My mantra as an estate planning attorney is “Estate Planning is all about planning for everything you own and everyone you care about – including yourself.” It’s this last concept that is most often overlooked in the process — there is a lot more to think about when you plan for the future than what will happen after you die. What if you become disabled? How will your business affairs be managed? Who will take care of you? How will you be cared for? How will your intentions regarding health care and end-of-life issues be made known? Who and how will determine when you are disabled? Properly drafted durable powers of attorney for both property and health care will make sure these intentions are carried out, and help avoid expensive and difficult guardianship proceedings.
A “power of attorney” is a document which allows you (as the “principal”) to name a person (an “agent”) to manage your affairs and act as your representative when a decision or action is required from a third party. They are referred to as “durable” powers of attorney because when the proper language is included, the agency survives the principal’s disability. So while POAs can be used to simply appoint someone else to, in effect, make decisions for you, these documents are usually reserved for the purpose of making sure the principal is cared for in the event he or she becomes disabled.
Because POAs have been created by statute, I rely on that legislation to prepare the forms I present to my clients. Illinois’ Power of Attorney Act has a recommended statutory form for both the POA for property (allowing the agent to make business related decisions) and for health care (allowing the agent to make health care and treatments decisions). Indiana’s statute does not prescribe a specific form, but clearly lays out the kinds of legal powers that can be delegated through a durable power of attorney, either for general business purposes or for health care.
I usually prepare estate plans when my clients are vigorous and healthy. They expect to live a long and fulfilling life. The estate plan therefore serves the same purpose as a life insurance policy – to plan for both the unforeseen and the inevitable. The POA is kept ready, in case disability strikes. In fact, when I draft powers of attorney relating to property or general matters, I usually include language that the agent cannot act unless proof of the principal’s disability (in the form of a letter from an attending physician) is produced with the POA. With both the doctor’s letter and the POA (which has been properly signed, notarized, and witnessed) in hand, the agent can approach the Bank or other financial institution and “do business” on behalf of the principal.
Recently, however, several clients have come to me complaining of problems connected with the use of a general/property POA for a disabled family member.
The scenario usually goes like this: the Client drafts and executes the POA at a time when they are healthy. Many years pass; sometimes 5, 10, or even 20 years go by. Suddenly, the client suffers a sudden, debilitating condition that incapacitates them — a stroke, a heart attack, or a chronic disease. Because the client was prepared, the agent named in the POA (usually a spouse or adult child) already has a copy of the POA and springs into action, obtaining the necessary certification of disability from the client’s physician, and then takes that certification with the POA to the client’s bank.
The bank, however, refuses to recognize the power or attorney. Despite the fact that the POA has been properly drafted, and the agent has produced what is necessary to prove his/her authority, the Bank will not allow the agent to access the bank accounts. The Bank will insist that the principal who signed the POA must come to the Bank in person to establish the agency relationship. If the principal is now disabled, this is impossible, creating a frustrating stalemate.
This shouldn’t happen.
The purpose of the Illinois Power of Attorney Act is clear. “[E]ach individual has the right to appoint an agent to make property, financial, personal, and health care decisions for the individual but that this right cannot be fully effective unless the principal may empower the agent to act throughout the principal’s lifetime, including during periods of disability, and have confidence that third parties will honor the agent’s authority at all times.” 755 ILCS 45/2-1. The Indiana Code states the same thing more succinctly, declaring that a power of attorney drafted under that law is presumed valid. IN Code § 30-5-3-2. Therefore, a properly drafted and executed POA is legally binding on third parties such as Banks.
An essential purpose of both the Illinois and Indiana Power of Attorney legislation is to fully protect third parties (i.e., people, financial institutions, healthcare providers, etc.) who rely on the agent and his/her authority, and release them from liability if they rely on a copy of the power of attorney in good faith and treat the agent as if they were dealing directly with a fully competent principal. 755 ILCS 45/2-8(a); IN Code § 30-5-8-7(a). A third party dealing with an agent named in a copy of a document purporting to establish an agency may presume to rely on the validity of the agency and the agent’s powers as reflected in the POA. 755 ILCS 45/2-8(c); IN Code § 30-5-8-7(c).
A Bank or other financial institution that refuses to accept or rely on a power of attorney risks significant penalties because any person who arbitrarily or without reasonable cause fails to comply with the direction of a duly appointed agent in accordance with the power of attorney is subject to civil liability for any damages resulting from noncompliance. 755 ILCS 45/2-8(d). Indiana’s statute goes even further. There, a Bank that refuses to accept the authority of an agent under a POA “shall pay” three times actual damages, attorney’s fees and any prejudgment interest. IN Code § 30-5-9-9(a). Therefore, agents under POAs ultimately have the threat of litigation against Banks that blithely refuse to follow the law.
The Bank does have one area where it can demand a certain level of verification from the agent. Both the Illinois and Indiana statutes provide that an agent can be required to certify, under oath, that to the best of their knowledge, the principal had the proper capacity to execute the POA, is alive, has not revoked, altered, or terminated the POA, and that the POA remains in full force and effect. Just like for its POA forms, Illinois has a statutorily prescribed from for this purpose. 755 ILCS 45/2-8(b). The Indiana law has no form, but provides for the same concept. IN Code § 30-5-8-7(b).
