There are typically five essential estate planning documents that every family should have – Will, Living Trust, Advanced Directive, List of Beneficiary Designations, and Standby Guardianship (for those with minor children). I have explained these legal vehicles in earlier blog posts to varying degrees. In addition to the above key estate planning documents, there is also one other important document – the Power of Attorney (herein referred to as “POA” for short). Wills, Trusts and Beneficiary Designations govern what happens to your estate (and/or minor children) when you pass on. Advanced Directives, Standby Guardianship and POAs operate while you are alive.
A POA can be a particularly effective tool in emergencies, such as when you’re too ill to manage your own financial affairs and/or access urgently needed financial assets. Note that a POA is not limited to such “emergency” situations; many people give POA to their trusted advisors or friends and relatives even when they can make their own decisions. It’s simply that they prefer not to have to manage their financial assets on their own, and would rather someone with more expertise, time and inclination do so for them.
Power of Attorney - How It Works
The idea behind a POA is that the Principal (you) grants legal authority to the Agent (the person you name in your POA) to make decisions relating to your financial assets. Examples of such assets include your real estate, bank accounts, retirement and investment accounts and other financial assets, plus possessions (e.g. car, jewelry) that have monetary value. Your Agent can enter negotiations and make transactions and contracts in your stead as regards these assets. “Agency” is a longstanding legal concept and can be a powerful tool when used properly. When abused, it can bind you to contracts or transactions without your knowing, thereby putting your financial stability at risk.
A POA can be granted at any time. It doesn’t require that you become incapacitated to take effect. Certainly, it becomes a highly useful tool in emergency situations where you can’t manage your own finances, or access them for your family’s care. Given the current COVID-19 situation, some of my clients have made their Advanced Directives regarding their health care, AND created a POA to ensure that they have someone they trust to act as their agent in financial matters should they be hospitalized for a period of time (this is known as a “durable” POA).
Important: note that a POA gives decision-making power to your Agent over your financial assets. It must be distinguished from an Advanced Directive (Living Will or Health Care Proxy) that governs decision-making on your behalf as regards your medical well-being. In short, you can’t have a POA for your health care in New York State. You can read more about Advanced Directives in New York state here.
POA In New York State – The Legislation & The Statutory Short Form
The legislation governing your POA in In New York State is straightforward and comes with a short form you can use (click the link to see the statutory short form in its entirety). It is a useful read as it shows you the language to be used in a typical POA. The form also lists the financial issues/areas in which you can grant an Agent decision-making authority (e.g. bank accounts, insurance, real estate and other contractual transactions). You can use the form as it is, but it’s best to amend it as you see fit, such that it reflects your intentions clearly. That said, whether you use the statutory short form or a non-statutory one drawn up by yourself and/or your attorney, you must include specific statutory wording to make the POA effective.
Note that in some specific situations (e.g. pension benefits of the Principal who was an employee with New York State), a prescribed POA form is required. Talk to your attorney and financial advisor about what kinds of assets require a government-mandated form for a POA to be effective.
Durable vs. Nondurable POA
A nondurable POA is typically limited in time or circumstances. An example would be to make your trusted friend your Agent in a real estate transaction that you cannot attend to because you’re out of the country or otherwise unavailable for the duration of the matter. Nondurable POAs are limited in scope and stand on the specifics of time periods and/or the completion of a transaction. They are not “all-encompassing” like a durable POAs.
The other key difference is that a nondurable POA can’t be used in a situation where the Principal is incapacitated. Incapacity is governed by a durable POA, as set out in the legislation referred to above. What this means is that when you have a durable POA, your Agent can make financial decisions for you when you are incapacitated, whether temporarily or permanently. Last but perhaps most importantly, the Principal’s incapacity does NOT terminate the POA, unless the POA document expressly states that this is to be the case. In other words, when you give a durable POA to someone, that person can continue to make decisions on your financial assets when you are incapacitated. I say “most importantly” because it’s precisely when you are incapacitated that you can’t override your Agent’s decision. This makes the selection of your Agent(s) the most important part of setting up a durable POA.
Let’s imagine your sister, who is an accountant and well-versed in financial matters, has been granted POA by you as you are less confident of managing your money and assets yourself. As your Agent, she manages all your money matters even in “normal” times. And you do not require that she consult you every time she makes a financial decision about your assets. You later become incapacitated (e.g. coma due to illness). Your spouse or partner then insists that your sibling no longer act as your Agent, for her own reasons. How would this most likely be resolved?
New York law is clear that unless expressively provided for in the POA, incapacity does NOT terminate an Agent’s authority. If your POA document is silent as regards incapacity terminating your sister’s Agency powers, your spouse or partner have no standing to stop financial institutions from carrying out your sister’s decisions. For that, your spouse/partner will have to go to court to prove some lack of fidelity on your sister’s part i.e. that she has not acted in your best interests as regards your financial assets. In short, incapacity alone would not terminate an Agent’s authority unless the POA document says so.
