When developing an estate plan, your clients need to consider who will take care of financial matters on their behalf when they’re no longer capable of doing so. The person your client chooses to hold their power of attorney (POA) is critical.
“Unlike an executor, the person to whom [your client] gives POA will be affecting his [or her] life while he [or she] is still alive,” says Leanne Kaufman, head of estate and trust services, RBC Wealth Management, at Royal Bank of Canada in Toronto. “I’m not sure if people give that [concept] the weight and consideration it deserves.”
Every adult should designate a person to hold POA to take care of financial matters, says Christine Van Cauwenberghe, vice president of tax and estate planning at Investors Group Inc. in Winnipeg. An untimely accident may leave a client’s loved ones scrambling to secure guardianship for property through the courts.
“You never know when you might become incapacitated,” she says. “[A POA] is not just for older people.”
As a trusted financial advisor, you can help your clients understand both the role of POA for financial affairs and who in the client’s life would be best suited for that role.
– Educate your clients
Explain to your clients that a POA is a document through which a person (the “grantor” – i.e., your client) gives someone else (the attorney) authority to manage the grantor’s affairs. A POA document, which should be drawn up by your client’s lawyer, can be created to deal with finances and property, or to deal with personal care and health decisions. (See sidebar on page 23.)
With some restrictions, anyone can be named an attorney (a.k.a. the POA holder), but clients typically choose a family member or trusted friend. A trust company can be a granted POA for finances, but not for health. Because estate law is governed by provincial and territorial legislation, the laws governing POA vary by jurisdiction.
For financial matters, your client can create a “general” POA, which allows the person holding POA to act on your client’s behalf for a limited time while your client still is capable – to take care of property during an absence, for example. A “continuing” power of attorney, on the other hand, allows the person holding POA to continue to act on your client’s behalf after he or she becomes incapable. Your client may specify in the POA document the time or condition under which he or she wishes the POA to become effective.
The POA holder essentially can do anything the grantor can from a financial standpoint, subject to any limitations included in the POA document. These tasks include paying bills, managing investments, and buying or selling property.
– Choosing the right person
The POA holder, then, may wield great power, which means your client must choose someone trustworthy to fill that role.
“You’re looking for someone who is as honest as the day is long,” says Keith Masterman, vice president of tax, retirement and estate planning at CI Investments Inc. in Toronto.
The POA holder also must have the time, availability and willingness to take on the job when the time comes, says Debbie Pearl-Weinberg, executive director of tax and estate planning, wealth strategies group, with Canadian Imperial Bank of Commerce in Toronto. A person named to be granted POA has the option of turning down the role.
Your client should speak to the person he or she wants to appoint to hold POA, Pearl-Weinberg says, to make sure that person is willing to take on the responsibility. “Just because you appoint them,” she says, “doesn’t mean that they will accept it at a later date.”
The POA holder should have a reasonable level of financial acumen to perform the role, Masterman says. Your client should ask: “What is the education level of the person I am going to name, and does he or she understand what a POA holder can and can’t do?”
Your client’s POA holder is required to act in the best interest of your client, and must not commingle personal assets with those of your client. The beneficiaries of your client’s estate may ask the POA holder to account for any actions taken on the client’s behalf, so the POA holder must keep good records. If a breach of duty is discovered, the POA holder may be held liable.
“[A POA holder] is effectively a fiduciary,” Van Cauwenberghe says. “His or her job is to protect and maximize the value of the grantor’s estate.”
Second, in choosing a person to hold POA, your client should consider where a candidate resides, Kaufman says, and whether the potential POA holder would have to travel in order fulfil his or her responsibilities.
Your client should avoid appointing a POA holder who is not a Canadian resident, Van Cauwenberghe says. For example, U.S. securities legislation may mean a Canadian advisor cannot accept trading instructions from a POA holder who resides in the U.S. “Choosing a non-resident [of Canada],” she says, “is tantamount to choosing no one at all because of the securities regulations.”
Third, your client should take into account the POA holder’s age, particularly if your client is considering appointing a contemporary, such as his or her spouse, Masterman says: “The issue is not so much whether the person is the right candidate today, but will he or she be the right candidate tomorrow?”
Your clients should consider naming an alternative POA in case the appointed POA holder is unwilling or incapable of taking on the role. POA also can be granted to two or more people, although doing so may present risks, Masterman says: “Eventually, someone’s going to disagree with someone. There’s going to be a deadlock and there’s going to be conflict. I would much prefer [the client] name one attorney, then have the conversation with [the client’s] kids as to why that choice was made.”
Your clients also should consider how their choice of POA holder will affect family harmony, says Pearl-Weinberg: “[The decision] can result in hurt feelings.”
Again, your clients should be advised to speak with family members well ahead of time about what the reasons are for granting a particular person POA.
Masterman suggests telling your clients: “The No. 1 thing is to communicate as much as possible with the people you love. People might disagree with the decision you make, but if they understand why you did it, they’ll be much more understanding of it.”
A POA holder is eligible to be reimbursed for costs related to the management of the grantor’s affairs. If your client wishes that the POA holder be compensated for the role, wording to that effect should be included in the POA document, Van Cauwenberghe says. Otherwise, the POA holder may apply to a court for reasonable compensation. In either case, however, court approval will be necessary before a POA holder can take compensation from the grantor’s assets.
If your client does not have a family member or a friend suitable to take on the POA, Pearl-Weinberg says, the client can opt to name a trust company as the POA holder, which offers the advantages of professional management and impartiality.
Although there may be significant fees associated with appointing a corporate trustee, that service may be worth the cost if the estate is large or complex enough, Van Cauwenberghe says: “Usually, the estate is going to end up being worth more on a net basis when it’s managed properly than [if it is] mismanaged.”
Some of your clients might consider using a joint bank account with an adult child instead of a POA document as a more convenient option. However, naming a joint owner is not recommended and can present risks, Van Cauwenberghe says. If the child divorces or goes bankrupt, for example, the joint bank account could be treated as part of his or her assets. “Appointing a POA is generally the much easier way to go,” she says.
A POA document often is created at the same time as a will as part of a broader estate-planning strategy. Some clients make the mistake of not seeking out legal advice, Van Cauwenberghe says, which can lead to headaches down the road: “The most important thing is for the client, when granting POA, to see a lawyer and have the document done up properly in the first place.”
POA for personal care
While your client can appoint the same person to hold power of attorney (POA) both for financial matters and for personal care, the two roles represent a great deal of time and work, and may be better suited to more than one person of different personalities. A separate person for each type of POA could be the best option, says Keith Masterman, vice president of tax, retirement and estate planning at CI Investments Inc. in Toronto. “Sometimes people like to split up [assigning POAs] between family members.”
As with POA for finances and property, the person your client selects to hold POA for personal care should be trustworthy and responsible. Your client’s personal care POA holder also should be someone who has a strong understanding of the client’s personal needs and wishes.
“You want someone who understands [your client’s] health situation and his or her personal philosophies on health,” says Christine Van Cauwenberghe, assistant vice president of tax and estate planning at Investors Group Inc. in Winnipeg.
Clients may be well advised to consult with their doctor about their personal-care POA document, so that the medical professional will have a good understanding of the client’s preferences regarding health care, Van Cauwenberghe adds.
Your client’s doctor also may have an opinion regarding the wording of any instructions in the personal-care POA document, she adds.
Van Cauwenberghe also recommends that the personal-care POA and the POA for finances be created in separate documents: “There’s no reason why your health issues need to be set out in a document that’s going to be registered with your financial services institution,” she says. “They’re separate issues.”
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