You may already know your estate plan needs an up-to-date power of attorney (POA).
But it also needs much more than that.
Here are some important facts on the power of attorney for you and your heirs, in terms of both the uses and limits of the POA.
For starters, here’s why you need more than a power of attorney for you and the estate to be protected.
Bills must be paid and assets managed, even if you aren’t able to do the tasks.
In a power of attorney, you appoint an agent to step in and perform those tasks.
An effective POA can protect your assets, smooth the transition of your estate, and make life easier for you and your heirs.
Without the POA, your family will likely have to undergo the cost, delay and publicity of asking a court to appoint a guardian or custodian to manage your affairs.
The POA is a time-tested legal document.
Each state has settled law, and since 2006, over half the states updated their laws by enacting versions of the Power of Attorney Uniform Law.
Estate planners are very comfortable with the document and recommend one for every estate plan.
It is widely recognized by financial firms and other businesses. Once you sign the power of attorney, you let the agent know about it and where copies are located (or give the agent a copy).
The agent or agents can step forward at any time to take action. (You can change or revoke the POA any time you have legal capacity.)
That’s all great in theory, but it doesn’t always work well in practice.
I have had practical experience helping to manage my parents’ affairs under a power of attorney and have heard the experiences of many others who used POAs and revocable living trusts.
While the power of attorney gives the agent authority, no one must recognize it.
Financial firms, especially since the financial crisis and the publicity received by cases of fraud and abuse, developed their own standards for accepting POAs.
Many firms now won’t recognize a POA that wasn’t executed recently.
Many require the power of attorney 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.
So, for your POA to be effective when you need it, you might have to generate a signed, notarized version on a regular basis.
Many financial firms have additional requirements.
Some require that you execute 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 power of attorney with an agent who is based in a different state than your residence.
Of course, once a firm recognizes the POA, your agent must convince the financial firm that he or she is the person empowered by the POA.
An agent can sue to have a POA recognized.
But that will take time and money, defeating the purpose of the POA.
Also, courts give financial firms a lot of leeway in declining to accept POAs, and your agent will have to pay the firm’s legal fees if the court sides with the firm.
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 is needed, so they’ll have it on file.
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.
Your agent also should be aware that some responsibilities might come with the authority.
The Uniform Power of Attorney Act has been adopted in more than 25 states, with more states 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 empowered under a POA 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.
In other words, the agent under a POA is accountable to the potential heirs as well as to the principal. They can demand to review the documents at any time.
If the agent fails to provide satisfactory records promptly, family members and other interested parties can ask a court to order production of the records.
Some state laws are more onerous. California hasn’t adopted the 2006 uniform law yet, but it’s POA law says it is a breach of the agent’s fiduciary duty to fail to keep adequate records of transactions.
Once it is alleged that the records are inadequate, the agent has the burden of rebutting it in court.
If it is found that the agent isn’t acting properly, courts usually don’t appoint another family member or friend to take over as agent.
Instead, the state is considered the agent for your protection.
Usually that means a professional guardian or fiduciary is appointed to the role.
The professional then makes the decisions on your behalf and charges fees for acting as the agent.
To protect yourself and your agent, be sure the agent is aware of the record-keeping requirements and is able and willing to do the job.
While a power of attorney is necessary, there are disadvantages and potential problems.
An alternative, or better yet a complement, is the revocable living trust.
The living trust often is recommended to avoid probate, but it also is a way to ensure a co-trustee or successor trustee can manage most of your affairs should you be unable to do so.
But the best approach for most people is to have both a power of attorney and a revocable living trust.
Have most of your assets in the trust so they’ll avoid probate, and your co-trustee or successor trustee will manage them when you can’t. But have the POA to cover assets that aren’t in the trust.
The important takeaway is that you and your agent need to be aware of the potential issues with a power of attorney and how to minimize them.