It’s an all too real scenario that many people face – parents who are growing older without an estate plan, and don’t believe in sharing their financial information with their middle-aged children. A few years ago, in the Wall Street Journal’s edition of its Wealth Management section, news editor William Power wrote a compelling and personal article about he and his wife’s struggles as they were forced to filter through hundreds of his incapacitated parents-in-law’s financial history in order to figure out what assets they had in a myriad of places; these included bank accounts, retirement accounts, safe deposit boxes, hidden boxes of coins, and even notes of scrap paper in various handbags. The nightmare of dealing with financial institutions without the proper written authority in place, such as a named attorney-in-fact through a statutory or durable power of attorney, or named trustee through a valid revocable living trust, is a situation that is a reality for many people – and will continue to be so for children of baby-boomers who will enter their retirement and post-retirement stages in life.
The patience and determination that Mr. Power and his wife Julie endured are admirable. However, many if not most individuals who unexpectedly find themselves in similar unfortunate situations will either not have the time to dig into the financial history of their parents, will live too far away or be too busy to have the wherewithal to deal with the situation, or both. As Mr. Power well described it, “Imagine being dropped in someone’s living room and being told, “Here you go, you’re running their house now.”” Most of us wouldn’t know the first thing about where to begin and how and why. Which of these file cabinets do we look in first? Are these documents from 1983 important? Are any of these old bank or retirement statements linked to existing accounts? How can I access these accounts? How can I obtain the necessary consent to access the accounts if my parent is incapacitated or has passed?
Fortunately, there are many solutions that, if properly executed, can help to avoid these unimaginable and almost impossible scenarios. As Mr. Power describes, the Power of Attorney (POA) can be a significant and essential tool. There are many types of POAs out there that can accommodate different situations. For example, a living parent who is still competent and wants to control his or her finances, but still would like his or her adult child to have limited powers to pay bills, sign lease agreements, etc. could create a limited power of attorney that would expire at either a certain age or specific event. A more general power of attorney would provide the adult child with greater authority to do things such as access bank accounts, buy and sell investment stock and real estate, conduct business transactions, etc. The Durable Power of Attorney remains in effect even when the parent is incapacitated and can no longer make financial decisions for him/herself.
Although the POA is a significant tool and can make it much easier to control an incapable parent’s assets, there are a few risks and challenges to be aware of. For one, as much as we would like to think that children will always look after their parents’ best interests, that is not always the case. Some children might take advantage of their newly discovered powers to deplete their parents’ assets for their own benefit. For this reason, many banks or other financial institutions, as Mr. Power pointed out, will decline a POA form that is not their own for fear of liability in case any undue influence or unethical behavior is at play. If a parent is incapacitated, obtaining a newly executed POA might be impossible. Second, although a POA would likely resolve the issue of accessing accounts, that is only half the story. As Mr. Power’s situation described, much of the stress and headache comes from actually finding the accounts, filtering through hundreds of unfamiliar documents, and trying to piece together a financial life of over 50 years that one was not a part of. A POA cannot help with this piece of the puzzle. Third, a POA will only be effective while the parent is alive. Once the parent passes, the POA becomes ineffective and the struggle to access accounts and other assets under the parent’s name resumes and becomes more difficult, and in some cases, even impossible.
One important solution not discussed in the WSJ article is the significance of a proper and complete estate plan. The most important piece of an estate plan is the revocable living trust. Unlike a will which only speaks once someone dies, or a POA which is only effective when someone is alive, a living trust accommodates the trustmaker’s wishes both while they are still alive as well as after they pass. A properly drafted revocable living trust allows for an individual, such as a spouse or adult child, to act as trustee in the case of the trustmaker’s incapacity. That same individual or a different individual can also act as trustee upon the trustmaker’s death. Financial institutions must honor the trustee’s powers as described in a trust just as they would a POA. The difference is that most trusts are drafted by attorneys and provide elaborate language that would not only describe a trustee’s powers, but also accommodate the trustmaker’s wishes when it comes to creditor protection, tax savings, asset distribution to children, protection of assets for a surviving spouse or children from a previous marriage, and so on. Because of its elaborate and comprehensive nature, banks will honor a trust document more freely than a POA and will not ask for its own forms to be completed. Furthermore, a trust that is properly funded can help identify and centralize all of ones accounts that a trustee should be aware of and have access to.
Most importantly, a trust is something that everyone can and should have in their estate plan (in addition to a power of attorney, advance health care directive, pour-over will, and certificate of trust to name a few other pieces). If properly executed and funded, the revocable living trust would eliminate the type of scenario experienced by Mr. Power and his wife, and many other people as they struggle to deal with incapacitated parents.
Sadly, many of us will find ourselves in the situation described above. However, with the right planning in place through an experienced estate planning attorney, one can plan ahead in order to save their loved ones from an unbearable struggle in the future.
