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A financial power of attorney that you establish when you’re healthy is supposed to allow your agent to step in to manage your finances if you become incapacitated or somehow unavailable (perhaps out of the country). The reality is that many agents who think they have valid documents are turned away when they need to exercise their powers.
So, for example, a well-meaning adult child can’t access Mom’s bank account to pay her mortgage when she’s hospitalized with an illness. The bank doesn’t want to accept the documents. How can scenarios like this be prevented?
While even the best-prepared plans can run up against incompetence or security-conscious overzealousness, experts say there are steps you can take to increase the chances of your financial power of attorney (POA) being accepted.
Create a durable, not springing, power of attorney
“There are two main types of financial powers of attorney: durable and springing,” said Alyssa Sweeney, JD, advanced wealth and tax strategist with MassMutual Trust in Springfield, Massachusetts. “Under a durable power of attorney, the agent may act immediately; under a springing power of attorney, the principal must be declared incapacitated before the agent may act.”
Because a durable POA is so broad, many people are reluctant to create one, especially if they are physically healthy and mentally sharp. That said, choosing a springing power of attorney can cause problems down the line.
“Springing powers of attorney are often more challenging to utilize due to the incapacity requirement,” Sweeney said. “It can be difficult for an agent to constantly request medical notes detailing the principal’s incapacity; however, the agent is unable to act without these notes.”
Potential problems include:
- The entity that needs to accept the springing power of attorney may question the legitimacy or accuracy of a doctor’s diagnosis of incapacity, as well as its recency.
- Your level of capacity may change from day to day or depend upon the time of day.
- You may think that you’re still with it, but your loved ones may be seeing signs of dementia.
- Ongoing doctor appointments and paperwork regarding incapacity can be involved and time-consuming.
These are some of the problems your agent may run into should you create a springing power of attorney.
Clearly, trust is paramount when naming a durable power of attorney. Your agent can act immediately, but you don’t want them to use their powers unless they have to. You must choose someone who won’t abuse their authority.
Keep your POA current
The whole point of a durable power of attorney is that it doesn’t have a start or end date. In practice, however, financial institutions may be more likely to accept a POA that is recent. (Related: How to prepare for your older years while still of sound mind)
“There is some resistance by financial institutions to accept financial powers of attorney, particularly older documents,” Sweeney said. “It is important to update these documents every three to five years.”
Create your POA with a local attorney
Another area where POA challenges can arise is if you create your document in one state, but now you live in another state — or if you use an out-of-state attorney to prepare your POA. State laws can vary in their requirements for witnesses and what a valid POA must include.
“We would strongly recommend using an attorney in the individual’s state of domicile to prepare the document for that individual,” said Perry E. Brown, CFP®, CTFA, advanced wealth and tax strategist with MassMutual Trust.
In California, for example, your POA needs to be notarized or witnessed by two people, and your agent must sign it before it can be used. In Alaska and Texas (among other states), it must be notarized and contain specific language to be considered durable.
In New York, a notary can be one of your two witnesses, and your agent’s signature must be notarized too. Typically, your agent cannot be a witness. Illinois prohibits certain health care professionals and relatives from being a witness or notary. (Related: Four financial acts for your family)
File your POA before you need to use it
Financial institutions need to protect their customers from fraud and abuse — and protect themselves from liability. You wouldn’t want it to be easy for someone to walk into the nearest branch of your bank with a document you’ve supposedly signed that effectively allows them to empty your account. (Learn more: Signs of elder financial abuse — and what to do about them)
If you contact your financial institutions to ask about their requirements, you may find that they’re as simple as completing a two-page form that both you and your attorney-in-fact must sign. Depending on the account type and the institution, however, the requirements can get more complex — requiring notarized documents, for example.
To avoid the need to jump through each financial institution’s own hoops, many people prefer to have a document they have drafted with an attorney that they can submit to as many financial institutions as necessary.
Still, some institutions may insist that you submit that document along with a sworn affidavit they’ve drafted or appear in person with your chosen agent. While these extra steps may seem unwarranted, they may be allowed by state law. Completing them now could save your agent time and hassle later on.
Once everything is squared away, have your agent conduct some realistic test transactions on your behalf to make sure they are accepted.
Record your power of attorney
Typically, you don’t need to file your power of attorney document with a local court to have it formally recorded. However, some states do require this step if you’ve given your agent the authority to buy, sell, transfer, or borrow against real estate on your behalf.
Know your state’s laws
Laws and protocols for power of attorney situations can differ from state to state. And situations can get additionally complicated if trying to exercise a POA for someone in another state.
You can find a state’s power of attorney laws online or by contacting the appropriate local courthouse. You can also find informational articles on the websites of attorneys in your state. And for some situations, it can be advisable to consult a local attorney as well.
Name a successor agent
If your first named agent can’t fulfill their duties and you haven’t named a successor agent, you’re out of luck. Your loved ones will be in the same situation as if you hadn’t created a POA. They will have to petition the probate court for conservatorship to be able to manage your affairs — a time-consuming, highly supervised, and public process of last resort.
Besides predeceasing you, other reasons why your agent might not be available include becoming incapacitated themselves or being on a trip where they can’t be reached. Further, if you name your spouse as your agent and the two of you later divorce, state law may automatically nullify their authority. (Related: Types of wills and what they are used for)
Establish a living trust
A living trust (also called a revocable living trust) is often the cornerstone of a solid estate plan. It allows you to retain control of your assets during your lifetime, then name a successor trustee (and an alternate successor trustee) to manage your trust assets after you pass away.
You can also name a successor trustee or co-trustee to manage assets in the trust if you become mentally or physically incapacitated during your lifetime. Some experts say financial institutions are more willing to accept the authority of a trustee than that of an attorney-in-fact.
Even if you establish a living trust to avoid problems with having a power of attorney accepted, it’s still best practice to have a power of attorney as well. A POA may be necessary to manage any assets outside your living trust and file tax returns on your behalf.
Digital work-arounds?
Most of us have established online access to our financial accounts. Banks allow us to complete many transactions by simply logging in. So, if financial institutions are hassling customers over legitimate POAs, why not just give someone you trust your login information so they can manage your finances if you can’t?
“In most states, using an individual’s personal identification to access that individual’s banking or financial accounts would constitute criminal activity punishable by law,” Brown said.
In other words, you don’t want to put your agent in a position that would require them to commit fraud if they had to pretend to be you to get them done.
Indeed, some states require digital accounts and assets be included in the list of items covered by a POA. And you want to make sure your POA covers digital assets in accordance with state law.
“The risks of not having a POA far outweigh the relatively inexpensive and quick process to create one,” Brown said.
The importance of a power of attorney
No one enjoys planning for their incapacity, but being proactive is always better than being reactive. Preparing a well-written and properly executed power of attorney could give someone you trust permission to manage your financial affairs when you need their help most.
Discover more from MassMutual…
Revocable vs. irrevocable trusts: What’s the difference?
Estate planning for LGBTQIA+ couples
A complete guide to understanding life insurance
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