Validating Power of Attorney Agreements
Written By Geoff Kreller, CRCM, CERP
A Power of Attorney (POA) is a document where someone gives another person the authority to act on their behalf, sometimes called an Attorney-in-Fact or their “agent”. POA documents are often created to cover periods of severe illness, mental illness, disability, or periods when a person is out of the country and cannot manage their day-to-day affairs.
POAs serve a very important purpose in managing the day-to-day transactions of customers who are physically or mentally unable to conduct those activities on a regular basis. However, POAs can easily become a gateway to misappropriation, financial fraud, and elder abuse.
In many cases, a financial institution is unable to validate the document by contacting their customer. This makes validating the legitimacy and current status of a POA much more difficult, especially since each state has its own set of rules and requirements regarding these agreements. It’s important to forward these documents to your Legal, Risk, and Compliance team for their review and consideration. Failing to correctly assess, validate, and limit a POA may lead to significant financial losses and a civil lawsuit for your organization.
A POA must be signed by your customer; however, many states allow a notary to sign the document on their behalf if certain conditions are met. The POA should describe an execution date, along with events where the customer’s agent can (and cannot) take over the day-to-day financial management of the customer’s accounts. The POA may only be effective if your customer is physically or mentally incapacitated and will not survive the customer’s death (at which time an estate executor is responsible for account disposition). In addition to the customer’s signature, states require that a POA must be witnessed and/or acknowledged by a notary.
Confirming your customer’s capacity to sign the POA at the time of execution is also difficult; each state has a different legal test for capacity based on the breadth and scope of the POA. Confirming that your customer is now in a mental or physical condition that enables the POA is equally challenging. This type of due diligence requires a review of medical records, speaking with the witnesses, or contacting the notary who acknowledged the document. Because of the sensitive nature of those documents, they should be securely sent to Legal and Compliance for review in conjunction with the POA.
Even when correctly executed, many states have specific rules on the agent’s enumerated rights in a POA agreement, especially with the rise of elder abuse cases throughout the United States. Gift-giving and changing beneficiaries are especially sensitive subjects (sometimes called “high-stakes actions”) subject to enhanced scrutiny and analysis. Even when generic phrases such as “all powers”, “all decisions”, or “all financial decisions” are present in the document, they often do not meet the state standard.
Several events will automatically end an agent’s authority under a POA, including: the customer’s death, when a specific expiration date is articulated in the POA, or when the specific task considered in the POA is completed (such as the sale or transfer of an asset). Because a specific task significantly confines an agent’s actions, these types of documents are typically referred to as a “Limited Power of Attorney” or “LPOA”.
It is much more challenging to verify whether your customer has voluntarily rescinded the POA. In theory, your customer could revoke their agent’s authority in writing if they retained the physical and mental capacity to do so. While financial institutions can generally consider the POA as valid until they are notified otherwise, institutions should monitor agent-initiated transactions and consider whether those activities serve the interests of your customer.
Conclusion
With the rise in elder abuse scams and transactions, it’s idyllic to think every elder has at least one person who would not betray their trust and also have the financial wherewithal to be their financial agent. It’s important to recognize that a family member or close friend with these powers will almost always have to contend with an apparent or actual conflict of interest when representing someone in this way.
Coupled with the difficulty in performing due diligence on a POA’s legitimacy and the financial agent transactions that follow, perhaps we should register qualified, bonded individuals at the state level who can independently offer these financial agent services. Registering active agreements and practitioners at a centralized source would be beneficial for financial institutions, elders, and independent financial agents genuinely looking after their elder’s interests.