Trust is Key (as is Ability)
You’ll see from opening the link above that a POA can be fairly detailed. At its broadest (durable POA), it can be all-encompassing in the legal decision-making power it gives an Agent. Even a nondurable POA can have far-reaching consequences when the financial matter or asset in question is a big one or the biggest of your asset base. When you grant someone POA, it is equivalent to them stepping into your shoes and taking over all decision-making as regards your financial assets. Properly thought through and constructed, you can have a POA that gives someone you trust attend to all matters, knowing that they will act according to what they understand to be your own wishes in any matter that arises, or at least in your best interests (as required by law). Or you could craft the POA such that the Agent’s decision-making power is limited to specific financial situations (in which case it would be prudent to consult your financial advisor together and your attorney).
That said, as with all estate planning, you have to decide for yourself what best serves your goals and protects your family. Estate planning attorneys like me can help guide you, and empower you with the knowledge you need to make informed decisions. We can also warn you of pitfalls and some of the problematic situations that arise when there is a failure to thoughtfully consider all options. In short, we can’t tell you who to pick as your Agent, but we can tell you what to look when selecting an effective agent. And in this, trust and ability are key.
Co-Agents and Back-up (“Successor”) Agents
As regards ability, sometimes, the person you trust to be your Agent lacks comfort with financial matters. The solution is simple -- you can divvy up agent responsibilities among two or more agents, provided you make this intention clear in your POA document/form. If you wish to allow each agent to act separately, then the POA must state this as well. Again, words reflect intentions and as in all legal documents, the specifics of your POA will guide a court (if there is controversy) as to who is/was allowed to do what.
Why would you appoint more than one Agent? One Agent may be perfectly capable of paying your bills, cashing your retirement or Social Security checks, and making small payments for your household/dependents to carry on with the lifestyle they already have. But that Agent may not be capable of making more complex financial decisions (e.g. investments, sale or real estate or business interests). Let’s say your family needs to free up cash quickly from certain assets (e.g. brokerage or investment account), but your Agent has little knowledge about this, and is uncomfortable with this kind of financial decision-making. In this case, it would have been prudent to appoint a co-Agent – e.g. a friend or relative who understands financial matters – who would consult with a financial advisor on the solution which would best serve your interests. Can one co-Agent overrule the other? No, unless you’ve specifically provided for it in your POA, or given each agent sole discretion in a specific area of financial management.
It may also be the case that the person(s) you pick to be your Agent(s) decline your request to take over your financial decision-making when the matters that need to be attended to start to get complex and challenging. These existing Agents may decide that they can no longer act for you. If so, you’ll need “back-up” alternative Agents (aka Successor Agents). Again, these “back-up” individuals must be clearly identified in your POA document, and if not, you must amend your POA document to give legal effect t.o the Successor Agent’s authority.
Spouses & Other Joint Account Holders
Let’s say you and your spouse or partner share a bank account that is used to pay for all expenses. As a joint account owner, your spouse/partner can access the funds with a need for a POA. Can you do so with all other financial assets?
It depends. You can’t, for example, make a spouse or other person a joint-owner of say, a 401k or IRA (IRS rules prohibit this, and for good reason – please consult your financial advisor o this). The workaround for this is to grant your spouse POA to make decisions on accounts where you are not joint owners. You can do the same with anyone else who you choose to be your Agent (e.g. sibling, trusted friend). Some financial institutions have their own legally enforceable forms for POA situations, but it’s best to run them by an attorney before utilizing their forms.
Formalities – Notary Public, Written Notice of Revocation
Your POA holds no legal weight unless it’s properly witnessed by a Notary Public. Having lay witnesses present when you and your Agent(s) sign it does not suffice. Again, your POA document must contain specific language as set out in New York legislation, whether you use the statutory short form or your own document (see above). Both you and your Agent(s) must sign the POA document before a Notary Public who will also append her stamp and signature to the document.
Under New York law, a POA extinguishes upon written notice of revocation by the Principal to the Agent (s) or by the Principal’s demise. You can revoke or terminate your Power of Attorney at any time and for any reason, as long as you are of sound mind. Such revocation or termination must be done in writing and sent to your Agent and any third-parties (e.g. financial institutions) that are impacted by the POA.
If you are no longer of sound mind, or are mentally incapacitated (e.g. dementia), a court can remove an agent for acting improperly. This, however, will involve your family or friends having to engage an attorney, and the situation is likely to be acrimonious and difficult (your family or friends will have to prove to the court that the Agent did not act in your best interests e.g. by accessing your funds for herself or willfully mismanaging them). Litigation is never pleasant and can be costly, time-consuming and above all, stressful to your loved ones.
As you will see by now, a POA is a powerful legal tool, that should be used only when you’re quite sure that the Agent(s) you pick can be trusted and relied upon to act in your best interests in your financial matters. It’s part of a family’s estate planning toolbox, especially during these strange times where all of us require safey-nets and back-up plans in order that we are ready for anything untoward.
Stay strong, healthy and be good to one another.
All my best,