Executive Summary
As more Americans are living well into their 80s and even into their 90s, the spectrum of risks that an aging population faces is only getting wider. The need to address longevity risk has become increasingly important, allowing financial advisors to add even more value for their clients by ensuring that their financial needs are met throughout retirement. This is particularly relevant when cognitive or physical impairments diminish (or eliminate altogether) their ability to make decisions on their own, and it becomes necessary to transfer those responsibilities to someone else. And while transferring responsibility may be relatively easy for accounts that are jointly titled or held within a trust, other accounts, such as qualified savings vehicles or annuities, require a Power Of Attorney (POA) when delegating decision-making authority to a third party.
In this guest post, David Haughton, the Team Lead for Advanced Planning at Commonwealth Financial Network, explores the importance of comprehensive POAs and how they can be constructed to avoid many of the common pitfalls that loved ones may encounter when accessing an incapacitated person's assets.
When it comes to giving someone the authority to act on behalf of a grantor, an essential consideration when developing a POA is durability. Unfortunately, nearly half of all U.S. states do not consider POAs to be durable (i.e., these states do not consider the POA in effect after the grantor's incapacitation) unless they expressly state otherwise. Moreover, even if durability is established, it's important to distinguish between an immediate POA, which is effective as soon as the document is signed, and a springing POA, which won't be effective until the grantor becomes incapacitated, and that incapacitation has been certified by a doctor as well!
Still, even with a durable and immediate POA, financial institutions are often reluctant to grant access to a grantor's accounts, which is understandable given the amount of fraud and elder abuse present in society. There are several reasons for financial institutions to prevent an agent from being added to an account, including the age of the POA itself and whether the document was prepared so long ago that it is considered 'stale', any number of (nuanced) state-specific signature formalities (e.g., notarization or witness requirements), the inclusion of multiple agents (which are often prohibited by financial institutions simply for the logistical complexity of getting more than one signature), complications with forms that are specific to an individual financial institution (but not others), and a failure to specify that the agent is authorized to take actions that are otherwise prohibited under the Uniform Power Of Attorney Act (UPOAA).
As a result, taking a 'kitchen sink' approach to drafting POAs is advisable, even if the resulting document may seem overly complex and lengthy. By including every possible specific power an agent could conceivably need when acting on behalf of someone else, the chances that an institution might block an agent from taking various actions (like making a gift or changing beneficiaries) are greatly reduced.
Ultimately, the key point is that a properly drafted POA is an essential part of every estate plan. By using a 'kitchen sink' approach when granting a loved one the authority to access a client's assets, an advisor can help ensure that their financial needs can be met at a time when they aren't able to act on their own behalf. While it's important for financial institutions to protect their customers from fraud and abuse, the roadblocks that can prevent an agent from taking action can be numerous and complex, meaning that advisors who understand the nuances around navigating those hurdles can help their clients gain peace of mind knowing that their needs are met at a time when they need help the most!
There are many unknowns when helping a client plan for their financial future, but one thing that is pretty definitive is that the client is going to die someday, and there is a high likelihood they will become incapable of making decisions regarding their finances prior to that point. Dealing with incapacity is already difficult for a family emotionally; trying to fight with a bank to permit access to financial accounts only makes the process more burdensome.
While joint bank accounts and revocable trusts can be a great option for ease of administration at incapacity or death, these are not options (or sometimes advisable) for some major assets such as retirement accounts or annuities. Therefore, a Power Of Attorney (POA) is an essential part of every person's estate plan, and it becomes even more critical when using a trust is not a viable strategy.
Failure to have a comprehensive POA that permits the agent to access a wide range of assets and the ability to engage in financial planning strategies on behalf of the incapacitated person could result in very serious consequences. And an improperly drafted POA can result in rejection by the financial institution, which can be devastating at a point in time when efficient access is essential to pay bills and protect assets.
This can also leave the client's advisor scrambling to help the family gain access to the funds, which can be frustrating and may even damage the relationship. It is estimated that upwards of 90% of heirs choose to leave the original advisor at an intergenerational transfer. Poor experiences by heirs and family members at these difficult points in time likely do not aid in reducing that figure.
