Last week we discussed powers of attorney and although they are generally lifetime documents, some powers can be effective after death. A properly drafted financial power of attorney is an essential tool in the estate planner’s toolbelt. However, there are limitations with financial powers of attorney of which you should be aware.
Financial Power of Attorney Does Not Stop Maker of Power of Attorney from Acting.
One of the major disadvantages of a financial power of attorney is that it offers no protections from a maker of the power of attorney, also called the principal, who is making poor decisions. A financial power of attorney only adds financial agents to act on behalf of a principal, it does not stop the principal from acting and handling their own finances. The principal could spend all of his or her funds and there would be little that the appointed financial agent(s) could do.
Financial Powers of Attorney Increasingly Dishonored
Banks and other financial services companies have always scrutinized financial powers of attorney. However, over the last decade and a half, we have been seeing banks and other financial services companies increasingly dishonor financial powers of attorney for a variety of reasons. There is no penalty for a bank or other financial services company from wrongfully dishonoring legally valid financial powers of attorney. They can and they do on a regular basis.
I believe it is a combination of the Patriot Act, the Dodd-Frank Act, the mortgage meltdown crisis and privacy concerns that drives these companies to cover their own assets. The power of attorney is usually sent to the corporate legal department for review. Several days or weeks later, you get a response. Instead of honoring legally valid financial powers of attorney, they are requesting a court order, which is probably what you wanted to avoid in the first place by having a power of attorney.
Sometimes, the legal department advises that the power of attorney not be honored because it did not have their preferred language to handle transactions with them. As we have encountered this situation over time, we have continually added specific language to our financial powers of attorney. Our general durable financial powers of attorney which were only three pages long in the 1990’s, have now grown to over twenty pages long. Consequently, because of this, we rarely have any of our powers of attorney dishonored due to lack of specific language in them.
Although there is no legal basis to do so, I have seen financial services companies refuse to honor a power of attorney for the reason it is too old. Even though Michigan statute states that durable financial powers of attorney continue notwithstanding the lapse of time since the execution of the document, some financial services companies do not seem to care.
At the other extreme, we have seen financial services companies refuse to honor a financial power of attorney because it is too new when a principal becomes mentally disabled shortly after signing the power of attorney.
Other financial services companies have not honored a financial power of attorney unless the principal signs a statement that the power of attorney is still valid. This is a challenge when the power of attorney is being used because the principal is already mentally disabled and cannot sign.
Michigan statute states that the failure to have a financial power of attorney acknowledgment signed by a financial agent does not affect the agent’s legal authority to act on behalf of the principal. Despite this, we have seen financial services companies refuse to honor financial powers of attorney that do not have the financial agent’s signed acknowledgement.
We have seen financial services companies refuse to honor a backup financial agent in a financial power of attorney unless the primary financial agent, who was unavailable and unreachable, signed a statement that he was refusing to act. I know of one local financial services company that as a matter of policy, never honors backup financial agents named in a financial power of attorney and another, also as a matter of policy, never honors financial powers of attorney with co-agents.
When your power of attorney is not honored after your mental disability, about the only choice your loved ones have is to go to probate court. Your loved ones then usually have two options, seek a protective order to enforce the power of attorney or request a conservator to be appointed to handle your finances, both time consuming and costly.
With all of these financial powers of attorney not being honored, you may wonder if you should even have one. Absolutely, you should. There are still a lot of other situations in which they can still be used and honored, avoid a probate court appointed conservator and keep matters private in the family.
Fully-Funded Trust as Supplement to Financial Powers of Attorney
Because of these issues regarding financial powers of attorney, adding a trust to your estate plan is a better option than using a financial power of attorney exclusively during your mental disability. A revocable living trust is effective not only during your lifetime, but after your death. However, to make your trust work and to have the results that you intend, it must be fully-funded.
Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust. The funding of your trust is critical in making it work and having the results that you want. Failure to properly fund your trust may cause unintended consequences, which could include probate both during your lifetime and after your death, distributions not in accordance with your instructions and other than you planned, additional taxes and additional administrative and legal expenses. What is the point of having a trust if you do not put anything in it.
For a fully-funded trust, you have to re-title bank and investment accounts, stocks, bonds, individual life insurance policies, business interests, real estate and sometimes vehicles into the name of the trust. You also need to name the trust and individuals in the proper order as beneficiaries of IRAs, retirement plans, annuities and life insurance. And you have to make sure that homeowners and other casualty and liability insurance policies of trust-owned assets name the trust as insureds or additional insureds, or the insurance company can deny a claim.
Most attorneys will draft a trust and then instruct you that your trust won’t work unless it is funded. Sometimes, the attorney will give you a letter of instruction about how to fund your trust. In the first thirteen years of my practice, I let my clients fund their own trusts. However in those first thirteen years, I found that not one single one of my clients had fully-funded their trust. So in 1999, we decided that in our office that we would only do fully-funded trusts. We have reviewed many trusts that have come into our office which were drafted by other attorneys. In my 32 years as an attorney, not a single one of these trusts have come into our office fully-funded.
With trusts, we regularly see financial services companies honor the successor trustee’s instructions immediately upon presentment of a certificate of trust. We rarely see a financial services company send the trust certificate to their legal department for a lengthy review process like we see with financial powers of attorney. The ease at which trusts are honored upon a trustmaker’s mental disability is just one more reason we do fully-funded trust-based estate plans in our office.
Also what can and should be included in your trust is a disability panel of trusted individuals, who make the determination that you are unable to effectively manage your property and financial affairs. Once the proper documents are signed by your disability panel and successor trustees, you are removed as trustee and your successors take over, all without court involvement. This protects your assets from your poor, unwise or inappropriate decisions.
With the proper documents in place, you can minimize hassles and minimize expenses both during your lifetime and after your death. This maximizes the amount available to you during your lifetime and to your beneficiaries after you are gone.
By Matthew M. Wallace, CPA, JD
Published edited December 30, 2018 in The Times Herald newspaper Port Huron, Michigan as: Using financial powers of attorney can be challenging