An affidavit to this effect should be sufficient for a Bank to rely on the agency. The Illinois act emphasizes that “good faith reliance on a document purporting to establish an agency will protect the reliant without the affidavit.” 755 ILCS 45/2-8(a). The Indiana statute says that “[a] copy of the power of attorney has the same force and effect as the original power of attorney if the attorney in fact certifies that the copy is a true and correct copy.” IN Code § 30-5-8-5. Therefore, it should not be necessary to produce the original document.
It might be worthwhile to include additional information in this affidavit. For example, if a spouse of the principal is the agent, it would be helpful for the certification to state that the spouse and the principal are not involved in a proceeding for legal separation or divorce. Also, if the power of attorney requires a physician’s certification of the principal’s disability, the agent should state that the triggering event has occurred. These additions would make the certification more palatable to a bank or financial institution.
Ultimately, a Bank that refuses to recognize a valid POA could be taken to court and made to comply, and pay for any damages the noncompliance caused. Perhaps the threat of such consequences might be enough to get the bank to cooperate.
But a little forward thinking might help avoid the conflict in the first place.
I am advising all of my estate planning clients to try and head off these issues. Even if the client is as young as twenty-one, or at any other age where they do not foresee any immediate health problems, once the POA has been executed, they should make an appointment with their banker and/or financial advisor. Bring the agent along with to meet the banker. At the meeting, share copies of the POA documents and explain all of your concerns. This way, the Bank will have the POA on record and be aware of the agency (or possibility of the agency) long in advance, and there will (hopefully) be no surprises from the bank if the principal is disabled.
There are some banking and financial institutions that insist on the use of their own forms for allowing an agent to have access to accounts or to do business on behalf of the principal. As stated already, a valid POA does not need to be questioned, and refusal by the bank could lead to its liability. But, perhaps these “in-house” forms can be dealt with at the time of this first appointment. As long as the in-house forms serve to supplement the POA, meeting the bank “half-way” should work. But be cautious. Some of these in-house power of attorney forms state that all previous powers of attorney “are revoked.” Such language could endanger the validity of the agency under the statutory POA. Language should also be included, either in the general POA, or in the in-house form, that any conflicting language between the two documents are resolved in favor of the client’s previously executed POA.
But if the agent only discovers that the Bank insists on having the principal execute its own in-house forms after the principal is already disabled, how can the stalemate be solved? One potential answer might already lie in the body of the POA itself. For example, paragraph 4 of the Illinois statutory form authorizes the agent to delegate discretionary decision-making powers. 755 ILCS 45/2-8(d)(4). This allows for the agent to execute the in-house forms on behalf of the principal. In order to make sure this concept will work, I recommend adding this language to the POA form: that the agent shall have explicit authority to execute such excluded powers of attorney on behalf of the principal.
In addition, I have also had clients recently complain about misunderstandings with banks when they have already had this initial appointment and introduced the POA and the agent to their bankers. Often, my clients will add the agent’s name as a co-owner, with signature power on their bank accounts, both for the convenience of allowing the agent access to the funds upon disability, as well as allowing the account to pass to the agent (if the agent is also an heir) without having to submit the account to probate at the time of death. (This is because property in joint tenancy passes to the surviving joint owner as a matter of law, and does not require probate to change ownership). In an earlier article, I have warned about the dangers of relying on joint tenancy as an estate planning tool (see Helping Seniors Avoid the Pitfalls of Do-it-Yourself Estate Planning), but joint ownership or “transfer on death” designations to facilitate the passing of banking or investment accounts to the next generation can be both prudent and convenient.
The problem stems from how the banker understands what the client is trying to do.
If the principal under the POA presents the document and introduces the agent, asking for the agent’s name to be added to the account, the banker will probably not presume the principal intends the account to be in joint ownership. Even if the agent is an adult child of the principal, the bank is going to be careful with the “ownership” designation. An agent under a POA is a fiduciary; the presumption is the agent will not and cannot use his/her position for personal gain. Therefore, the bank will not make the agent a joint owner with right of survivorship unless the principal makes this intention absolutely clear. Several of my clients have expressed frustration to discover that even when they have taken their elderly parent in to the bank to establish the agency relationship with the POA document, after the parent has died, the Bank will not give them access to the account. This is because the Bank presumed that the agency was all that was intended. After the principal’s death, the POA has no effect, and if the joint ownership was not properly established, the bank account will likely need probate to be transferred to the heirs.
In any event, there is no reason a bank should reject a validly executed power of attorney, and if this happens, the threat of legal action might convince the bank to cooperate. However, if the problem can be avoided altogether by bringing the POA and the agency relationship it creates to the Bank’s attention in advance, then perhaps you can avoid these kinds of conflicts at a time when its essential to make sure your agent’s power to help you is completely unfettered.