Who Do You Trust With Your Money? (Part One – The Effective Date)

“Whom do you trust?” is the most challenging question for people planning their estates. This question arises because we each need to rely upon others for support in times of crisis or illness. We wonder who we trust to be honest, fair, reliable, and diligent. Designating an agent involves careful consideration of when, how, and why they will use their powers. Particularly when executing powers of attorney, we need to both select people we trust and craft documents that anticipate less than trustworthy behaviors.

I shall explore this issue in several parts when the power of attorney becomes operative, how conflicts of interest are addressed, and the optimal number of agents appointed.

Creating wills, trusts, and powers of attorneys require an answer to the “who do you trust” question. These documents require the selection of a fiduciary, a person who is entrusted with powers to make decisions that would otherwise be reserved to the individual.  In a power of attorney, the fiduciary is called an agent. The person giving the power to the agent is called the principal. The agent has a duty to be loyal to the principal. The agent must preserve and protect the principal’s assets.

For the average healthy adult, the power of attorney document is important should there be disabling illness or incapacity. For healthy middle-aged adults, the possibility of illness or injury is far greater than the chance of dying at any given time.

Attorneys offer clients a power of attorney document to designate whom they will rely upon when ill or when an injury occurs. The standard durable power of attorney form appoints an agent upon its execution. In other words, one names an “agent” to serve whose powers are effective at the time of signing and continuing thereafter. The term “durable” refers to the ongoing authority to act, even after the principal has become incapacitated.

Why would you want to name an agent to act on your behalf before you are ill or otherwise incapacitated? You name an agent now so that there is a smooth transition at the time you are unable to make decisions for yourself.

The alternative to the standard durable power of attorney is for an agent to first prove that the principal is incapacitated before the agent can act. To do so, the power of attorney must have first set out a standard by which the agent obtains authority. This is called a “springing” power of attorney.

The springing power has fallen out of favor because it is difficult to use. Before the agent can act, there must be proof that the principal is disabled.  This standard is typically a written certification of incapacity by a medical professional. The standard must be carefully written; separating physical disability from mental disabilities and considering psychological impairment differently from cognitive impairment. With all these considerations it is difficult for a medical professional to certify incapacity. And then it gets more complicated.

Doctors worried about liability will hesitate to declare an individual incapacitated. Generalists may defer to specialists. Institutions may have restrictive policies. And HIPAA regulations may prohibit the doctor from sharing protected medical information! If a real emergency exists, your agent under a springing durable power of attorney might not be able to get timely access to file your taxes, complete a transaction, or pay an invoice.  Accordingly, the springing power of attorney is a deeply flawed approach.

Attorneys generally agree that springing powers of attorney are a poor choice if not an example of attorney malpractice.  The danger lies in no one being available to serve as an agent if incapacity cannot be proved. With the durable financial power of attorney, an agent stands at the ready to advocate for and protect the rights of the principal.  The rewards of a durable power of attorney far outweigh the risks.

There is always some concern about abuse associated with powers of attorney. That risk is minimal while the principal is aware and alert. While healthy the principal would know if the agent has performed well or abused their power of attorney. Therefore, the “whom do you trust” question could be insignificant while the principal is healthy because the agent’s actions can be reviewed. The principal can even hold tightly to the original power of attorney document so that the agent has no original document to present to financial institutions, lessening the chance of abuse.

The greater concern will always be with how the agent performs when the principal has diminished capacity. The potential for misconduct is great. The agent may be acting without any oversight or reporting requirements. However, there is increasing awareness regarding financial abuse, particularly with regard to elders. Going forward, it is critically important to both select a trustworthy agent or agents as well as draft clear and complete documents.