Choosing the Right Fiduciary: Financial Powers of Attorney

This is the second installment in our blog series on Choosing the Right Fiduciary.  This week, we discuss how to select the best agents under a power of attorney.

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An agent under a durable general power of attorney is empowered to carry out almost any action you (called the ‘principal’) could take for yourself with regard to your assets and finances.  Many clients choose to name their spouse as their agent, which can make sense because a spouse is often well-positioned to be familiar with financial affairs and can be one of the most trusted individuals in a person’s life.

Clients who are unmarried or for whom it is not desirable to name a spouse sometimes struggle with this decision, however, and married clients can have similar trouble choosing back-up agents to serve if their spouse is unable to act.  Your choice may be guided by several factors, but the most paramount is trust.  The power granted under these documents makes abuse relatively easy and difficult to detect.  Consider naming family members or close friends who merit a high level of trust and do not have financial, addiction, or other troubles in their past that might render them vulnerable to temptation. 

Another factor to consider when choosing your agent is the relative complexity of your financial situation.  Agents under a power of attorney are typically called upon to pay your obligations and manage your affairs.  If your major assets are cash accounts, retirement assets, and a primary residence, the skills required for your agent to effectively handle your finances are substantially different from someone with interests in small business entities, investment real estate, or securities that are not professionally-managed.

Finally, consider naming someone you believe can be ‘neutral’ in exercising the authority granted under a power of attorney.  Agents have fiduciary duties to avoid conflicts of interest when acting on your behalf, but when family issues between siblings or step-relations arise, it can be difficult for someone who is emotionally invested to remain objective.  One might question how often an agent under a power of attorney could become entangled in such disagreements, but consider a child approaching the agent for an extension of an existing loan, or a second spouse requesting the agent’s cooperation in purchasing a marital residence or funding the spouse's long term care using the principal’s separate assets.  An emotionally-invested agent might even reconfigure beneficiary designations and transfer on death arrangements made by the principal to secure an estate outcome which he or she considers more just.  Another problem might arise if an agent (intentionally or otherwise) sells property that is given by specific bequest to a beneficiary under the principal’s estate planning documents to provide for the principal's support, rather than choosing a different asset to sell.  Naming agents who are suitably loyal to your own interests and values reduces the likelihood of these kinds of conflicts producing undesirable results.

Depending on the level of complexity your agent will be dealing with (whether that means financial or family complexity), it can be worthwhile to name a professional such as an accountant, attorney, or someone else with special skills that will increase the agent’s effectiveness.  Although this option can be more expensive, it might make sense if there is substantial risk in naming a family member or friend who may not be up to the task.  Agents who are already acting under a power of attorney can also benefit from engaging professional services to supplement the agents’ own knowledge and skill.

In case you missed the first part, Choosing the Right Fiduciary. And look for next week’s installment in our blog series on Choosing the Right Fiduciary – Health Care Powers of Attorney.

Jennifer Schooley  |  Contact  |  Estate Planning