Your estate plan needs an up-to-date power of attorney (POA), but it also needs more. The power of attorney (POA) is essential for every estate plan, but it often is oversold by estate planners. The shortcomings of POAs aren’t well-known and could bite you or your heirs without proper preparation.
You and your heirs need to know some things about the POA, both its uses and limits. You’ll also find that you need more than a POA for you and the estate to be protected.
In a POA, you appoint an agent to step in and perform tasks such as paying bills and managing assets when you aren’t able to. Without the POA, your family would 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. It is widely-recognized by financial firms and other businesses.
After you sign the POA, 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 in practice things don’t always flow smoothly.
I’ve had practical experience helping to manage my parents’ affairs under a POA and have heard the experiences of many others who used POAs and revocable living trusts.
While the POA gives the agent authority, no one has to 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 POA 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’s 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 the POA be on 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 POA with an agent who is located in a different state than your residence.
Of course, once a firm recognizes the POA, your agent has to 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’s 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.
While a POA is necessary, there are disadvantages and potential problems.
An alternative, or better yet a complement, to the POA is the revocable living trust. The living trust often is recommended as a way 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.
As with the POA, try to make your financial firms familiar with your co-trustee or successor trustees. You want to do what you can to smooth any transition. Remember, the financial firms are protecting themselves. They don’t want to be on the hook in case a con artist or deceitful relative pretends to act on your behalf but instead pockets your money.
The best approach for most people is to have both a POA 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 a POA to cover assets that aren’t in the trust. The important take away is that you and your agent need to be aware of the potential issues with a POA and how to minimize them.