Although the document can get lengthy, having a flexible POA that specifically covers all conceivable situations may be a client's best bet for a loved one's streamlined access to their assets and ability to use all appropriate financial planning strategies in the event of incapacity. Unfortunately, despite best efforts, a POA may still get rejected. However, there are ways to deal with a rejected POA and still gain access to an incapacitated person’s assets.
Types Of Powers Of Attorney (POAs)
Powers Of Attorney (POAs) come in many shapes and sizes. Saying, "I have a power of attorney; can I [insert proposed act]?" is similar to saying, "I have a car; can it climb Mount Washington?" It is impossible to answer the question without a lot of additional information. "What kind of car? How many miles are on it? Does it start?" So, if a client says, "I have a power of attorney", that should always prompt additional questions to determine the nature of the document and the powers it bestows.
POAs are utilized in various situations and can be used for finances and healthcare. However, it is important to know that these documents are typically not combined. Healthcare POAs have many different names depending on the state in which they are created (e.g., healthcare proxies, advance directives, etc.) and have their own statutory section of state law separate from laws related to POAs for finances.
A POA for healthcare is designed to permit an agent to make medical decisions on a person's behalf if they are unable to. This could involve end-of-life situations and scenarios where a person is under anesthesia or their mental health has deteriorated to the point that they are incapable of making decisions.
While a healthcare POA is an essential piece of any estate plan, it is not a helpful tool in accessing a person's financial accounts. To be able to access financial accounts and enter into transactions on another person's behalf, the principal had to have executed a valid financial POA.
Nerd Note:
Sometimes, one type of POA or the other is not enough. In cases such as assisting someone filing for Medicare, multiple forms of authorization, including POAs for finances and medical decisions, could be required.
Durability
When assessing the effectiveness of a Power Of Attorney (POA) document, a fundamental question to address is its "durability". In other words, will it still be valid if the client were to become incapacitated? Believe it or not, this is not a given.
Historically, under common law, a POA would not be presumed durable unless expressly stated otherwise. This would mean the POA would no longer be valid precisely when it's most needed: upon the grantor's incapacity. This likely runs counter to what many people see as the primary point of a POA in the first place, which is to authorize a person to act on behalf of the grantor when they are no longer physically or mentally able to do so themselves.
However, for at least the 26 states that have come to adopt the Uniform Power Of Attorney Act (UPOAA), durability is presumed unless otherwise stated in the document. For the many states that have not adopted the UPOAA, durability may not be a sure thing, so it is critical that the language of the POA document is confirmed to expressly state that its effectiveness survives the client's future incapacity.
Nerd Note:
The UPOAA should not be confused with the Uniform Probate Code (UPC), which has been adopted in several states and which also contains "uniform" provisions governing POAs. The UPOAA is significantly more detailed on POAs than the UPC provisions, and some states that have adopted the UPC have repealed the POA provisions in that statute in favor of adopting the UPOAA.
Immediate Vs Springing
There are 2 main forms of durable POAs: "immediate" and "springing". An "immediate" POA becomes enforceable the moment it is signed, allowing the named agent to start signing in place of the individual immediately, regardless of the individual's capacity. A "springing" POA will restrict the agent's action unless – and until – the individual is incapacitated.
The latter sounds better, right? Here's why that's not always (or even usually) the case.
Imposing incapacity as a prerequisite for the POA's effectiveness introduces a barrier to the agent's speedy access to funds in a potentially urgent situation. Banks won't take an agent's word that the person is incapacitated; they typically need 1 (or maybe 2) doctor's certifications – worded exactly right – to confirm incapacity. And this process could take precious time, potentially causing significant delays.
By making the POA effective immediately, there is no need to make a showing of incapacity, and therefore, the agent should have prompt access to the funds.
A key question to ask a client is if they are concerned about their agent accessing their money without authorization prior to incapacity, do they really even want to name them as someone with POA for when they become incapacitated?
