Wednesday, March 25, 2009

Practical Drafting Tips--Financial Powers of Attorney

This entry refers you to actual language I put in my financial powers of attorney.

In Wilson Rawl’s Where the Red Fern Grows, Billy says of his small hunting dog Little Ann, “Dynamite comes in little packages.” In my opinion, the small, throw-away document known as a "General Durable Power of Attorney" or "financial power of attorney" is a little package of dynamite. Inadequate financial powers of attorney are at the heart of numerous explosive, expensive, and painful probate cases. At the same time, carefully handled, I think financial powers of attorney are as important and powerful in doing good as revocable trusts and demand as much attention.

I recently read an informative article about powers of attorney written by Linda S. Whitton, titled “Durable Powers as an Alternative to Guardianship: Lessons We Have Learned.” The article is found in 37 Stetson L.Rev. 7 (2007) and was revised in August 2008. The article can be downloaded from here

In sum, Ms. Whitton's article states three lessons learned about powers of attorney (I have changed the order):

1. A Power of Attorney is Only as Effective as the Willingness of Third Parties to Accept It.

2. A Power of Attorney is Only as Protective as the Agent is Trustworthy.

3. A Power of Attorney will Not Prevent Family Power Struggles over the Principal’s Assets.

That first lesson is spot on (as the Aussies say). If a third party refuses to accept a financial power of attorney, then the power of attorney is not very effective.

A word about this first lesson in terms of Utah law. As of the date of this entry, there is no Utah statute or Utah judicial decision that requires a third party to accept a financial power of attorney or that offers any statutory redress against a third party for unreasonably refusing to accept a financial power of attorney. Utah statutory law governing financial powers of attorney is quite basic, essentially recognizing and authorizing the use of financial powers of attorney, but not much more. (U.C.A. §75-5-501 to 504.)

Therefore, in Utah, if a client is incapacitated and if third parties will not accept a durable financial power of attorney signed by the client, then the named agent has only two options: the agent can sue the third party to force acceptance of the power of attorney or seek a conservatorship.

So the question is, what can be done in Utah to encourage third parties to accept financial powers of attorney?

I have asked the legal departments at Zions Bank, Wells Fargo, U.S. Bank, Key Bank, and Mountain America Credit Union what they are looking for in financial powers of attorney that encourage them to acknowledge the agent’s authority to access the principal’s accounts. The responses are summed up as follows:

1. First, are the formalities honored? Is the document signed and notarized? (A few of the legal departments said they would be impressed if the principal’s signature was witnessed, even though there is no statute requiring witness attestation.)

2. What is the liability of the third party in accepting or rejecting the power of attorney? The less liable these third parties are, the more likely they said they would be in accepting the agent’s authority under the power of attorney.

3. How recent and well-organized is the document? The more “fresh” and readable the power of attorney is, the more likely these third parties will accept it.

With these ideas in mind, I suggest that financial powers of attorney include language at the very beginning of the document that releases third parties from liability for accepting the agent’s representations regarding the validity of the power of attorney (and places liability for abusing the principal or the power of attorney squarely on the agent). I suggest this language include clear language as to what third parties are and are not obligated to do in accepting a financial power of attorney. I have presented such language in my website under “Practical Drafting Tips,” which can be accessed at estateessentials.com

In regard to Ms. Whitton’s second lesson about the importance of trustworthy fiduciaries: again, spot on. Perhaps more on that in another blog.

As to Ms. Whitton’s third conclusion, I disagree. I disagree based on personal experience. Yes, Ms. Whitton is correct that a power of attorney in itself will not make controlling family members suddenly loving, giving individuals. However, I am convinced that a well-drafted power of attorney, required acceptances, and communication can keep the urge to control from raging out of control.

To this end, my clients have liked the term in my latest financial power of attorney requiring (during a limited time period after the client’s incapacity and upon pain of being disinherited at the client’s death) that all interested beneficiaries sign a document acknowledging the validity of the power of attorney and agreeing to be bound by all its terms. The document’s terms then include strict requirements imposed on both the agents (such as strict accounting and investment requirements) and the beneficiaries (such as strict requirements prohibiting the beneficiaries’ personal use of the client’s assets). I have personally experienced in meetings with an incapacitated client’s family how these terms and requirements defuse initially very tense situations that undoubtedly would have escalated into litigation with less thoughtful planning.

In sum, financial powers of attorney are as dangerous as poorly-handled dynamite if not well-drafted and thought out. But if carefully conceived and communicated, the financial power of attorney can effectively protect the client upon his or her incapacity, avoid the hassles associated with conservatorships (especially recently here in Utah), and preserve family relationships, or at least prevent poor relationships from disintegrating further.

Craig E. Hughes
As always I am interested in any comments you wish to post. Please keep them civil! Or feel free to call me. Please also review the Disclaimer at the top of the blog, which Disclaimer applies to this entry.

1 comment:

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