I have received several calls recently about Powers of Attorney (POA), so now is a good time to write about them.
Why Do I Need One? The time may come when you are no longer able to pay your bills and manage your finances. This may be a temporary situation, after you have been in a bad car accident or are hospitalized for a debilitating illness. Or this may be a permanent problem if you are suffering from dementia or Alzheimers disease. Someone must be responsible for making sure that your bills are paid on time, that your investments are being managed properly, your tax returns are filed on time, and any other financial or legal matter are being dealt with. Even if you have joint bank and investment accounts with a spouse or child who can access the funds in the accounts to pay the bills, your spouse or child may not have the ability or the time to handle these matters. And there are some things that a spouse or chld cannot do for you, such as taking withdrawals from your IRA or 401(k) account or signing a tax return on your behalf. If you have a POA in place, the person that you have chosen to manage all financial, tax, and legal matters for you can take care of all of these matters. The person that you choose is known as your “attorney-in-fact”. Without a POA in place, you have a problem if you are incapacitated and are no longer able to understand or sign a legal document. Without a POA, a family member or trusted friend must be appointed as your legal Guardian through a difficult, expensive, lenghty and public Probate Court proceeding.
What Kind of Power of Attorney should I have? There are three basic types: a Durable Power of Attorney, a Springing Power of Attorney, and a Limited Power of Attorney. A Durable Power of Attorney takes effect when it is signed and notarized. There must be a statement in your POA which states that the POA “shall not be affected by my subsequent disability or incapacity”, or words to that effect. Without this language, your Power of Attorney is no longer valid when you become incapacitated. Since this is when your Power of Attorney is needed the most, this language should always be included in your Durable POA. In practice, most of my clients put their POA away, and let their attorney-in-fact know where it is and how to access it when needed. A Springing Power of Attorney takes effect only when a certain event happens, such as a diagnosis of dementia or Alzheimers Disease, or a doctor certifies that you lack the mental capacity to manage your finances, taxes, and legal matters. In a Springing POA, you should be very specific about what triggers or “springs” your Power of Attorney. Requiring a diagnosis by a specialist, such as a geriatric psychiatrist or other specialist who can administer a series of cognition tests to determine your mental capacity, is appropriate. A Limited Power of Attorney names an attorney-in-fact for a specific purpose or for a limited time period. For example, you may give a Limited POA to your attorney to attend a closing for you if you will be away on a busines trip or vacation.
Who Should be my Attorney-in-Fact? Trust is the most important factor. I can’t overstate this. If the person that you trust the most is not knowledgeable about finances, taxation, and investing, he or she can continue to use your financial advisor or accountant or they can hire whatever professional advisor they need. A Durable Power of Attorney takes effect when you sign it. Your attorney-in-fact can use it immediately, even if you have full mental capacity. There is no obligation that your attorney-in-fact act under your supervision. If you don’t trust your attorney-in-fact to act in your best interests when it becomes necessary, name somone else. While a A Springing POA prevents you attorney-in-fact from acting until your inability to handle your finances is confirmed by a doctor, you no longer have the capacity to determine when your attorney-in-fact is acting improperly. Your attorney-in-fact has the fiduciary obligation to act in your best interests and not spend your money on themselves, but this does not always happen. At least once a month, I receive a call from someone who is sure that their silbing is using Mom’s or Dad’s POA for their own benefit. Don’t chose a child to be your attorney-in-fact because he or she is the oldest child or lives the closest to you. Think about which child, family member or friend you trust the most to do the right thing. While your family members have recourse in civil or criminal court proceedings if your attorney-n-fact is spending your money on themself, few family members wish to put the family through this.
Dealing wtih Power of Attorney Problems. I frequently receive calls from family members when the original POA can’t be found. Banks and investment companies need to review the original POA the first time that they deal with the attorney in fact. If the client who signed the Power of Attorney still has the mental capacity to understand and sign legal documents, signing a new POA is the best option. This is the same solution when the attorney-in-fact is told that the POA is “stale”. This will definitely happen if the POA is more than ten years old, and will possibly happen if the POA is more than 5 years old. In both cases, if my client can no longer understand and sign legal documents, I can attach an Affidavit to my copy of the POA, stating that it is still in full force and effect, and has not be destroyed or replaced by a later POA.
A more diifficult problem is when the attorney-in-fact won’t take any actions until there is a doctor’s certification that my client is no longer able to manage his or her affairs, even though the POA is not a Springing POA. This usually happens when the attorney-in-fact is my client’s accountant or financial advisor. They are reluctant to act without the medical certification, even though the POA does nto require it. For that reason, I have been adding language to the Durable POA’s that I am drafting, stating that no medical certification is required before an attorney-in-fact can take actions on my client’s behalf. I am hopeful that this language will deal with this problem.
Elder financial abuse is a real problem. Banks and investment companies have to be careful when dealing with an attorney-in-fact. While POA problems can be bothersome, you should be happy that your bank or investment company is being careful when dealing with your attorney-in-fact.