Over my years of experience with a wide range of clients and families, I have observed three common Power of Attorney (POA) mistakes made by clients. These three mistakes can result in unnecessary confusion and expense, as well as unfortunate family squabbles.
Getting a Bank Power of Attorney or a Joint Account
My banking friends will give me a hard time on this one, but the first mistake many clients make in their POA planning is listening to their local bank branch representative. Often the local bank rep will suggest clients use a Bank POA or a Joint Account when the Power of Attorney discussion is raised at a bank. A Bank POA, or conversely a Joint Account, is often the incorrect tool to use, and here’s why:
- Most clients expect the POA to be effective if they lose capacity; however, many bank POAs are not effective in the event of incapacity. That’s right, they are not effective.
- The Bank POA will only deal with bank assets. In that sense, it’s an incomplete Power of Attorney. Assets outside the bank will not be covered.
- Another tool often recommended by banks is the Joint Account. Joint Accounts are powerful, but often too powerful.Joint Accounts can easily dilute a good estate plan or good family relationships. Just ask two sisters, one who lives in the same city as mom and has helped her out for the last ten years, and the other who lives out of town. Did Mom intend for the Joint Account’s proceeds to flow by right of survivorship to the in-town sister, or are the Joint Account proceeds meant to form part of Mom’s estate? Often, a Joint Account muddies the waters and contributes to family troubles.
Be aware that from a pure efficiency perspective, banks like their own POA documents, or Joint Accounts. They are easy and no one in the bank has to review and approve that pesky POA document prepared by an outside lawyer.
Choosing the Wrong Attorney
The second common POA mistake that clients make is picking the wrong (POA) Attorney. Clients should appoint a (POA) Attorney that:
- They trust absolutely.
- Has the required skill.
- Is interested in the job, not just the power.
- Understands what it means to be a Fiduciary.
If the (POA) Attorney does not have the above attributes, think about utilizing someone who does, or perhaps a Trust company.
Think carefully before appointing a (POA) Attorney who has a conflict of interest and who does not understand what a fiduciary duty is.
To help you think about conflict of interest, think about the following scenario:
Imagine your eldest son is your (POA) Attorney, and you need to receive greater care. Your son must now decide from the following three alternatives:
- Approving in-home care services that will likely deplete 70% of your net worth (his estate) over your lifetime, or
- Authorizing the high fees for very comfortable retirement care at home, which will likely deplete 50% of your net worth (his estate), or
- Moving you into the local retirement home that has recently recovered from a COVID outbreak, which will likely only deplete 20% of your net worth (his estate).
Which alternative will the son, who has a conflict of interest, choose? I often see choices being made that include the (POA)’s interest rather than what is best for the parent.
One alternative in the above situation would be to appoint an independent Attorney who has no interest in the parent’s remaining estate’s size. Another alternative is to name an Enduring Power of Attorney (EPA) who may have a conflict of interest but clearly understands their fiduciary duty is to look after you, regardless of the impact on your estate.
Using a Trigger in the Power of Attorney
About 90% of the Enduring Power of Attorneys I see in my planning practice include an embedded trigger. A trigger is something that must occur before the Enduring Power of Attorney (EPA) becomes effective. A common example is a clause that requires two doctors to sign off on the Donor’s incompetence.
In my view, a triggered EPA is often a mistake when viewed in context of a traditional long-term couple relationship. Why, in most cases, would you want your loving spouse to have you declared incompetent before they could help with your finances?
Contrast the following two scenarios. In both scenarios, a 68-year-old male has a debilitating stroke, leaving his wife of 45 years to look after the finances.
In the first scenario, the couple created POA documents several years ago, appointing each other as EPA immediately, with no requirement to have the donor declared incompetent before acting.
After completion, the POA documents were distributed to various financial institutions, brokers, banks, the CRA and other financial entities to enable the institutions to learn of the POA and to act on the spouse’s direction.
Next, the spouses required the various institutions to complete a transaction based on the instructions of the Attorney named in the POA. The institutions pushed back, but the spouse insisted, forcing the financial institutions to recognize the POA. This process took about a year to complete.
When the spouse had a stroke, the surviving spouse seamlessly assumed responsibility for managing the various financial assets.
Now compare that to the second scenario where a spouse could not do any of the work noted above in advance because the POA required a medical determination of incompetence before acting. This is not a great situation. After the spouse had a stroke, the remaining healthy spouse is forced to go through the same (often year-long) frustrating, institutional run-a-round while coping with the stress of caring for a partner who just had a stroke.
Don’t let a Joint Account lull you into a state of complacency. A Joint Bank Account can work when one party is incapacitated; however, just try selling a home that is in Joint Tenancy when one of the Joint Tenants has had a stroke… a court order will likely be required.
If you need to create a Power of Attorney, avoid these three mistakes. Don’t listen to your bank about getting a Bank POA or Joint Account. When a proper Enduring Power of Attorney is required, appoint someone to act for you that you trust and who understands what it means to be a Fiduciary.
Lastly, in a long-standing, trusting relationship, consider appointing your spouse as an Enduring Power of Attorney without a trigger so that you can ease the burden for each other if the unthinkable happens.