Nerd Note:
Florida is one state that affirmatively doesn't even allow springing POAs anymore, for POAs executed after October 1, 2011. The applicable Florida statute states that "a power of attorney is ineffective if the power of attorney provides that it is to become effective at a future date or upon the occurrence of a future event or contingency".
Reasons Financial Institutions Reject POAs
Concerns over fraud and elder abuse are ever-present in today's society, and financial institutions holding investors' nest eggs stand in a difficult position of balancing ease of access with protection from fraud and embezzlement. And the concern of financial institutions is legitimate: playing events logically forward, if a villainous person were to access a person's funds through fraudulent means, one of the first parties to see a lawsuit come their way would be the financial institution that permitted the access.
Therefore, banks and custodians are very cognizant of having strict policies regarding the review and acceptance of POAs. When submitting a POA to be added to an account, advisors can potentially run into any number of pitfalls that could delay or restrict a preferred agent's access to a client's account.
Document Is Stale
The first reason a financial institution may refuse to honor a POA is because it is 'stale' (too old). There is no identifiable basis in law that a POA should be deemed ineffective merely due to the passage of time, but it is a stance that certain financial institutions have taken to the incredible frustration of clients, attorneys, and financial advisors alike.
Some state statutes even expressly state that a lapse of time would not, alone, affect the validity of a POA. Notwithstanding the unreasonableness of a policy such as this, the law is constantly evolving (as are life circumstances), so updating an old POA is typically prudent both to ensure its provisions are currently applicable and to avoid frustration in having the POA rejected.
The POA Is Signed Without Requisite Formalities
Just as with a last will and testament, each state has signature-formality requirements when it comes to executing a POA to ensure its validity. One state could require notarization, while another could require witnesses, and another state may even require both! Knowing these nuances is critical to avoid a client walking around with an invalid POA.
Nerd Note:
While some states do not require witnesses for POAs, it is generally best practice for the client to have 2 witnesses for their POA (in addition to a notary). Absent witnesses, an agent may not be able to act in certain circumstances (e.g., when transferring title to real estate if the applicable state's registry of deeds has strict signature formalities with regard to real estate transactions). Having witnesses can also help ensure that a POA is respected across multiple state lines.
The Problem With Multiple Agents
Clients with multiple children sometimes can't decide who to appoint as their agent under a POA, leading them to name more than one to act jointly. While this may seem logical, doing so can result in complications with the financial institution that is asked to honor the POA. Many financial institutions, preferring not to deal with the complexity of coordinating signatures from multiple parties, may have policies that prohibit account access for joint agents under a POA.
One potential solution is to specify that the agents may act independently of one another. This approach might face less resistance, although the institution may still require one party to resign and withdraw themselves as an agent of the POA. However, even aside from the challenges of getting the POA accepted, there are practical reasons clients should be hesitant to name joint agents. For example, family members don't always agree. Which means that managing finances for an incapacitated loved one can be a potential source of family conflict, and if more than one person is responsible for decision-making, there is the risk of gridlock in approving proposed actions.
Nerd Note:
It is possible to have multiple POA documents that are effective at the same time. Therefore, a client could have separate POAs that each name a different agent. As most POA documents have a provision stating that any and all POAs are revoked as a result of the creation of the POA, clients need to be careful with this approach so that the language of the POA does not undermine their intent.
Complications With Form POAs
Many states have 'statutory form' POAs. These are POA documents that include language taken directly from the state POA statutes. Using a statutory form POA could make life easier because there is reasonable certainty that a financial institution will accept it, given that it unequivocally complies with state law. However, these statutory form POAs are generally just recommended templates and are not the only acceptable form for a POA document. Additionally, banks and financial institutions routinely have their own forms for a client to complete to establish a POA on an account.
While using form POAs can be convenient and ensure that the POA will get put on the account, their language may not be as comprehensive as the client's estate planning attorney may recommend. Additionally, if the POA is a financial institution's own form, it is unlikely to apply to anything other than the account(s) held at that specific institution and, therefore, would not cover any external assets.
