3 Essential Questions to Ask When Preparing a Power of Attorney for an IRA
By Jeffrey Levine, IRA Technical Expert
Giving another person the ability to make significant financial decisions and/or take actions on your behalf is not an easy thing to do. That said, various situations may arise where you no longer want to, or are able to, manage your own finances. In such cases, you want to make sure someone else can act on your behalf.
Typically, this is done via what’s known as a Power of Attorney (POA) document. This form, which is generally prepared by an estate planning attorney, grants a person – known as your attorney-in-fact (or agent) – the ability to step into your shoes and make what are often critical and important decisions.
Clearly, great thought should be given to whom you name as your attorney-in-fact. All too often though, that’s where the thought stops. In reality, a commensurate level of thought and discussion should take place regarding the document itself and the provisions that are incorporated into your POA.
#1 -What Kind Of POA Do I Want To Create?
All powers of attorney are not the same. In fact, there are a number of different types of powers of attorney. Durable powers of attorney, for example, are probably the most common type of power of attorney and generally take effect once the POA document is executed. In other words, this type of POA is generally effective both before and after you are incapacitated or otherwise unable to make pertinent decisions.
Another type of POA is known as a springing power of attorney. Springing powers of attorney have that name because they “spring” into effect once a certain triggering event has occurred. For instance, you might create a springing power of attorney that only gives your attorney-in-fact their authorized powers if you become incapacitated or become cognitively impaired.
Chances are that when/if you execute a POA, it will be with the idea in mind that your attorney-in-fact will only act on your behalf if you are unable to do so on your own. That might lead you to believe that a springing power of attorney is best for you, but that’s often not the case for a variety of reasons.
For example, let’s say you create a springing power of attorney that only gives your attorney-in-fact powers over your IRA in the event you are incapacitated. How are your financial professionals and institutions supposed to know that you are, indeed, incapacitated and that your attorney-in-fact can legally act on your behalf? To protect themselves from potential lawsuits, they may require one or more physicians to certify your incapacitation and to provide them evidence of such in writing. Needless to say, it might take a fair amount of time between your incapacity and when your attorney-in-fact is finally able to act on your behalf.
What if changes to your accounts need to be made during that gap? What if the deadline to take one of your required minimum distributions is quickly approaching or voluntary distributions are needed to pay for some of your medical bills? Due to concerns like these, durable powers of attorney are the preferred document of many estate planning professionals.
#2 - What Powers Do I Want To Grant To My Attorney-In-Fact?
When/if your attorney-in-fact is able to act on your behalf, what type of powers do you want them to have? Do you, in essence, want them to step into your shoes and give them full control to make any decisions and/or changes to your accounts as they see fit? If so, what you’re describing is a POA that grants general powers. Indeed, most POAs are written this way so that an attorney-in-fact is able to address as many potential issues as possible. After all, the whole purpose of the POA is to be able to act on behalf of another. So if a POA does not have the appropriate powers, it doesn’t really do much good.
On the other hand, it’s possible to more narrowly define the powers you grant your attorney-in-fact. Such documents are often called “limited powers of attorney.” For example, you might have a child that you would like to oversee your investment decisions, but you do not want that child to have the power to change the named beneficiaries of your accounts. A limited power of attorney could be drafted in such a situation to help achieve these goals.
When considering POAs in the context of IRAs in particular, you may want to consider whether your attorney-in-fact should have the power to:
- Make investment changes on your behalf
- Take distributions from your account (generally a taxable event)
- Make changes to your beneficiaries
- Make Roth conversions
- Move funds to a different institution
#3 - Will My Financial Institution Honor My Own POA Or Do I Need To Use One That They Provide?
You can hire the best estate planning attorney in the world to draft an exquisite POA document that perfectly captures all of your goals and intentions, but if your financial institution refuses to honor the document when it becomes necessary for your attorney-in-fact to take action, your POA will pretty much amount to some very expensive kindling. Don’t let this happen to you.
If a POA is part of your overall plan – and in virtually all cases it should be – then one of the first things you should do is check with your financial institutions to see what their policies and procedures are. Typically institutions will have one of the following policies:
- The institution will have its own POA document that must be completed in good order and on file with the institution before your attorney-in-fact will be able to act on your behalf. If you have a customized POA that was created by an attorney or other similar document, it will not be accepted.
- The institution will have its own POA document that you may choose to use, but it will also accept customized POA documents. As long as either is submitted in good order and on file with the institution, your attorney-in-fact will be able to act on your behalf.
- The institution will not have its own POA document, but will accept customized POA documents you have prepared elsewhere. As long as your POA is submitted in good order and on file with the institution, your attorney-in-fact will be able to act on your behalf.
Note: Although it would be highly unusual, it’s possible that your financial institution could refuse to accept all forms of POA documents.
Obviously, it’s important to know your financial institution’s policies to make sure your plan can be executed as intended. For instance, in many cases, the POA offered by a financial institution that only accepts its own POA will be a durable POA that grants general powers. If a springing POA or limited the scope of your attorney-in-fact’s powers is important to you, it might necessitate finding a more flexible financial institution.
Remember, POAs are an important part of nearly every estate and financial plan. If you become incapacitated, your POA may be the one document that allows the family to timely continue distributions needed to pay any medical expenses, as well as other necessary expenses, such as mortgages, taxes, insurance and more.