Power of Attorney for Financial Decisions

Power of Attorney for Financial Decisions

People sign powers of attorney for financial decisions (“POA”) in the presence of a notary public so that other individuals can make financial decisions for them.  Typically, people want someone to make financial decisions for them if they are incompetent or unable to complete the transaction themselves.

For example, a truck hits Chris and she is left in a coma.  Chris cannot make financial decisions for herself.  If Chris signed a POA and named someone to make financial decisions for her, then the named individual could pay her bills while she could not pay them herself. 

1.     Married Couples Cannot Make Financial Decisions Just Based on Married Status.

Many married couples erroneously believe that they can make financial decisions for their spouse based on their married status.  A married individual does not have any “spousal” rights to make financial decisions for his or her spouse.

For example, David and Martha own a house.  David wants to sell the house.  Without Martha’s signature or a POA naming David as her attorney-in-fact, the title company will not close the deal.

2.     Terms.

The person signing a POA is called the “principal.” The person named to make financial decisions for the principal is called the “attorney-in-fact.” An attorney-in-fact does not need to be an attorney at law.  The principal should name someone they trust and who acts financially responsible to serve as the attorney-in-fact, since the attorney-in-fact’s actions will bind the principal.

A POA should state that it is a durable power of attorney.  A durable POA merely means that it remains effective even if the principal becomes incompetent.  The POA should state that the POA remains effective even if the principal becomes incompetent.  A nondurable power of attorney terminates if the principal becomes incompetent.

A POA can be either a general POA or a limited POA.  A limited POA allows the attorney-in-fact to care for one specific matter such as selling a car or purchasing a house.  A general POA generally states that the attorney-in-fact can do anything that the principal can do on the principal’s behalf.

3.     When Effective.

A POA for financial decisions can be made effective immediately, upon the disability of the principal or for a specified time period.  Sometimes financial institutions such as banks and brokerage firms do not want to accept a POA that is only effective upon disability.  A POA that is effective immediately shows the financial institutions that the principal trusts the attorney-in-fact.  Financial institutions accept a POA made effective immediately more readily than a POA made effective upon disability.

If a person has a concern about a financial institution accepting a POA, then they should ask the financial institution if it will accept the POA.  In addition, some financial institutions want to see some very specific language in the POA, especially relating to brokerage accounts, stocks and mortgages.

Washington state law has tried to make it easier for a person to have a POA accepted. The law provides a seven business day timeframe for determining whether it will be accepted initially, an additional five day determination period after a certification has been signed and submitted, and the ability for the attorney-in-fact to obtain a court order confirming the validity or mandating the acceptance of the POA. An attorney-in-fact can potentially receive reasonable attorneys’ fees and costs in any court action to confirm the validity or mandating the acceptance of the POA.

4.     Guardianship.

If an individual does not sign a POA and the individual needs someone else to handle his or her financial affairs, then a guardianship proceeding is commenced in the court.  A guardianship proceeding, generally, is not a satisfactory way of handling an individual’s financial affairs.  Guardianship proceedings tend to be costly, time consuming, and require an annual accounting of the incompetent individual’s assets to the court.  To avoid guardianship proceedings, all individuals, young or old, should sign a POA.

5.     Guardianship for Minor Children.

Parents may name who they would want to act as the guardian of their minor children in their POA.  The guardianship provision for minor children would generally come into effect only if both parents are incompetent and unable to act.  The guardian for a minor child does not have to be the same person chosen to be the financial attorney-in-fact.

6.     Powers of Attorney-in-Fact.

A POA can state that the attorney-in-fact can do everything that the principal can do.  With broad general language, the attorney-in-fact could make most financial decisions for the principal, such as enter into contracts, run a business or sell or buy real property.  However, a POA must specifically list the following powers for an attorney-in-fact to make decisions on those items for the principal:

a.  Create, amend, revoke or terminate an inter vivos trust;

b.  Make a gift;

c.  Create or change rights of survivorship;

d.  Create or change a beneficiary designation;

e.  Delegate some but not all of the authority granted under the power of attorney, except as otherwise provided in RCW 11.125.110(1);

f.  Waive the principal’s right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan;

g.  Exercise fiduciary powers that the principal has authority to delegate;

h.  Exercise any power of appointment in favor of anyone other than the principal;

i.  Create, amend, or revoke a community property agreement;

j.  Cause a trustee to make distributions of property held in trust under the same conditions that the principal could;

k.  Make any other provisions for the nonprobate transfer at death contained in nontestamentary instruments described in RCW 11.02.091;

l.  Make health care decisions for the principal, or give informed consent to health care decisions on the principal’s behalf.

For example, Martha, who owns assets worth $12,000,000, develops dementia so that she cannot handle her own affairs.  Until Martha could no longer handle her own affairs, she gifted the maximum amount that could pass annually without gift tax ($15,000 in 2020) to each of her children annually.  Martha signed a POA stating that her attorney-in-fact could do anything that she could do herself, but it did not reference the power to make gifts.  Martha’s attorney-in-fact cannot continue the annual gifting to her children.

In comparison, Martha’s POA includes the provision that the attorney-in-fact can make gifts following her pattern of gifting in the past.  The attorney-in-fact can continue to make the gifts to Martha’s children.  In 2020, each $15,000 annual gift would reduce the federal estate taxes on Martha’s estate by approximately $6,000 if she died in 2020.

The IRS will not recognize any gifts made by an attorney-in-fact if the POA does not specifically mention a gifting power.  This means that even if an attorney-in-fact made annual exclusion gifts to the principal’s children, the IRS includes the value of those gifts in the principal’s estate for estate tax purposes.

For example, Martha owns assets worth $12,000,000.  She signs a POA naming David as her attorney-in-fact.  The POA does not include the specific right to make gifts.  A truck hits Martha, leaving her in a coma.  David gifts $15,000 to each of her 4 children and 8 grandchildren.  Shortly after David makes the gifts, Martha dies.  The IRS will include the $180,000 in gifts in Martha’s estate.

7.     Recording a POA.

If an attorney-in-fact uses a POA to transfer title to real estate, then the POA must be recorded with the county auditor where the real property is located.  A benefit of recording a POA with the county auditor is that if the original POA is lost, a certified copy can be obtained from the auditor.

For example, a truck hits Chris and leaves her in a coma.  Martha, her attorney-in-fact, cannot locate the original POA signed by Chris.  Martha can obtain a certified copy from the auditor if Chris recorded the POA.  If Martha needed to provide an original POA to a financial institution or a title company, she could use the certified copy.

8.     Terminating a POA.

A POA automatically terminates upon the principal’s death.  A principal can also terminate or revoke a POA by providing written notice to the attorney-in-fact.  A revocation or termination must be recorded with the auditor’s office where the principal recorded the POA.  A POA between spouses or domestic partners is automatically terminated when a person files for dissolution, annulment or legal separation from his or her attorney-in-fact.  However, the POA will be reinstated if the dissolution, annulment or legal separation is dismissed with the consent of both parties or petition for dissolution, annulment or legal separation is withdrawn.

9.     Conclusion.

A POA for financial decisions allows a person to choose who will make financial decisions on their behalf.  A POA can also avoid a guardianship proceeding if the person becomes incompetent or unable to handle his or her own affairs and can be used to appoint a guardian for a minor child if neither parent can care for the child.

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