A power of attorney is an essential part of every estate plan. It is a document you hope is never needed but that you must have in place before a need arises. The POA ensures that someone can manage your estate when you are unable to. Bills can be paid; investments can be managed; and other actions can be taken.
Yet, having a document called a power of attorney does not mean your problems are solved. You may want an additional layer of protection or two to ensure the agent follows instructions and acts in your best interest.
Protecting Your Estate
In 2007 New York philanthropist and heir Brooke Astor was in the headlines with lurid allegations that her son and lawyer were using a power of attorney to subject her to a substandard lifestyle, conserving her wealth for them. After she died, charges were filed alleging that the two essentially stole some of her money.
The case highlights the importance of selecting the right person as your agent in the POA. Since anyone can be tempted by power and money, some people want to take additional steps to protect themselves in case an agent is tempted.
There are several steps that add protection to a POA. Here are some protections to consider.
Require regular accounting. Most agents holding POAs are responsible only to themselves. A layer of oversight can dissuade an agent who is tempted to abuse his position.
The oversight can be simple. Require the agent to send monthly statements to one or more people. The recipients can be relatives or professionals, such as your attorney or accountant (if they aren’t on the POA). The accounting also can be simple. The agent can send copies of the monthly statements from whatever financial accounts are involved. The recipients can review them to see that no suspicious transactions are taking place and also that adequate amounts are being spent for necessities.
Appoint multiple agents. Though Ms. Astor’s son and attorney were alleged to collude against her, two or more agents makes malfeasance less likely. The price is that multiple agents can complicate matters, because two or more people have to approve everything and might be required to sign every check. As long as you have trusted people living reasonably close to each other, the additional complication will be small and offset by the protection.
Appoint a protector. This is someone who has the right to review everything done by the agent and can replace the agent at any time for any reason. Again, collusion always is possible but having oversight reduces the probability of malfeasance.
Have a side agreement. Some estate planners recommend you draft a separate letter of understanding that both you and the agent sign. In this letter, the principal (you) clearly states his or her intentions and desires about how the agent will manage the assets. The document has no legal effect. But it can be consulted by the agent and is believed to have an effect on an agent’s actions.
Remember to balance these protections with the goals behind a POA. Too much protection can make the agent’s job more difficult and might prevent someone from accepting the position. The bottom line is that there is no substitute for carefully selecting the agent or agents. The POA should be given to someone who is both trustworthy and capable of handling the estate.
Spelling Out the Powers
You also need to pay attention to the details of the document. All POAs are not the same. An off-the-shelf POA is not adequate for everyone and might not be right for your situation. Here are some key details of a POA to consider as part of your plan.
Is your POA springing or durable? The standard POA is a durable POA. It takes effect as soon as it is signed. That means if you appoint an unscrupulous person as your POA, he legally could immediately use the power to write checks, change investments, and sell assets. This is not an issue if you have done a good job of selecting the agent holding the power.
To avoid this potential pitfall, there also is the springing POA. The agent under this POA has authority to act only after the principal is disabled. Initially that sounds like a solid solution, but it has the potential to make thing worse.
Not all states allow the springing POA, so it might not be available to you. When the springing POA is allowed, someone has to determine that the principal is disabled before the agent has authority to act. Does there have to be a letter from a doctor? Which doctor? How is disability defined? If the letter certifying that the principal is disabled is two weeks old, should financial firms rely on that? Or should they require a more recent letter certifying that the principal still is disabled? Because of these and other potential problems, a financial services firm might not comply with the agent’s directions unless the POA contains a clause indemnifying from liability anyone who reasonably complies with the agent’s directions.
You can have the springing POA drafted more tightly to answer these and other questions, but there still will be issues and financial firms might decline to comply with the agent’s directions because of the questions.
Do you intend for the agent to manage investments? Some people expect an agent to be a caretaker, paying bills and performing other routine tasks. If there are actions you want the agent to be able to take, spell them out in the POA. Otherwise, a financial advisor or firm might decline to follow the agent’s instructions. The same advice holds for other assets such as real estate and collectibles. A buyer might be advised by an attorney not to close a transaction with your agent unless the POA specifically authorizes it. If you own a business, the POA should spell out the actions the agent is authorized and not unauthorized to take regarding it. Some people create different POAs for different assets. On the other hand, when there are actions you don’t want the agent to take, spell that out in the document.
Are gifts allowed? State law generally prohibits an agent acting under a POA from making gifts. If you want the agent to continue your estate planning gifts or make gifts in other situations, the POA needs to say so. The IRS has stated that gifts made by an agent don’t count for estate tax purposes unless the POA specifically authorizes gifts.
The gifting power might need to be broader or more detailed than in many POAs. Do you want the agent to make gifts only up to the annual gift tax exemption, or are estate planning gifts above that amount allowed at the agent’s discretion?
The POA also should state who can receive gifts. A standard provision is to limit gifts to lineal descendants (children and grandchildren). That means gifts cannot be made to your parents, siblings, or other family members who need help, even if you have been helping them, unless you put in nonstandard language.
Will the POA be followed? After the POA is drafted, contact your financial service providers. Some firms insist that their own forms be used or that the POA be on file with them before the agent takes actions. They also might want it updated every few years.
You should understand the POA. Know under which conditions it can be used and the actions the agent is empowered to take. Consider whether it covers all the actions that might need to be taken, and also any limits you want to place on the agent.