This is the sixth article in a series of eight about leaving family wealth to the next generation(s). The other Articles are entitled:
- Why you should make a Will?
- Why create a trust?
- Types of trust and who’s involved
- One trust or two?
- Trusts and passing on the family business
- Trusts and Forced Heirship
- Protectors, the ups and downs
On occasion I am faced with the prospect of a client getting older and the issues for the client and other members of the client’s family if a parent becomes incapable of looking after their financial affairs and invariably themselves. Whilst this is not the only reason why someone may wish to consider granting a power of attorney (“POA”) it is perhaps the most common, especially where the client may become incapacitated or suffer from dementia. However, whilst a POA is very useful they do have their limitations.
A POA is a deed executed by a person (the “Grantor” – donor or principal) which empowers another person(s) (the “Attorney” – donee or agent) (often an adult child or a professional person) to act on their behalf. The POA can be general, whereby the Grantor authorises the Attorney to do anything which the Grantor could lawfully do, or alternatively limited such that the Attorney may have authority to only deal with a particular matter or transaction.
The power(s) conferred by the POA may be limited in time or on the happening of an event.
A POA is only valid as long as the Grantor is alive and compos mentis, i.e. of sound mind. If the POA is to last post the Grantor becoming mentally incapacitated, i.e. of unsound mind, then a Grantor is advised to grant what is called an Enduring Power of Attorney (“EPA”) and when the Donor becomes mentally impaired the Attorney(s) needs to apply for and have the EPA registered with the Court.
A POA is typically granted:
- Where someone is going away on holiday or for work and they are completing on the sale or purchase of a property;
- By an elderly person about to become resident in a care home and they want someone to look after their home and pay any utility bills, sell it or deal with their investments and other finances; and
- In commercial banking transactions such as allowing a bank as lender/mortgagee to sell a property if the mortgagor/borrower defaults.
Usually a Grantor of a POA will appoint one person to act as their Attorney. Where more than one person is appointed as Attorney the POA will state that they will either have a:
- Joint power whereby all the attorneys must act together, no single attorney can bind another and if one attorney dies the POA comes to an end; or
- Joint and several power is given in which case any of the attorneys can act independently of each other, one attorney can bind another and if one attorney dies the POA remains in force.
I personally prefer a POA to be a joint power as there tends to be less family arguments over controlling a parent’s assets and more importantly gives more comfort to anyone agreeing to be an Attorney, the client’s family and third parties alike.
An Attorney is usually appointed from one of the following:
A Grantor needs to give careful consideration as who is to be nominated to act as an Attorney, but whoever is to be appointed, the Attorney(s) should be a person(s) (individual or entity) the Grantor can trust. Some of the points a Grantor should bear in mind when choosing who is to be the Attorney:
- There may be situations when not to appoint someone as your Attorney could cause offence, such as where the Grantor has several children living nearby and not appointing all of them as Attorneys could cause issues, even if one of the children may be untrustworthy.
- There is always the risk that relatives or friends may abuse the power vested in them by the POA to benefit themselves rather than the Grantor and although they can be held to account for any misuse of money or property, such right is of little use or benefit if the Grantor has little to no assets.
- The Grantor and the Attorney are often related and they will frequently not expect to be paid for the work they do. However, if there is no suitable friend or relative, a solicitor, accountant or other professional person may be appointed and they will expect to be paid for the work they do.
- Professionals or licensed entities which are appointed as Attorney usually have professional indemnity insurance from which the Grantor or the estate of the Grantor can seek redress for any act of negligence or theft. This is not the case for a relative or friend who is not acting in a professional capacity.
- Professional or licensed entities who act as Attorney are more accustomed and used to dealing with statutory and regulatory requirements than the lay person. Unfortunately as the law becomes ever more complex, having Attorneys who are not “in the professional world” invariably means that recourse to a professional(s) is inevitable and with it the associated cost.
There are some practical issues about POA that should also be borne in mind:
- Financial Institutions, e.g. banks, will generally need to have an original copy of a POA for their own records or have sight of an original copy of a POA to make their own copy to comply with their internal policies. The requirements are not industry standard and so what is acceptable to one institution may not be to another.
- If the POA is to be used to manage assets outside the Isle of Man you may need to get a certified translation of the POA from “an approved source” and this can be expensive and time consuming. An English and foreign language translation side by side is usually the best format and the services of an individual or firm with an individual(s) who is perhaps a member of the Association of Translation Companies in the UK is a good place to start. Such POAs also tend to have to be signed before a Notary public.
- Some institutions will not accept a POA that is over 6 months old.
- Some institutions require a POA to be on their own forms or have specific provisions within their wording.
- At many institutions the “counter staff” will not be able to act on a POA once they receive it as it will need to be approved by internal legal departments and there may be a cost associated with having the POA processed and approved.
So before a Grantor has a POA drafted it is worth considering:
- Finding out from any key financial institution(s) is there anything specifically that needs to be inserted in the POA or requirements that need to be met for the POA to be accepted, e.g. identity and proof of address of the named Attorney(s).
- How many Attorneys need to be appointed? Some institutions like to see at least two Attorneys to reduce the risk of an Attorney acting contrary to the provisions within the POA.
- Make sure the POA is drafted by someone who is suitably qualified and that it covers what needs to be covered. Also ensure that an original copy of the POA is kept with your advocates in case you need to obtain certified copies to send to a variety of parties.
A POA has a useful role to play in managing an individual’s wealth but it should not be considered to be a standalone and “one size fits all” solution. Having been involved with POAs on occasion and indeed serving as one of a large estate at present, consideration should be given to the use of trusts to deal with the more valuable aspects of an estate and using a POA to address the more, dare I say mundane items such as bill payments and operating a personal bank account.
If you would like to know more about the points raised in this Article then please contact me or one of my colleagues at Fulcrum Limited