Powers of Attorney: A Critical Part of Your Estate Plan

It is a fact of life that we can’t be everywhere at once. And it is also a sad fact that as we get older, we often lose our capacity to do things for ourselves. Thus, during your lifetime you may need to delegate important personal decisions about your finances and health to a third party such as a spouse or other family member, a friend, or a lawyer.

Powers of attorney may grant others narrow or broad legal authority to represent you in transactions that might be inconvenient or impossible if you had to see to them yourself. We believe every financial plan should involve powers of attorney to provide for your needs during your lifetime.

What are the different types of powers of attorney, and where do they belong within your overall estate plan? (Please keep in mind that Alpha Fiduciary is not a law firm and cannot give legal advice.)

POA Types

First, you should understand that the word “attorney” or “attorney-in-fact” in this context really just means “agent.” Your agent can be any trusted person of legal age who is competent to make decisions on your behalf. But because of history, the term power of attorney and attorney in fact are still used on official documents. We will use POA throughout the rest of this article to avoid confusion.

At the highest level, a full or general power of attorney is a legal document giving your agent broad powers to act on your behalf. These powers may include withdrawing money from your bank accounts and other financial accounts, paying your bills, real estate transactions, hiring contractors to work on your house, etc. You want to exercise extreme caution when assigning a general POA to anyone, because your agent’s word under a POA becomes as good as yours from a legal standpoint. Can you really trust that friend to act as you would in all matters?

Its broad powers notwithstanding, there still are particular things that a general POA will not allow for absent specific accompanying language; for example; if you are the grantor of a trust (i.e., the person who set up and funded the trust), your agent will not be able to change the trust unless the trust specifically grants this power to your agent. Thus, any consideration of a general POA should involve harmonizing it with your existing trust documents.

A limited power of attorney restricts the agent’s powers to just the transactions and authority you wish to grant. It may also be time-bound, meaning that it only remains effective for a specified time. Financial institutions frequently offer their own versions of POA documents (both general/full and limited) to ensure that the wording meets their requirements. For example, the LPOA form for one of our custodians allows you to indicate that your agent may make trades and log in to your account as well as inquire about account details. It does not permit cash withdrawals, address changes, or adding/removing account features.

You actually grant a POA to your financial advisor when you hire one. The financial advisor usually can trade on your behalf, withdraw money for fees, and request other transactions which you have previously authorized in writing. As you can see, a limited POA can be very specific and can carry many restrictions that protect you from agent overreach.

Within the universe of general and limited POAs, we have some subtypes. A durable power of attorney, or DPOA, serves an important purpose for individuals who become physically or mentally incapacitated. A regular POA will terminate when the individual assigning it becomes unable to remove the agent due to illness or disability. But a DPOA is “durable” even when life events remove the main decision maker from the equation for a time. A DPOA can give you peace of mind that your agent can handle your affairs when you aren’t able.

A springing power of attorney describes a POA that becomes effective only upon a specific event (such as when the principal becomes incapacitated, etc.). It does not give the agent any power prior to the event. You will want to work with your attorney when drafting a springing POA to make sure the conditions are clearly stated and measurable. Note that the term “springing” describes the trigger feature and does not indicate a different POA type (LPOA, DPOA, FPOA). Any of the above could be a springing POA, for instance.

A joint power of attorney names more than one agent, who may have to agree unanimously before taking any action. This can create complications and result in very slow decision making. If you appoint two agents who do not see eye to eye, nothing might get done and the agents will probably experience strife. Think long and hard before using a joint POA for anything, especially if it involves healthcare decisions.

The last POA type we will mention is a healthcare power of attorney (sometimes called a healthcare proxy). As the name implies, this POA gives your agent authority to make decisions about medical treatment for you. It does not generally permit financial transactions or other activities beyond what is specifically named in the POA. For example, a healthcare POA might include accepting or refusing care, authorizing care providers, admitting you to a care facility, and medical record access and sharing. It can also contain specific restrictions and preferences which you include to guide your agent.

A healthcare POA is not the same as a living will, though there can be some overlap when the healthcare POA includes end-of-life decisions. A living will provides advance directives about medical decisions such as keeping you on life support, administering palliative care, and the like. It may make sense to couple a healthcare POA with a living will. Also consider making your healthcare POA durable, in case you foresee long-term decline. Your attorney can best advise you.

Finally, review your POA assignments from time to time. For example, if you had assigned a POA to an ex son- or daughter-in-law and then filed it with your financial services provider, you’d probably want to terminate it. Remember, too, that all powers of attorney end at death, so if you are planning for someone to act on your estate’s behalf, you must look to your will or trust to take over when that happens.

Complications when using a POA

You may hire the top attorney, use the most careful language, and follow all the best practices when drafting your POA, but that doesn’t mean it will be seamless to your agent who must demonstrate authority to your financial institutions and medical

facilities. Think of it from their point of view: A total stranger walks into your company waving a piece of paper and starts giving instructions on behalf of your client. “Not so fast,” you might say. How do you know the paper is legitimate and that you won’t get in trouble for following this new person’s orders?

In fact, many front-line employees display a self-protective hesitancy to be helpful when a stranger starts asking questions that might involve a client’s private information. The worst thing your agent can do when encountering resistance is to forget how hard it is to trust people in this area of financial fraud and become demanding or rude. Still, the first employee he or she encounters simply might not know enough to handle the situation correctly. After all, employees are trained in company policy, not necessarily the law behind them.

Go the extra mile and check with the company yourself to make sure your POA will work for your agent without a lot of extra hassle. For example, if you want your agent to have a standard POA with your financial company, contact that company now and ask for its own power of attorney forms. It will be a whole lot easier than trying to get a big corporation’s legal department to adopt your forms, and it may be that the company forms will suffice.

Next, remember that state law has a lot to do with how your POA should read. If you draft your own POA, don’t just rely on a generic form you find at the office supplies store or online. Make sure you know what states require and that your POA is specific to the state(s) where future actions must be taken. Go ahead and spend the money on a lawyer to ensure it was drafted properly, including occasional updates in case the law changes.

Make sure your financial advisor, trust company, future agent(s), and family know about the POA now to avoid surprises with future transactions. Your agents will be glad you did this extra work up front.

When a POA doesn’t help you

The POA serves you during life both when you remain active as well if you become incapacitated. But the moment you pass away, a POA is of no further use. Thus, other forms of protection belong in a well-constructed estate plan. You should also consider how your assets are titled, the trust language, your will, statements of wishes, etc.

Alpha Fiduciary serves its clients as a true fiduciary investment manager and financial planner and can refer you to its network of experienced professionals to provide services for trust administration, legal advice, and accounting. We’d love to discuss your current estate plan and offer our guidance. Click here to schedule an appointment.

About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.

Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).

Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.

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About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory. Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA). Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.