The financial Power of Attorney (POA) could be the most important document in your estate plan. Yet, many people don’t have one. Many people who do have a POA didn’t give it much thought and have inadequate documents. Adverse results can range from bills not being paid on time to trusted people committing financial abuse or theft. Sometimes shortcomings in the POA result in disputes and litigation over who’s in charge or who can receive something.
The POA determines who manages your affairs when you aren’t able to. Having one ensures bills are paid, investments are managed and other important tasks are performed. When you have a living trust, the trust needs a provision similar to a POA that determines who will manage the property when you are unable to do so. But you still need a POA for assets not included in the trust.
Celebrities often provide the best examples of why the POA is so important, because their cases make headlines. 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. More recently, 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 of their assets.
These and other problems are much less likely to occur when you take the essential steps and have the right provisions in your financial POA.
Choose the agent carefully. The agent is the person who acts on your behalf under the POA. Choosing the agent 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. It is not an appointment one should receive because of status (such as being the oldest child) or they might be offended if someone else is named.
You’re 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 family member or friend. When you have a meaningful amount of wealth, consider appointing a professional who will be paid for managing your affairs. Also, don’t appoint someone without first discussing it with him or her. Be sure 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. Of course, that’s not foolproof. Brooke Astor had co-agents, and they colluded against her. Co-agents also can create new problems. They need to live reasonably close to each other so they can meet regularly to do the work. They also have to agree on actions to take. Some actions might be delayed until they can discuss and agree on matters and then sign the appropriate forms. Even so, it is worth considering whether co-agents will work best for you.
Check with your financial institutions. Many banks, brokers and other financial firms have their own standards about honoring POAs. Your institutions might require that their forms be used. Some firms require the POAs to be submitted in advance and be on file with them to be honored without delay. A POA also might need to be updated or ratified every few years at some firms. You or your attorney need to work with your financial institutions to ensure smooth management of your assets.
Which type of POA? Many states allow you to have either a durable POA or springing POA. The durable POA takes effect as soon as you sign it. The agent legally could use it and take actions in your name right away. The springing POA takes effect only under certain conditions, such as your incapacity or disability.
While the springing POA sounds like what most people want, it has disadvantages. Not all states allow the springing POA. Also, you have to define the terms carefully under which the agent can act. Often, that means a doctor (or doctors) have to certify that you are incapacitated. Someone has to ask the doctor to act, and the doctor has to evaluate you. If someone disagrees with the doctor’s evaluation, the courts might become involved. The process can mean delays and disagreements.
A compromise some attorneys recommend is to sign the durable POA but not give it to the agent (or agents). Instead, store it in your home. Make sure the agent has access to your home and knows where to locate the POA. The agent then can begin using it when you are unable to manage your affairs. (Of course, that might not be viable when a financial institution wants the POA on file before it is needed.)
Don’t have the POA stored in your safe deposit box or with your attorney. The agent probably won’t be able to access the safe deposit box. Leaving the POA with an attorney or someone else limits access to the POA and puts the attorney in the position of determining when it is appropriate to give the POA to the agent. This conundrum shows the importance of naming the right agent.
With the durable POA, there still 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.
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 actions you definitely want the agent to be able to take.
For example, many states say there is no implied right to make gifts in a general POA. The IRS indicates 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 clearly state that. Also, you might want to include some details. Do you want to limit gifts to the federal annual gift tax exclusion per person, $14,000 in 2017, or do you want to allow more flexibility?
It 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 problems in the Brooke Astor case and others. Standard POA terms often limit gifts to lineal descendants (children and grandchildren). But 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 in amount or allow the agent discretion?
A related issue is whether the agent can fund accounts, such as 529 college savings accounts and Roth IRAs, for family members or other people. If you want to allow this power, spell out the details in the POA.
Establish some oversight. Agents under POAs generally aren’t accountable to anyone unless someone files a court complaint. One simple type of oversight is to require that one or more people you trust be sent copies of the 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 whether or not the agent is performing the duties such as paying your bills.
Appoint a protector. A protector is becoming more common with trusts but also 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. There’s always the potential for abuse or collusion, so you have to choose a protector carefully just as you have to select the agent with care.
Limit actions. Some POAs specifically prohibit certain actions. A common exclusion, as mentioned, is not to allow gifts to the agent and to be specific about who else can and can’t receive gifts. Some POAs don’t allow gifts or sales of certain property. When a business is involved, the agent might be prohibited from trying to manage details of the business or sell the business. The same holds for some commercial real estate. In those cases, you’ll have someone familiar with the business or real estate manage it. 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 that expertise.
Make your intentions clear. To supplement the POA, you can draft a letter that makes clear your intentions about when the agent should act and your desires about what the agent will and will not do. Both you and the agent sign the letter. The letter isn’t legally binding, but it can affect the agent’s actions, be used when others question the agent’s actions and be evidence of your intention if the courts become involved.
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.