Making Sense of POAs
Power of attorney (POA) legal arrangements are becoming a prevalent tool that retirees use to manage their finances—including their IRA assets. Under such an arrangement, an individual—including an IRA owner—may grant to another the legal authority to act on his behalf in financial or other matters. To reduce liability, financial organizations should create a process for reviewing, accepting, and responding to a POA.
At a glance
POAs are often granted by individuals who will be unavailable to conduct their financial business for a limited period of time.
A nondurable POA terminates if the principal—the person who granted the POA— becomes legally incompetent.
If a durable POA, the principal’s incompetence does not terminate the agent’s authority.
State law governs the rules for determining whether a POA is valid and how it may be used. Some POAs grant only limited authority. Others grant very broad authority.
Any legally competent adult may execute a valid POA.
What is a POA?
A POA is a written legal document authorizing one person, known as the attorney-in-fact or agent, to act on behalf of another person, known as a principal or grantor. POAs are often granted by individuals who will be unavailable to conduct their financial business for a limited period of time. An individual may wish to have a family member or friend conduct his personal affairs while he is unable to do so. This may include authorizing someone to make contributions or take distributions from an IRA on behalf of the ill or absent individual.
Important Terminology
Attorney-in-fact or agent: the person authorized to act on behalf of another person.
Principal or grantor: the owner of the IRA who is authorizing an agent to conduct business on their behalf.
The authority of a POA can be limited to a certain period of time or it may be limited in scope. A nondurable POA terminates if the principal becomes legally incompetent. With a durable POA, the principal’s incompetence does not terminate the agent’s authority. Language in the durable POA document should indicate that the POA becomes or remains effective upon the principal’s incapacity or incompetence. Whether durable or nondurable, a properly executed POA may confer broad authority to the agent.
NOTE: The term "power of attorney" often describes both the POA document itself and the actual authority (power) given by the document.
Types of POAs
There are several types of documentation that individuals can use to establish a POA.
Fill-in-the-Blank
Offered by some financial organizations. Typically drafted by the financial organization’s attorney.
Permits a client to grant authority to an agent with minimal effort.
Used to conduct routine IRA transactions, such as deposits or investment renewals.
Financial organizations offering fill-in-the-blank POA forms must be careful not to provide legal advice to the IRA owner completing the document. Because of this concern, some financial organizations do not provide this form, and insist that IRA owners have their own lawyers draft the POA document.
Statutory Short Form
Offered by some states.
Permits consumers to select which powers they are assigning to an agent.
Allows individuals to complete a valid POA without an attorney’s help.
Some state statues include a “pre-approved” form that spells out the specific scope of each power selected by the principal.
This may, however, create even more of a need for financial organizations to understand the POA rules. You may want to see if the states you do business in, and where your customers reside, offer a statutory short form.
Attorney-Drafted
An individual may retain a lawyer to draft and execute a POA for their use.
POA documents need not be drafted by a lawyer.
Any competent adult may execute a valid POA document.
Financial Organization Responsibilities
Because attorneys-in-fact “step into the shoes” of the principal, financial organizations must follow the agent’s instructions, just as they would with an IRA owner. Provided the agent does not exceed the scope of the authority conferred in the POA, the financial organization must treat the agent just like the IRA owner.
Although a financial organization should not refuse to accept the authority conferred in a valid POA, it should use the same diligence in an IRA transaction with an agent as with the principal. Proper identification should be requested from the agent before an agent-requested transaction occurs. Guidelines should be established for transactions requiring greater scrutiny (for example, changing beneficiaries).
Many states give financial organizations protection from liability when they rely on a facially valid POA. Sometimes a statute or an internal policy may require the attorney-in-fact’s signature, which attests to the attorney-in-fact’s belief that the POA is still valid.
Whether dealing with a principal or an agent, financial organizations are under an affirmative duty to ensure that investments are protected and that transactions are properly conducted. The surest way to guarantee that this is done is to obtain and follow the direction of legal counsel familiar with individual state requirements.
Accepting the POA
In determining whether the POA is valid, the following issues should be considered.
Are the principal and the agent identified?
Is the POA signed and dated by the principal, is the document acknowledged (if necessary) by the agent, and is the document notarized (if necessary)?
What type of power is granted (durable or nondurable)?
What is the nature and scope of the power granted? (Is there authority to conduct IRA transactions?)
What is the document’s effective date? Has the power expired or terminated? Is there an event that must occur before the POA is effective?
Does state law provide protection for a financial organization that acts upon a POA that appears to be valid?
NOTE: The rules for determining whether a valid POA exists and how it may be used are governed by state law. These statutory requirements are contained within the state probate code. The suggestions here are not intended to address any specific state requirements. Financial organizations should consult their own legal counsel to determine the validity of POA documents or to draft guidelines to assist the financial organization’s staff in making that determination.
Revoking a POA
There are several reasons that a principal may want to revoke a POA. For example, the agent may no longer be able to fulfill the functions outlined in the POA form, or the principal and agent may have a disagreement about decisions made based on the authority granted in the form.
State law will determine which procedures must be followed when revoking a POA. For example, some states simply require the principal to notify the agent in writing, while others require the revocation to be notarized. Financial organizations should consult with their legal counsel to determine what procedures must be followed when determining if a POA revocation is valid.
Following a valid revocation, the principal should notify all parties or institutions (e.g., banks, credit unions) where the form was being used that the POA no longer exists, and collect and destroy any copies of the revoked POA form.
Your financial organization should be aware of the possibility that a once-valid POA may have been revoked, and have a process in place for addressing such situations.
Financial organizations often find themselves fielding legal questions that go beyond general IRA maintenance. Whether dealing with a POA’s principal or with an agent, financial organizations must ensure that investments are protected and that transactions are properly conducted. The surest way to guarantee that this is done is to obtain and follow the direction of legal counsel familiar with individual state requirements.
