or honesty, don’t appoint him or her. Don’t feel obligated to appoint a particular person.

When you have a meaningful amount of wealth, consider appointing a professional who will be paid to manage at least part of your affairs, such as your investments. Also, don’t appoint someone without first discussing it with him or her to ensure they are willing and able to take the role.

     Consider appointing more than one agent. You might obtain an additional layer of protection and expertise by naming more than one person to act jointly to handle your finances. That might be especially important when you have a significant net worth or a complex plan.

Of course, multiple agents isn’t foolproof, as the Brooke Astor case shows.

Co-agents also can create new problems. They might need to live reasonably close to each other to work efficiently, though technology makes that less important than in the past.

If you require decisions to be made jointly, some actions might be delayed until the trustees can discuss and agree on matters and then execute the appropriate documents.

You might split responsibilities. A professional might be empowered to manage your investments while a family member or friend takes care of routine matters, such as paying bills.

Consider the pros and cons and decide if co-agents will work best for you.

Check with your financial institutions. While the POA gives the agent authority to act, no one is required to recognize it. Financial firms, especially since cases of fraud and abuse received widespread publicity, set their own standards for when they’ll recognize POAs.

Many firms now won’t recognize a POA that wasn’t executed recently. Some require the POA to be signed within the last six months, and I’ve talked to financial firms that require the POA to be no more than 60 days old unless it has been certified by a bank officer.

Many financial firms have additional requirements. Some require the POA to be on their forms and require those forms to be re-executed every year or so. Some firms won’t accept a POA executed in a state other than the one where you’re resident. Others won’t recognize a POA with an agent who is based in a different state than your residence.

Of course, once a firm recognizes the POA, your agent has to convince the financial firm that he or she is the person empowered by the POA.

You can overcome many of these problems by working with your financial firms while you’re healthy instead of keeping the POA in a file until it’s needed. Ask firms what their standards are for POAs, and then comply with them. Give them a copy of the POA before it’s needed, so they’ll have it on file and will let you know if it is acceptable. Get to know one or more employees when possible and introduce your agent, so they won’t be dealing with a stranger when the agent first tries to use the POA.

Which type of POA? Most estate planners recommend a durable POA, which takes effect as soon as you sign it. The agent legally could use it and take actions in your name right away.

Some states also allow a springing POA that takes effect only under certain conditions, such as your incapacity or disability. Problems with the springing POA are that you have to carefully define the terms under which the agent can act and usually a doctor (or doctors) has to certify that you are incapacitated. Someone has to ask the doctor to act, and the doctor has to evaluate you.

Even in states that accept a springing POA, the durable POA often is the better choice.

     Where should the POA be kept? If you trust the agent, he or she should be given a copy of the POA after it is executed or be told where one is stored. It should be in a place he or she can access when needed.

Don’t have the POA stored in your safe deposit box or with your attorney. Either action greatly limits access to the document.

     Which actions can the agent take? The standard POA is unlimited, giving the agent the authority to take any action on your behalf. Even so, you might want to spell out specific actions the agent is authorized to take.

For example, many states say there is no implied right to make gifts in a general POA. The IRS says gifts made under a POA without specific gifting authority won’t be treated as gifts for tax purposes. The assets will be included in the principal’s estate. If you want the agent to be able to make gifts, the POA should have a clear statement. Also, you might want to include some details. Do you want to limit gifts per person to the federal annual gift tax exclusion ($17,000 in 2023)? Or do you want to allow more discretion?

It also is a good idea to specifically name the people to whom gifts can be made. Many estate planners recommend that gifts to the agent or agents not be allowed. That reduces the potential for problems such as occurred in the Brooke Astor case.

Standard POA terms often say gifts can be made only to lineal descendants (children and grandchildren). That means gifts can’t be made to siblings, parents and others who might need help.

When gifts are allowed to children or other family members, do you want to require that gifts to different family members be equal, or do you want the agent to have some discretion?

A related issue is whether the agent can contribute to accounts, such as 529 college savings accounts and Roth IRAs, or family members or other people. If you want to allow this power, spell out details in the POA.

Establish some oversight. The Uniform Power of Attorney Act has been adopted in more than 25 states, with more likely to adopt it in coming years. The act imposes recordkeeping requirements on an agent, and many states that haven’t adopted the act impose similar, or even more stringent, recordkeeping requirements.

The agent is required to keep records of all transactions made under the POA. In addition, if a family member or other interested party requests to see the records or wants an accounting of how money was handled, the agent is required to comply.

But people might not know of these rights or exercise them effectively. You might want to establish additional oversight.

One simple type of oversight is to require that one or more people you trust be sent copies of monthly account statements or have online access to them. These people can be relatives or your financial professionals, such as an attorney or accountant. They’ll be able to review the statements and perhaps spot suspicious or unusual transactions. They also will see if the agent is performing the duties, such as paying your bills.

     Appoint a protector. A protector is becoming more common with trusts but can be used with POAs in many states. The protector has the right to review actions taken by the agent and can replace the agent at any time for any reason. When your estate is valuable, you might want to consider naming a protector.

Limit actions. Some POAs specifically prohibit certain actions, such as restricting gifts or not allowing sales of certain property. When a business is involved, the agent might be prohibited from trying to manage or sell the business. When you have a valuable collection or other property that requires special knowledge or expertise, you might want to prohibit the agent from doing anything with it, unless the agent has expertise.

If your POA prohibits such actions by

the agent, consider separately empowering someone with the appropriate

expertise to manage your business,

collection, or other specialized property.

     Make your intentions clear. To supplement the POA, you can draft a letter clearly stating your intentions about these issues. Both you and the agent sign the letter. The letter isn’t legally binding, but it can effect the agent’s actions, be used when others question the agent’s actions and be evidence of your intention if the courts become involved.

     Consider a transition. There could be times when it isn’t clear you need help managing things. That’s why it’s a good idea to gradually include someone in the management of your finances as you age. Preferably that someone is also an agent in your POA. See my recommendations about transition planning for your portfolio and finances in the May 2023 issue.

Your best protection is to choose carefully when appointing an agent or agents. You have to establish a balance when developing your POA. When you have too many layers of protection, it might be difficult or time-consuming for the agent to act, and good people might decline to be your agent.