Many people use the last part of the year to put their financial houses in order. Yet, one move many overlook is to create or revise their powers of attorney (POA). You need more than one POA, and they are an essential part of every Estate Planning strategy, regardless of the value of your estate. You should be sure the POAs are in place and up to date, even when you aren’t ready to sign a will or trust documents.
You need both a financial POA and a medical POA. The financial POA ensures that someone can manage your estate when you are unable to. Bills can be paid; investments can be managed; and other actions can be taken. The medical POA designates one or more people to make treatment decisions on your behalf when you aren’t able to. Fail to have a medical POA, and you don’t know who will make those critical decisions.
Yet, having documents called powers of attorney does not mean your problems are solved and that your estate planning is in good shape.
All POAs are not the same. An off-the-shelf POA is not adequate for everyone and might not be right for your situation. In this visit, we focus on the financial POA. Here are some key details to consider as part of your estate planning.
Is your POA a springing or durable one?
The standard POA is a durable POA. It takes effect as soon as it is signed. That means if you appoint an unscrupulous person as your POA, he legally could immediately use the power to write checks, change investments, and sell assets. This is not an issue if you have done a good job of selecting the agent holding the power. It should be someone you trust, who will act as a fiduciary, and will use the power according to your wishes and only when you can’t act.
An alternative is the springing POA. The agent under this POA has authority to act only after the principal (you) is disabled. Initially, that sounds like a solid solution, but a springing power isn’t always the best choice.
Not all states allow the springing POA, so it might not be available to you. When the springing POA is allowed, someone has to determine that the principal is disabled before the agent has authority to act. Does there have to be a letter from a doctor? Which doctor? How is disability defined? If the letter certifying the disability is two weeks old, should financial firms require a more recent letter certifying that the principal still is disabled? How often should the principal’s status be updated, and under what conditions does the principal return to power/ Because of these issues, many financial services firms don’t like spring POAs. They might not comply with the agent’s directions unless the POA contains a clause indemnifying from liability anyone who reasonably complies with the agent’s directions.
You can have the springing POA drafted more tightly to answer these and other questions, but there still will be issues and many financial firms might decline to comply with the agent’s directions because of the issues. If you are using a springing POA, be sure in advance your financial services firms will accept it.
How broad should the agent’s powers be?
Some people expect an agent to be only a caretaker, paying bills and performing other routine tasks until there is a permanent change. If so, they should limit the actions the agent can take instead of providing a general POA. But you can’t forecast exactly how events will occur, so it’s not always a good idea to be restrictive in a POA. Suppose you are disabled for an extended period and executed only a limited POA. Someone will have to go to court for permission to take broader actions on your behalf, which defeats some of the point of having a POA.
If there are actions you want the agent to be able to take, it’s a good idea to spell them out. A financial firm or advisor might decline to follow the agent’s instructions when the POA is vague or general. When you want the agent to be able to sell assets such as real estate and collectibles, say so. A buyer might be advised by an attorney not to close a transaction unless the POA specifically authorizes it. If you own a business, the POA should state the actions the agent is authorized and not authorized to take regarding it. Some people create different POAs for different assets and make sure to include clear succession plans for businesses in their estate planning.
Are gifts allowed?
State laws generally prohibit an agent acting under a POA from making gifts. If you want the agent to continue your estate planning gifts or make gifts in other situations, the POA needs to say so. The IRS doesn’t recognize gifts made by an agent unless the POA specifically authorizes the gifts. Instead, it includes the gifts in the estate.
The gifting power might need to be broader or more detailed than in many POAs. Do you want the agent to make gifts only up to the annual gift tax exemption ($13,000 in 2012, likely $14,000 in 2013), or are gifts above that amount allowed, whether made for estate planning purposes or other reasons?
The POA also should state to whom gifts can be made. A standard provision is to limit gifts to lineal descendants (children and grandchildren). That means gifts can’t be made to your parents, siblings, or other family members who need help, even if you have been helping them. Of course, it also means gifts can’t be made to non-family members.
Another issue is whether gifts to different people should be equal. When you believe it’s okay to make unequal gifts (say, because one child isn’t as well off financially or your will provides inheritances will be adjusted for unequal gifts), say so in the POA. You can define the circumstances when unequal gifts are permitted. When you want children or others treated equally, say so.
Is the agent allowed to fund accounts?
If the POA only allows gifts to family members or others, it doesn’t authorize contributions to accounts for their benefit such as 529 education savings plans. If you want the agent to be able to consider such options, the POA has to say so. State the types of plans that may be funded, for whose benefit contributions are allowed, and the maximum amount that can be contributed.
Will the POA be followed?
After the POA is drafted, the appropriate people and firms need to know about it. Of course, you, your attorney, and the agent should have copies. You also should contact your financial service providers. Some firms insist that their own forms be used or that the POA be on file with them before the agent takes actions. They also might want periodic updates or affirmations.
Protections in the POA
You also need protection against the possibility an agent might become unethical or simply make poor decisions. As an extreme example, the son and attorney of New York philanthropist and heiress Brooke Astor were convicted of using a Power of Attorney to subject her to a substandard lifestyle, conserving her wealth for them, and essentially stealing her money. The case made national headlines for an extended period.
Of course, your first protection is to select carefully your agent. Since authority can tempt anyone, consider additional steps to protect yourself, your wealth, and your loved ones. The key is to establish a balance between security on the one hand and having a clear, usable, fairly simple document on the other hand.
Here are some estate planning protections to consider.
Require regular accounting.
Most agents holding POAs are responsible only to themselves for their decisions and actions. A layer of oversight or reporting can dissuade an agent who is tempted to abuse his position, or it can encourage someone to seek advice for key decisions.
The oversight can be simple. Require monthly statements be sent to one or more people in addition to the agent, such as relatives or professionals. The agent simply can ask financial services firms to send those people copies of the monthly statements from whatever financial accounts are involved. The recipients can review them to see that no suspicious transactions are taking place and also to see that adequate amounts are being spent for your upkeep.
Appoint multiple agents.
Though Ms. Astor’s son and attorney were alleged to collude against her, malfeasance is less likely with two or more agents. The downside is that multiple agents can complicate matters, because two or more people have to approve everything and might be required to sign every check. As long as you have two or more trusted people living reasonably close to each other, the additional complication will be small and offset by the protection.
Appoint a protector.
Borrow the idea of a trust protector or supervisory agent, who is someone with the right to review everything done by the agent and can replace the agent at will. Again, collusion always is possible but having oversight reduces the probability of malfeasance.
Have a side agreement.
Some estate planning specialists recommend the principal draft a separate letter of understanding that both the principal and agent sign. In this letter, the principal clearly states his or her intentions and desires about how the agent will manage the assets. The document has no legal effect. But it can be consulted by the agent and is believed to have an effect on an agent’s actions.
The bottom line is that the details of the documents are important, but there is no substitute for carefully selecting the agent or agents. The agents should be both trustworthy and capable. You never can be certain how someone will act when faced with the temptations and responsibilities of the position, so some protections are in order. But the best protection is to carefully select the agent and be sure you understand the POA.