Powers of attorney: A different perspective

By Barbara H. Pietrowski CPA, CFP, PFS
Member, MACPA Personal Financial Planning Committee

As CPAs, we are often in the position of advising our clients to create powers of attorney so their affairs can be managed in case of mental and/or physical incapacity. The power of attorney is most often vested in a close family member; often, the attorney in fact is an adult child or children.

Most of us are trusting individuals and we assume a close family member is the appropriate individual to exercise control of our finances if we are unable to do so. Regrettably, I believe that an unrestricted power of attorney is, in many cases, an invitation to self-dealing. The ability to misappropriate the assets of another person is a temptation to which all too many people succumb.

I am not an auditor, but I know that having one person handle all the accounting functions of a business with no internal controls or oversight is an invitation to fraud. Unfortunately, just as the sweet, little old lady who handles your business accounting may be stealing large amounts with impunity, the dutiful child or the loving sister/brother may be doing the same thing. We expect our own family members to always have our best interests at heart, but sometimes our trust is misdirected.

If we find an employee is embezzling from us, we have the option of prosecution and possible restitution from whatever assets they may have. In the case of a broadly written power of attorney, with no restriction on the actions of the attorney in fact, we may have no recourse. If we have given another person unrestricted access to our money, to act in our stead in any and all instances, then if they decide to self deal, the only recourse we have is to cancel the power of attorney. This will stop the drain on the assets if the person who issued the power of attorney is mentally competent to revoke it, but the amounts that have been misappropriated are probably gone. In many state courts, recovery of misappropriated assets is unlikely from the attorney in fact, provided his/her actions are consonant with the terms of the power of attorney. If the grantor of the power of attorney is mentally incompetent, to remove the remaining assets from the hands of the holder of the power of attorney will require a competency hearing, revocation of the power of attorney and appointment of a guardian. In the end, the assets may be used to pay for attorney's fees for the family member who arguably misappropriated the assets in the first place.

I recommend the following provisions be placed in all powers of attorney.

The power of attorney ideally should be a joint power of attorney with two family members making joint decisions. No funds should be withdrawn from the accounts without both signatures.
Amounts expended must be used only for the health, maintenance, upkeep and welfare of the grantor of the power of attorney. Other expenditures should require the permission of the grantor in writing, and the grantor must be mentally competent to make this decision.
The power to gift assets might well be eliminated completely from the power of attorney. If the grantor is competent, the grantor can make his own gifts. If he is incompetent, preservation of the assets may be critical and no gifts should be made. If this power is included, it could be limited to no more than 2 to 5 percent of the assets annually. Reducing possible estate taxes should not be the paramount concern in handling the financial affairs of the grantor.
I believe there should be an annual review of all the accounts by an outside CPA. The attorney in fact should be required to provide complete records and documentation of all expenditures from the grantor's funds whether expended from the grantor's accounts or from the personal accounts of the attorney-in-fact.
Some restrictions on the ability to sell assets may be appropriate. Consult an attorney regarding this issue.
No power of attorney should give the attorney in fact unlimited discretion regarding the use of the grantor's funds, even if fiduciary law in that state implies limitations on the powers delegated by the grantor. Powers of attorney should be drafted by an attorney who is knowledgeable in this area. There should be extensive discussion of the grantor's wishes and expectations in the handling of their financial assets. Notes of these discussions should be preserved in case of later incompetence of the grantor.
For larger accounts, professional trustees may be appropriate although they will be expensive.

This content has not yet been Rated.

To Rate content, please Login.