Some institutions may insist on using either a statutory form or their own form for a POA on an account. Similar to rejections based on document staleness, this requirement is often more about operational convenience and consistency than a valid legal ground for rejection. Challenging the institution by providing a custom-drafted POA that complies with state law formality can result in the institution reconsidering its strict policy. As section 120 of the Uniform Power Of Attorney Act (UPOAA), adopted by some states, indicates that "a person may not require an additional or different form of power of attorney for authority granted in the power of attorney presented." Therefore, financial institutions need to be careful that their policy does not open them up to liability for violation of the law.
Failure To Specify Specific Power
Sometimes, a POA may be deemed valid and acceptable by the financial institution, but certain actions the agent intends to undertake may not be permitted; therefore, the transaction is blocked, or the act is prohibited. Often, these prohibitions relate to restrictions expressly stated in the law.
In states that have adopted the Uniform Power Of Attorney Act (UPOAA), an agent under a POA is prohibited from taking certain actions unless expressly permitted to do so in the POA document itself.
Specifically, the following acts are prohibited under Section 201 of the UPOAA unless expressly permitted:
- create, amend, revoke, or terminate an inter vivos trust;
- make a gift;
- create or change rights of survivorship;
- create or change a beneficiary designation;
- delegate authority granted under the power of attorney;
- waive the principal's right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan;
- exercise fiduciary powers that the principal has authority to delegate;
- exercise authority over the content of electronic communications sent or received by the principal; or
- disclaim property, including a power of appointment.
The Benefit Of 'Kitchen Sink' POAs
Advisors may sometimes scoff at 'boilerplate' legal documents that attorneys create for clients due to their (seemingly) unnecessary length and complexity. However, especially when it comes to POAs, these documents are often lengthy to ensure they have the breadth to cover every possible scenario. That is why it can be useful to take an 'everything but the kitchen sink' approach when creating a POA, which involves throwing in every possible specific power an agent could conceivably need when acting on behalf of someone else.
In most cases, clients don't specify particular actions they want to restrict their agent from taking. However, the law typically favors protecting a person from abuse. Therefore, if certain powers are not explicitly enumerated in a validly executed POA document, those powers will not be permitted.
A POA could make sweeping declarations like, "I give my agent the unlimited power to act with respect to all of my property in any possible way they see fit." However, without granting specific authorization, such as the power to change beneficiaries on a retirement account, an action could still be denied by the custodian. Which is why more can be better when it comes to drafting POAs.
Power To Change Beneficiaries
Among the various powers typically needed in a POA, the ability to create or change a beneficiary designation is often the most crucial.
For example, consider a situation involving a married client and their spouse, who have each named the other as the beneficiary of their respective retirement accounts, with their child named as the agent under a POA. One partner becomes terminally ill and incapable of managing their own affairs. The ill spouse's partner is in a nursing home receiving government-subsidized care through a state Medicaid program. However, in this case, the terminally ill spouse does not want assets to be directed to their spouse at death because the assets could render the spouse in the nursing home ineligible for Medicaid assistance and would necessitate a mandatory spend down of their assets.
In such a case, an elder law attorney may recommend that the child use their agency under the POA to change the beneficiary of the terminally ill spouse's retirement accounts to protect the Medicaid eligibility of the spouse in the nursing home. However, if that power was not specifically articulated in the POA document, the custodian likely would not authorize and process the beneficiary change.
Lacking the power to change beneficiaries can hamstring financial planning in many ways beyond just Medicaid planning. Agents, acting in good faith and for practical reasons, may need the flexibility to create or change beneficiary designations. For instance, what if an agent wishes to move funds from one investment manager to another? Once the assets reach the new firm, the agent would likely wish to put a Transfer On Death (TOD) or beneficiary designation on the new account, perhaps to match the original account's registration setup.
However, if the POA does not explicitly grant the power to create a beneficiary designation, the agent may be hard-pressed to convince the custodian to process the change. This limitation not only impedes the agent's ability to manage the assets effectively but also potentially disrupts the continuity of the financial and estate plans.
