In our world, a great deal of time is spent having discussions over the proper ways to perform estate planning tasks. This can be as simple as establishing wills and beneficiary designations or can involve a network of specialized trusts to ensure your wishes are carried out after you pass away.
However, it is just as important to do proper estate planning for how you’d like your wishes carried out during your life as it is post-mortem. Let’s talk about some of the tools that are available to be deployed to protect what’s yours while you are alive.
A financial power of attorney is a legal document that authorizes someone to act as your agent in order to make financial decisions on your behalf, for your benefit. The scope of the authority you grant a power of attorney can be tailored to your specific needs. For instance, a power of attorney document can be crafted to only allow your designated agent to take certain actions when certain conditions are met.
A common misconception with a power of attorney is that you are ceding your rights to another party and need to rely on good faith that they will not take advantage of you. While it is extremely imperative that an individual you name as a power of attorney is someone you trust, there is still legal structure that can protect you from a power of attorney acting in bad faith. A power of attorney owes you a fiduciary level of care. Just as a fiduciary financial advisor has a legal obligation to always act in your best interests, your power of attorney also has a legal obligation to take actions that are solely in your best interest.
Let’s talk about a couple common situations where you may want to have a power of attorney set up:
It is important to note that any power of attorney that you’ve put in place is only active while you are alive. The authority granted by a financial power of attorney ceases the moment you pass away. It is also crucial to realize that a power of attorney must be in place before a debilitating condition like dementia strikes. Once you are deemed to be of ‘unsound mind’ you lose the ability to grant legal instructions like a power of attorney.
As financial fraud has ticked up in recent years, all investors, but particularly seniors, need to exercise enhanced vigilance over their financial assets. In 2017, the SEC gave approval to a rule that encourages account custodians and brokers to try to have their customers name someone as a ‘trusted contact’ on their accounts. As custodians have begun adopting a trusted contact form to be included with regular account applications, so too have some investment advisors.
Completing a trusted contact form allows the broker/advisor to contact the third-party of your choosing in order to consult them over suspicions of financial exploitation. They can ask things like “we received an out of character request from Bob, have you been in touch with him recently?” In practice, this acts as a speedbump to delay potentially fraudulent transactions until true verification of intent can be made.
Here’s a practical example of a trusted contact form in use:
Imagine you are on a trans-Atlantic cruise and your advisor receives a suspicious trade order from “you”. They try to obtain some sort of secondary verification, but are unable to make contact with you (you’re in the middle of the ocean!). Without someone else to go to, they may have little choice but to execute the request as ordered. If a trusted contact is on file, the advisor would have the option of delaying the request on suspicions of fraud and consult with your designated party to help determine the validity of the request.
A trusted contact is not a stand-in for a power of attorney. Your trusted contact is not able to make decisions on your behalf or make inquiries on your accounts.
While not strictly a financial safeguard, an advance healthcare directive often is lumped into the same basket as things like a financial power of attorney. In effect, a healthcare directive offers two types of protection:
No one wants to contemplate their own mortality. However, not taking appropriate steps to codify your wishes will leave family members in a heartbreaking situation of being unable to give the authority necessary to carry out your intents.
Our hope is that this summary can help clarify the role of various tools that help safeguard your financial well-being during what we hope is a long and prosperous lifetime. We are happy to talk through the implications of anything discussed here. That being said, professional legal counsel is usually necessary as you sort through the details of a power of attorney or medical directive. We can help coordinate the necessary professionals and assist in properly communicating your wishes. Always remember, we’re here to help!