Everyone should have a durable power of attorney in place, at least as long as they have anyone to trust to step in for them to handle financial and legal matters if they become incapacitated. We all are at risk of incapacity, whether from illness or injury, whether temporary or permanent. Of course, this risk rises as we get older.
Without someone in place to handle legal and financial matters, bills can go unpaid, contracts can’t be signed, homes can’t be refinanced, leases can’t be terminated, investments go unmonitored and unadjusted, and families often fight over who’s in charge. The remedy of seeking court-appointed conservatorship is expensive, cumbersome, and time-consuming. It’s best that you pick your own person or people for this role.
Nevertheless, however important taking this step can be, it’s not always enough. There are two reasons for this: the “staleness doctrine” and the fact that agents sometimes don’t step in until it’s too late. Both problems can be remedied through the use of a revocable trust.
The “Staleness” Doctrine
You won’t find the staleness doctrine in legal treatises. It’s just my name for the tack many financial institutions take to refuse to honor durable powers of attorney. They often reject older powers of attorney claiming that they can’t know whether they have been revoked since first signed. Sometimes they will require the drafting attorney to attest to the fact that the document hasn’t been revoked, even though the attorney may not have met with the client for many years and, of course, can’t know everything the client did during that time.
Financial institutions are uncomfortable honoring powers of attorney because they do not want to be held liable for any malfeasance by the agent appointed under the document. In the opinion of most estate planning attorneys, such institutional rejection is contrary to law, but there is no good remedy when this occurs since any lawsuit against the likes of Bank of America or Fidelity will be expensive and time consuming.
Fortunately, there are three ways to avoid this institutional intransigence:
- Refresh your documents periodically. Financial institutions are more accepting of newer documents than older ones, so it’s a good idea to execute new durable powers of attorney every five years. Of course, this is perverse. If the power of attorney is being used because of your incapacity due to dementia, you are more likely to have been experiencing cognitive challenges a year prior to its use than ten years earlier.
- Use the financial institution’s forms. Most banks and investment companies have developed their own durable power of attorney forms with which they are more comfortable than general ones you may have found on line or which your attorney prepared. Contact each financial institution where you have an account and ask whether it has a durable power of attorney form. You’ll still need a general durable power of attorney, since the financial institution’s form only governs accounts held there, but using its form should prevent any problems with its acceptance.
- Create a revocable trust. Financial institutions seem to accept revocable trusts more readily than durable powers of attorney. Revocable trusts have the added advantage that you can appoint a co-trustee to serve with you, which brings us to their second great advantage over durable powers of attorney.
As we discussed in last week’s post about choosing a financial advocate, as we age, we all become increasing susceptible to making financial mistakes and becoming victim to scammers. Having a financial advocate in place can help avoid both. An important step is to name an agent under a durable power of attorney. However, such agents often don’t step in until it’s too late — until the senior has already lost a significant amount of money.
A co-trustee on a revocable trust, however, is already named on the accounts in trust. Even if she doesn’t take an active role, she can monitor the accounts to make sure nothing untoward is occurring. Further, when it’s necessary to step in, the co-trustee can do so immediately and seamlessly. In contrast, an agent under a durable power of attorney must present his credentials to the financial institutions and go through its vetting procedure, delaying access to accounts to protect them from further siphoning off of funds or just to be able to pay bills on behalf of the grantor.
For these reasons, revocable trusts often work better than durable powers of attorney. However, two caveats are in order: First, trusts only control the accounts actually held by them. So, for it to work, you must retitle your accounts into your trust.
Second, even if you have a revocable trust, you still need a durable power of attorney. This is for two reasons: First, you may not have transferred all your accounts into the trust and will need to give your agent control over those accounts and the ability to transfer them into the trust. Second, the trust only governs financial matters. Your agent under your durable power of attorney can also handle legal ones on your behalf, including signing your income tax returns.