Power To Make Gifts
In a similar vein, gifting toward the end of life can be a valuable planning strategy to minimize taxes or protect assets. For instance, compared to other states, Massachusetts has an exceptionally low estate tax threshold of $2,000,0000. Unlike the Federal system, Massachusetts' estate tax system does not include gifts in the valuation of what is taxable, which means deathbed gifting is a common tool to reduce the value of the estate subject to taxation. Without the express authority for the agent to gift away the principal's property, popular end-of-life estate planning strategies may be limited.
The ability to gift is a power that a client may be a bit hesitant to permit, even if valid estate planning strategies would be lost. However, a well-drafted POA can delineate the applicable recipients of gifts and direct that any transfers be done to ensure that assets are distributed in a manner reasonably consistent with the client's estate plan.
Notably, care must be taken when including a provision in a POA that empowers an agent to gift to themselves. Such an unlimited gifting power for the agent could be deemed a general power of appointment, which would render the principal's assets includible in the agent's estate or even potentially reachable by the agent's creditors!
Nerd Note:
Underlying all powers in a POAis the agent's fiduciary duty to act in the best interests of the principal. Any breach of this duty could result in liability for the agent. The scope of an agent's potential liability will vary by state and ultimately would be the subject of case law/judicial interpretation of a state's POA statute and the limits of an agent's authority. If an agent under a POA has concerns about any actions they are taking, then the agent should consult legal counsel of their own. The agent may want to consider utilizing counsel other than the client's own estate planning counsel due to conflict of interest issues that could arise.
Power To Deal With "Digital Assets"
An increasingly important aspect of estate planning involves "digital assets". In many instances, clients may have created their POAs before the concept of digital assets was fully appreciated. Therefore, the document may not even contemplate that a fiduciary may need to access online accounts or other electronically stored content as part of managing the incapacitated person's affairs.
An increasing number of states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which lays out the statutory framework for dealing with digital assets. The RUFADAA requires explicit authorization in the applicable legal document for a fiduciary to access a person's electronic communications. Therefore, a generic POA (or an old one) may be missing specific language empowering the agent to access certain digital assets, making such access legally prohibited by this statute.
Which is why it is increasingly critical in today's information age, where digital assets and electronic communications are increasingly integral to personal and financial affairs, to explicitly provide an agent with the specific power to access these electronic communications. This inclusion ensures that the agent's authority is comprehensive and adapts to the evolving digital landscape, covering all critical aspects of asset management and decision-making on behalf of the principal.
Dealing With POA Rejection When The 'Kitchen Sink' Isn't Enough
Sometimes, despite a client's best efforts (and under the guidance of their financial advisor and estate planning attorney), a financial institution will refuse to honor a POA based on the institution's internal policies. While frustrating, clients are not without potential remedies.
Taking Legal Action
Most state statutes provide that a person may have a legal cause of action against a financial institution that unreasonably refuses to honor a POA. Therefore, financial institutions cannot simply make a policy that they will reject all POAs out of an abundance of caution; they must have policies reasonably tailored to fit the law.
Additionally, financial institutions cannot simply sit on a POA without taking a stance on rejection or acceptance for an indefinite period of time. Section 120 of the UPOAA states that an institution must either accept or reject a POA within 7 business days. If more time is needed, there must be a valid reason (like a legal opinion), and the maximum amount of additional time the institution will be granted to review the POA is limited to 5 business days.
Nerd Note:
Disaster can sometimes be averted by getting a POA on file as early as possible and not waiting until incapacity. If a POA is rejected, but the client still has capacity, then the client would still have the ability to sign a new valid POA to potentially correct the issue.
Conservatorship As An Option Beyond Power Of Attorney
Failing a successful legal contest to a firm's refusal of a POA – which would carry with it invested time, expenses, and aggravation – a conservatorship proceeding would likely be necessary in order to access an incapacitated person's accounts. A conservator can be thought of as a kind of court-appointed agent under a POA, where the powers of the conservator are confined by what is granted by a judge in accordance with the law. A conservatorship proceeding is sometimes referred to as "living probate", which is typically precisely what a POA or living trust seeks to help avoid.
