Before attending law school, I worked for the Navy. Jack Cabana, then a mentor and colleague, once told me a story that ended with the following quote: “possession is nine-tenths of the law.” This quote applies well to an often overlooked but very important estate planning piece—the Durable Financial Power of Attorney (DFPOA). This document primarily aims to allow an incapacitated person’s agent to make financial decisions for the incapacitated person without court approval. Unfortunately, many people have old or poorly drafted DFPOAs, and these often lead to problems. This is because it doesn’t really matter whether the DFPOA is valid; the question is whether the bank or other third-party custodian will accept it and allow the agent to do what needs to be done. “Possession is nine-tenths of the law.” The bank or third-party custodian “possesses” your client’s money. If the bank or custodian refuses to accept a client’s DFPOA, the only option is to go to court, which is exactly what the client was trying to avoid with the DFPOA. If you are an accountant or financial advisor and have a client who has a DFPOA drafted more than a few years ago, there is a very good chance it will not serve its purpose if and when it’s needed.
A bank and third-party custodian’s primary reason to reject a valid DFPOA stems from lawsuit fears. What if the client revoked the DFPOA—how will the third-party custodian know? To be safe, most banks and third-party custodians typically take either of two approaches: they refuse to accept DFPOAs that are more than one or two years old, or they only accept their own DFPOA forms.
Before sharing advice to pass on to your clients regarding DFPOAs, it is important to understand two important issues. The first is whether your client’s DFPOA is effective immediately or has a springing power. Effective immediately means that the agent can act any time, even if the client is not incapacitated. A DFPOA with a springing power only becomes effective once the client is deemed incapacitated. Many older DFPOAs that I see in my practice are springing, though I almost always recommend making DFPOAs effective immediately, as they are much more efficient. (If you can’t trust your agent while you are alive and well, why would you trust them when you are incapacitated?)
Second, all DFPOAs are not equal. Most authorize the agent to use basic powers. Unfortunately, many DFPOAs are too basic and miss key issues that may become important later. For example, one client with an older DFPOA tried to act as agent for his wife who has dementia. But the credit union said the banking power in her DFPOA applied only to banks, not to credit unions, and refused to accept it. Another key element missing from many DFPOAs deals with the planning necessary to obtain government long-term care assistance such as ALTCS (Arizona Medicaid) and VA Aid & Attendance benefits. A DFPOA that lacks these elements likely will limit a client’s opportunities to take advantage of ALTCS and VA planning opportunities. In some cases, it may even prevent a client from ever being eligible for ALTCS.
If you are an advisor, how can you protect your clients?
- Recommend that your clients complete their banks’ and financial institutions’ DFPOA forms. The bank and financial institution will continue to accept this form until the client revokes it. The third-party DFPOA should not replace the client’s general DFPOA, but instead supplement it. Note that these third-party DFPOA forms will almost certainly need to be effective immediately, which can be an issue if the client does not want the agent to have any power unless the client is incapacitated.
- If a client has a DFPOA more than a couple years old, encourage them to contact their attorney to see if they should obtain a more current one. Our clients automatically receive a new DFPOA every two years at no additional cost as part of our Client Care Program.
- Review the client’s DFPOA to ensure it addresses planning for ALTCS (Medicaid) and VA Aid & Attendance benefits. If you have questions whether the DFPOA has the necessary language, consult the attorney who drafted the form or contact our office for a courtesy review.
By encouraging your clients to take a few simple steps now, they may be able to avoid significant headaches later.