A Durable Financial Power of Attorney (aka General Power of Attorney or Financial Power of Attorney) designates and authorizes an Agent (aka attorney-in-fact) to handle your financial matters in the event (1) you are not able to do so yourself, or (2) immediately, depending upon your designation. If you do not have a Financial Power of Attorney no one has default authority to handle financial matters on your behalf, including a spouse. Without a valid financial power of attorney in effect at time of need, a Court may need to appoint a Conservator over your assets. Conservatorship is an often lengthy and expensive legal proceeding under which the Court, not you, will designate another to handle your financial matters and account to the Court and your family for so-doing. Every adult, age 18 or older, should have a Durable Financial Power of Attorney in effect. This is a simple, but important and powerful, legal document.
Without a financial power of attorney, the following can happen:
Your Bank and Investment Accounts
Typically only those named on an account (i.e. checking, savings, money market) will have access to the account. A financial power of attorney will allow your agent to access the account, but in a fiduciary capacity and there is no change in ownership of the account. Frequently we see people add another person on their account as a joint owner for the purpose of writing checks, paying bills, etc. in the event they are not able to do so. This is not the recommended course of action since the person added will be treated as an account owner, which may have unintended consequences. The person being added may need to file bankruptcy or be subject to garnishment proceedings at a future date, which means the amount in the account will be at risk from that person’s creditors. If the person being added decides to use the funds in the account for their own benefit, it would be difficult to prove that person was not authorized to do so. If that person is only able to access the account as an agent under a financial power of attorney and makes these same transactions, there are more legal protections in place, as provided by statute with criminal and civil penalties.
There may also be unintended testamentary consequences in the following scenario: Mom has 3 children and adds the local child to her bank account. Her intent is for the 3 children to inherit all assets of her estate in equal shares. However, the local child may argue that Mom added her on the account because Mom wanted her to have the proceeds in the account upon her death. The other 2 children not on the account may have to go through the trouble to prove this is not Mom’s intent. Had Mom signed a financial power of attorney allowing local child access to the account when needed, there would be no question as to ownership or gift.
With investment accounts (and bank accounts, to a lesser degree), having another person listed on your account that does not truly own the investments can be problematic for tax purposes. There are specific reporting requirements and realization of capital gains (and losses) that need to be considered. Having an agent under financial power of attorney assist with the management of the accounts is beneficial, and especially during times where it is advisable to buy or sell securities.
In the event no one other that you are listed on the account and there is no power of attorney, no one is able to access the account without legal authorization. This means that someone will have to file a petition with the court to request conservatorship. In a crisis situation (i.e. payment has to be made immediately), an emergency petition may be required. Depending on your incapacity, you may not be able to voice your position as to whether the person requesting access is someone you would like to handle your finances. Your financial affairs may be handled by someone who has a very different idea from how you have handled your finances.
Unlike bank accounts where one owner may manage and have access to the whole account, with real property the property owner is able to manage only their own interest in real property. For example, husband and wife own their home as community property with right of survivorship and husband has disabling stroke. Wife wants to sell or refinance the home, but husband had no financial power of attorney in place pre-stroke and now lacks capacity to execute such legal instrument. While wife has authority to sell or refinance her ½ interest; wife has no legal authority to sell or refinance husband’s ½ interest. Under these circumstances, wife would have to obtain Conservatorship over husband’s interest in real property.
Your Retirement Accounts
A retirement account must be owned by one individual during his or her lifetime. As such, if you have a retirement account there is no one with legal authority to manage your retirement account upon your disability, without financial power of attorney, and Conservatorship will be required. We often see cases where the individual has a Trust and has placed all other assets into trust. The Successor Trustee will be able to manage the trust owned assets, but not the retirement account(s).
Your Income Stream
A Financial Power of Attorney is critical when dealing with an income stream. Even those who have created a trust to hold their assets and funded the trust will not be able to properly plan for receipt of their income stream without a Financial Power of Attorney. Your named agent will be able to accept and endorse checks on your behalf.
It should be noted that the Agent will only have the specific authority to act, as set forth in the power of attorney document itself. A thorough financial power of attorney is a must as part of a complete estate plan. Contact our office to get started on your own Financial Power of Attorney or to review your existing document, in order to ensure peace of mind that your finances will be handled properly if the time comes and you need assistance. You do not want to be subject of an expensive Conservatorship proceeding, nor do you want to put those you care about through the process.
- Letty Segovia, Esq.