During an initial consultation with our private wealth management team, one of the key areas explored is the status of our future client’s estate planning documents. In addition to exploring wills and trusts, we also ask about any Power of Attorney (POA) documents that may be in place. We have seen POAs misunderstood or problematic in several scenarios.

Before we share the top four mistakes our team sees, let’s define some key terms:

What is a Power of Attorney (POA)? A POA is a legal document that gives written authorization to an attorney-in-fact allowing him or her to act on a principal’s behalf. The POA document usually lists “powers” that the attorney-in-fact is allowed to exercise.

What is a principal? A principal is the person granting the authority. In the POA document, the principal names his or her attorney-in-fact; that is, the person whom they want to act on their behalf.

What is an attorney-in-fact (AIF)? An AIF is the person to whom the principal has granted authority; that is, the person who may act on the principal’s behalf.

Are there different types of POAs? Yes. There are four main types of POAs:

1. Limited

2. General

3. Durable

4. Springing.

When does a POA terminate? The only POA that continues to allow the AIF to act once the principal is incapacitated is a Durable POA, of which a Springing POA is one. The authority granted to an AIF by Limited and General POA documents ceases once the principal becomes incapacitated. In all cases, an AIF’s authorization ceases when the principal dies.

With those definitions in mind, here are four common mistakes regarding POAs that our team has seen over the years:

1. NO POA IN PLACE.

Not having a POA properly executed is a problem. Sometimes we will meet with people who have a trust, or trusts, and think that their trustee is all that is needed. Unfortunately, the trustee only has authority over assets titled in trust, and often people have assets that are held outside of the trust. Should the client become incapacitated, without proper documents in place our team is likely unable to take instructions from another party on their investment accounts with us. This can be especially problematic if funds are needed to pay for medical expenses, etc.

2. POA NOT CURRENT.

It is not uncommon for someone to go through the exercise of executing a POA, or POAs, and then never reviewing. If the AIF named in the POA has died and the document did not name a successor, the principal can find themselves in a difficult spot, especially if they became incapacitated.

3. NOT UNDERSTANDING WHEN THE POA IS IN FORCE.

Some POAs are effective immediately, while others are springing and only become effective once an event occurs. For example, a Springing POA may be triggered by the principal’s confinement to a nursing home. We have talked with prospects who thought they had authority to act on behalf of a parent, for example, and did not realize that the POA had not given them that authority yet.

4. NOT WORKING WITH AN ESTATE PLANNING COUNCIL TO CONSTRUCT THE POA.

We have seen this scenario more frequently over the past 10 years than prior. Whether people feel that they don’t have time to work with proper legal counsel, feel that they can save money by finding a document online and editing it themselves, or decide to reach out to counsel whose practice does not include estate planning, the end result can be problematic. One of life’s lessons is often that you get what you pay for. The potential to save a little money upfront can have disastrous consequences later when you really need the document to grant the intended authority.

BE SMART

Although our team works with legal documents like POAs on a regular basis, we are not licensed attorneys and do not provide legal counsel. Instead, we work with your qualified advisors like your estate planning attorney to help assure your lifestyle and legacy. If your current advisors are not a complete resource, or if you are seeking another opinion, give our team a call. We’d be happy to help.