Like probate, a conservatorship proceeding is also a lengthy and costly process to endure. Additionally, it is highly unlikely that the powers of a conservator would have the same breadth as the powers granted to one acting as agent under a POA.
For example, an incapacitated client may have wished for a Medicaid analysis to be performed in the event of a physical crisis. However, the ability of a conservator to perform Medicaid planning for an incapacitated person would be at the mercy of a judge’s discretion as to whether Medicaid planning is appropriate in the given situation. A judge would typically be concerned only with the protection of the incapacitated person (rather than with the preservation of assets for the next generation) and may direct the conservator to pay their ward's nursing home bills rather than attempt to get them qualified for governmental benefits (even if that is what the client would have wanted).
Trusts Can Make Life Easier All-Around
While the discussion here has primarily dealt with POAs for accounts held in an individual's name, it's important to note that revocable living trusts are often a more straightforward option for incapacity planning, assuming the assets in question can be held in trust. In such trusts, the trustee (who holds a role, not a specific identity) is the legal owner of the trust property. This structure allows for a more streamlined process of handling an incapacitated individual's affairs.
The language of the trust, in conjunction with the governing state law, dictates how a new trustee is appointed. Financial institutions typically don't take a strict supervisory role in enforcing the terms of the trust as they do with individual accounts. Therefore, if a trustee becomes incapacitated, a successor trustee, as designated in the trust terms, can simply step forward and assume control of the assets. This highlights the dual utility of a revocable living trust; not only is it a tool for the transfer of assets at death, but it can also ensure efficient administration in cases of incapacity during the individual's lifetime.
Nerd Note:
For the reasons outlined above, it would be atypical for a POA to govern assets held in a trust. This is because trusts typically have their own established process for accessing trust property in the event of the grantor's incapacity. While it is sometimes possible for the agent under a POA to play a role in managing or altering a client's trust, the extent of this authority varies based on state law. Some states (such as Massachusetts) require both the trust and the POA to cross-reference each other for the power to exist.
Another major benefit of a trust over a POA is its comprehensive coverage for various contingencies. What if an agent is unavailable, unwilling to serve, incapacitated, or even deceased? While clients can (and should!) name successors, there may still be scenarios where there is no agent available to act. Under these circumstances, a conservatorship is often necessary. However, a trust typically includes a provision for appointing a new trustee that does not involve the court, such as a vote of the beneficiaries. This makes a trust a more practical and convenient option compared to a POA during the client's lifetime, even when the client's preferred fiduciaries are unavailable to help.
Of course, a trust cannot be used in all circumstances. For example, certain assets like IRA accounts cannot be transferred to a trust during the owner's lifetime. Similarly, some assets like annuities may not be titled into a trust due to potential tax implications at death. Additionally, certain client actions, like filing taxes, would be inapplicable to a trust and would instead require the action of an agent under a POA. Which is why there is always a need for a valid POA in an estate plan, even if the plan is anchored by a revocable living trust.
While a POA is a document that most people would prefer never be necessary, it is, in reality, an essential component to every estate plan that ensures assets will be accessible in times of incapacity. And as POAs come in all shapes and sizes, knowing what type of POA (and what specific powers it should contain) is critical.
Financial institutions are cautious of the liability associated with someone other than the account holder accessing an account. Accordingly, financial advisors with a firm handle on achieving acceptance and dealing with rejection of POAs will not only be better equipped to navigate institutional hurdles, they will also help reassure clients that they are in the best position for their assets to be accessible should they become incapable of managing it themselves. Furthermore, by understanding the role of POAs in protecting their clients' assets, financial advisors not only build their clients' confidence in their financial future, but also help them pave the way for a legacy marked by wealth and the wisdom to preserving it!
This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice. The views expressed are those of the author and do not necessarily reflect those of Commonwealth Financial Network and are subject to change without notice based on changes to state and/or federal law. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.
