Your financial power of attorney might give you peace of mind that a responsible person you appoint will manage your assets upon your incapacity or inability. As a legal document, however, POAs often face challenges from cautious financial institutions or concerned family members. Creation of a revocable living trust, attention to formalities when dealing with financial institutions, carefully choosing the agent to represent you and updating your documents can prevent your plan from failing.
Over the years, a financial power of attorney has provided Americans with a handy way to give someone else formal permission to manage their money should the need arise.
No one is immune from the possibility of becoming incapacitated. That's why as a legal document, a financial POA has become a popular planning tool for those who choose to prepare for the unexpected, protect their assets and prevent family disputes.
If you lack a financial POA, you'll likely deal with the less desirable option of a court-appointed guardian or conservator, possibly a total stranger, being handed control of your checkbook, credit card, brokerage account and other assets because you didn't carefully choose your own agent when you had the chance.
Your lack of planning can lead to your bills going unpaid and family members heading to court so they can argue - in public - over how your money is spent and who can do the spending.
There are better options.
One is a financial POA, which is commonly written to “spring” into effect when its creator, or principal, becomes incapacitated. The POA agent is a fiduciary and legally required to manage financial affairs in the principal's best interests. A debilitating health problem is the main reason people rely on powers of attorney during their lifetime.
“The details differ, but the basic facts are similar. As a person ages and cognitive function declines, someone must step in and help manage financial and personal affairs and help with medical care and decisions,” says Forbes contributor Bob Carlson. A well-planned POA can prevent family disharmony, court fights, inappropriate use of assets and other problems, Carlson says. “That's why the power of attorney could be the most important document in your estate plan.”
In theory, you've covered your bases with a financial POA. Your estate planning binder is incomplete without one.
In reality, however, power-of-attorney documents commonly are challenged. Even though a POA is a fundamental part of your legal paperwork, there are weak links that can cause your plan to fail.
Over the past 15 years, financial institutions have heightened their scrutiny of financial POAs and increasingly have dishonored them for numerous reasons, says Michigan-based attorney and CPA Matthew M. Wallace.
“The power of attorney is usually sent to the corporate legal department for review,” Wallace says. “Several days or weeks later, you get a response. Instead of honoring legally valid financial powers of attorney, they are requesting a court order, which is probably what you wanted to avoid in the first place by having a power of attorney.”
Banks and their sister institutions would rather be safe than sorry and not financially liable if they accept a bogus POA. Financial institutions won't face a penalty - short of a civil lawsuit - if they reject a valid POA, which is another factor motivating their hesitancy to accept them, experts say.
Institutions cite many reasons when rejecting POAs, Wallace says. The POA may be too old, or too new. A POA created years ago may raise doubts about the principal's present intentions. A POA with the ink barely dry could prompt suspicions whether the principal was of sound mind or under duress when the document was created. The name appearing in the POA may not exactly match what's on the agent's identification and lead to rejection. If the POA lacks the bank's “preferred language” that references the institution, it may not be honored.
There are more potential obstacles. Some institutions require their own forms be used - not the papers you've had drafted by an attorney or tried to create on your own. That's a problem if you become incapacitated before you can fill out a form unique to a financial institution. If the POA language conflicts with your trust or other planning documents, that's another reason for a bank to balk. In some cases, the institution may require the principal to sign a statement that the POA is valid, which is impossible if the principal is incapacitated. More red flags fly if an alternate agent is named on the form and seeks appointment as the primary agent.
Your agent can plead and protest. But getting a cautious bank to budge can be a challenge, experts say.
“We have seen financial services companies refuse to honor financial powers of attorney that do not have the financial agent's signed acknowledgment,” Wallace says. “We have seen financial services companies refuse to honor a backup financial agent in a financial power of attorney unless the primary financial agent, who was unavailable and unreachable, signed a statement that he was refusing to act.”
If a financial institution won't honor your POA, your loved ones are usually left with the stressful, expensive and time-consuming option of going to court. They can seek a probate judge's order to enforce the POA or request the appointment of a conservator.
Despite the potential difficulties with recognition of financial POAs, there are ways to help ensure the person or entity of your choosing will handle your money responsibly when you can't.
- Create a revocable living trust. The successor trustee of your trust performs a similar role as a financial power of attorney, serving as a fiduciary and managing your assets upon incapacity or conditions you predetermine. One advantage of a trust is that it is effective during your lifetime as well as after your death. A POA is only effective during the life of the principal. To be effective, your trust must be funded with your assets titled in the name of the trust. Your successor trustee only controls assets funded into the trust and is bound to follow your instructions.
- Follow formalities required by financial institutions. Work with your attorney to ensure financial institutions will recognize your POA when the time comes. Provide relevant institutions with your POA and inquire about complying with their rules. Your agent could face other obstacles accessing and managing digital accounts, such as an online brokerage. Terms of service agreements may explain how online platforms handle POAs. Also, provide financial institutions with a copy of the certificate of trust that names your successor trustee. Assistance of a qualified attorney is highly recommended over do-it-yourself forms.
- Select your agent or trustee wisely. Give careful thought to the person, people or institution you appoint as your financial POA or successor trustee. Appointing the same person as POA agent and successor trustee prevents giving two different people authority over your assets. Also, granting authority to multiple people is discouraged because of potential delays and disagreements in making financial decisions. And make sure you name alternate agents or successor trustees.
- Review your documents. Your power of attorney or trust can fail because of dated, inaccurate or missing information, and documents should be updated for a variety of reasons. Some POAs are written with expiration dates. Names of institutions change, and so do their rules. The identity of agents or trustees can change because of marriage or divorce, or your proxy may predecease you. Discrepancies lead to difficulties.
There's no way to guarantee that incapacity won't strike. But proper planning can keep a physical or mental disability from causing a bureaucratic nightmare regarding your fiscal affairs. A properly crafted financial power of attorney coordinated with a revocable living trust and the management of reliable people can ensure your assets are protected and utilized according to your wishes.