Kelly Greene and Jessica Silver-Greenberg recently wrote about the changing environment surrounding the use of durable powers of attorney in the Wall Street Journal.
The “power of attorney” is a legal arrangement that helps older people turn over management of their finances or other business matters to family members or friends. It is thought of as simple, easy and affordable as an estate planning tool. Anybody who can use the internet can either find a form or buy one from someone promising to “put the law on their side.” The problem is that the document is emerging as a vehicle for fraud.
This is not to say that those pitchmen vendors or software form writers are doing anything wrong. It’s the users that we have to watch. Not long ago, such documents were rarely challenged or exploited. But according to the Wall Street Journal, the number of cases of adult children looting assets from parents’ accounts is rising. That has prompted lawmakers to turn their attention to power-of-attorney abuse—often the first step in a swindle.
Banks, for their part, have long rejected financial maneuvers made under the cloak of a power of attorney, for fear of being parties to fraud. Banks have been concerned about liability, even under the best of documents.
The State of Maryland recently addressed this when the Legislature passed legislation creating a statutory power of attorney for both general and limited purposes. Other states have done the same thing, as well. But even with statutory formats, vigilance is essential to ensure that loved ones won’t misuse them. But it takes careful planning.
The poster child for Power-of-attorney abuse is philanthropist Brooke Astor’s son who was convicted of trying to “unjustly enrich” himself. The son was convicted in 2009 of grand larceny, among other counts, for using a power of attorney to increase his own salary, ultimately siphoning more than $1 million from her. He is appealing the verdict.
Local regulators and state lawmakers are beefing up legal safeguards as well. We talked about Maryland. New York has strengthened its protections during the past two years. Now it allows adults to name outside monitors in their power-of-attorney documents, to whom agents must provide regular accounting reports. Maryland’s new form carries similar reporting provisions.
Banks and brokerages, meanwhile, are taking matters into their own hands, imposing tough new hurdles on power-of-attorney claims on non-state specific statutory forms. Firms have started rejecting documents that were signed more than six months ago, that are from out of state, or for other reasons, say attorneys—making it much tougher for well-meaning adult children to take the reins when their parents’ health falters.
In many power-of-attorney lawsuits, the legal fees pile up quickly as adult children battle with financial institutions’ legal departments. In the Wall Street Journal article, they wrote about a recent Florida case where, Deborah Butler, a partner in her father’s real-estate business and holder of his power of attorney before his death, tried to close two bank accounts worth about $1 million in a dispute over whether the assets were intended to go to a girlfriend. Whitney National Bank refused to honor her power of attorney and filed a counterclaim asking the court to decide who would get the money.
The Journal wrote that in March, a judge in Manatee County Circuit Court ordered the Butler estate to pay more than $1.7 million in legal fees and upheld the bank’s decision. Now, the case is on appeal, meaning the bills continue.
So what can you do to make sure your power of attorney doesn’t spark family strife or tussles with banks? The writers give us a list of things to consider:
Set it up early.
Above all else, while you are still healthy and in full control of your faculties, you need to be comfortable with the person to whom you’re giving power of attorney, since it can be invoked at any time. I see that routinely in my estate planning practice. You need to know what powers you are giving out and when they take effect.
Once you sign away power of attorney, it takes effect immediately, giving your agent instant access to your money. One way around that is to use a “springing” power of attorney that goes into effect only after you become incapacitated. The advantage is that there is a smaller time window for abuse.
But there’s a potentially big disadvantage, too. Just when you want the power of attorney to work most, you have to put on the brakes and go find a physician. Some estate planners define incapacitation as two doctors are required to confirm it before the springing power of attorney kicks in. Some will make it a spouse and the attending physician.
Keep it Current.
The best way to avoid pushback from banks, fund companies and other asset-holders is to use a state mandated form. The second best way to avoid the pushback is to renew your power of attorney every six months. Even if you’re dealing with a family member developing dementia, don’t despair: There’s a lucid interval that attorneys are trained to recognize. Even if the client couldn’t understand the 20-page single-spaced durable power of attorney that my firm prepares, if my client is having a good day, sometimes they are able to sign the documents.
Check with your financial firms
At the same time that you make or update your power of attorney, check with the banks and brokerages you use to see if they have their own forms. If so, sign them as a safeguard to ensure that your agent has access to those accounts.
Keep it under lock and key.
If you have a good relationship with your lawyer, consider letting him or her keep your original power of attorney at his office, and put a copy in your home files. That way, it will be more difficult for your agent to use the original copy without being vetted first.
Restrict the Power.
Consider building in controls, such as giving one adult child the authority to write checks up to a certain dollar amount, but require all your children to agree on decisions above that limit.
You might let an agent pay bills and manage brokerage accounts, but block him from altering a will or changing beneficiaries on life insurance policies. Also consider having the agent provide monthly or yearly accounting statements to family members or your lawyer.
Plan for Gifts
Many wealthy people plan to give away assets this year and next. The goal: to take advantage of the tax law that Congress enacted in December that upped the amount people can leave to their heirs, or give away during their lifetime, to $5 million from $1 million without incurring estate or gift taxes. But the exemption limits are set to lapse after 2012.
If you’re giving power of attorney to your spouse or adult child, and you’re making annual gifts, you need to make sure you say so in writing.
Cover your IRA
In the past, individual retirement accounts typically held much smaller portions of older adults’ savings. But now that fewer people have traditional pensions and more have IRA rollovers from 401(k)s, powers of attorney need to address these important accounts.
If you’re married, make sure your power of attorney gives your agent the ability to roll over your IRA to your surviving spouse’s IRA, and also to designate beneficiaries for the rollover IRA. And if your agent would be among the beneficiaries, give your agent permission to name himself.
Prepare separate documents.
If you spend your time in various states, set up durable powers of attorney that comply with the state laws in each place. Every state uses these instruments a little bit differently.
Set up a disability trust as a fallback. You may want to set up a disability trust—technically a revocable living trust—to kick in if your power of attorney breaks down. That way, you could avoid publicizing your finances in a court case that might be needed to assign a guardian or conservator.
Sometimes disability trusts are used if the agent and any back-up agents named in the power of attorney have died, are disabled, or live too far away to effectively do the job. You can also think about naming a corporate entity, such as a bank or trust company for the sole purpose of transferring assets out of your name and into the name of the disability trust.
Why not just keep using the bank or trust company as the agent? Financial institutions typically refuse to serve in that role, because they have fiduciary responsibility for assets they might not even know about. Once the assets are in a trust, the professional trustee knows exactly what it’s responsible for.
To read the Wall Street Journal article in full follow this link:
You can reach the authors at the following location:
As always, good luck and good hunting.