Decreased capacity of the principal means increased complexity and responsibility for the financial fiduciary
The financial power of attorney— typically called the “power of attorney for property”— is often considered of lessor importance in estate transitions. Assuming there is a trust, the thought is that the necessary tasks are completed by the trustee, especially where all the assets are scheduled to be put into the trust. And anything that didn’t get transferred into the trust before death is supposed to get deposited there after death through the will’s so-called “pour over” provision.
In contrast, in my experience there is almost always some asset outside of the trust. That often includes the bank account that is receiving automatic pension or Social Security or other benefit payments, which can’t be simply re-titled as a trust account without the onerous task of retitling the benefits.
Along with those outside assets there are also various tasks, especially some critical decision-making, that often falls to the individual holding the financial power of attorney. To name a few of the technical ones:
- Managing current and anticipating future government benefits.
- Coordinating insurance benefits.
- Marshaling pension benefits.
- Managing the bank accounts, especially where the account is connected to ongoing automatic deposits and debits.
- Collaborating with the health care power holder as well as the team of health care advocates, managers and givers.
- Stewarding other assets that are not in the trust.
The execution of these tasks is significantly complicated by the mental disability of the “principal”— who technically speaking is the one who hires the power holder. The complications mount when the principal is suffering under those too-common forms of dementia which cloud executive function.
The power holders are supposed to follow the instructions of their principal— but how can that be done well where the principals are unable and perhaps even unaware that their requests are often inconsistent and sometimes even destructive to prudent management?
While it’s their money and life— and we defer to a person’s choices on how to invest and spend both— the tension of their independence and expressed choices conflicts with safety and prudent financial practices.
Serving as a professional financial power is one of my core professional offerings. Along with serving as trustee, I serve as an independent financial fiduciary, which includes acting as power of attorney for property. Sometimes I serve that role while also serving as trustee and executor.
A few years ago I actively served two separate individuals, both of whom suffer from dementia. While neither of them started with observable mental deficits, their dementia increased to the point of their respective doctors finding them “non-decisional.”
Yet, despite their doctors’ findings and the obvious gaps in their mental functionality, they both insist they are decisional and that their wishes should be respected.
Ultimately, court-imposed guardianships may be necessary. However, guardianship starts with a costly and adversarial proceeding where the issue is proving the inability of the individuals to take care of their own person and finances. Too often the court places a guardianship over the individual’s understandably strenuous and emotional objections.
This article will use the case studies of these two separate engagements – as well as other insights from the front lines by me and other colleagues— to provide some insights as to how to engage for success as power of attorney for property with a principal whose capacity is diminishing. These ideas also translate to service as trustee, both successor and acting.
Further, some of the ideas may also be of help where the principal is not yet suffering from diminished capacity.
- As to preparedness: confirm the principal’s capacity at the time of document execution. For example, I was to be the financial power holder for a lovely older woman on a special asset; however, I never got to act. A few weeks after she extended the power to me and signed her other estate documents, a family member sued to void them all, alleging her mental incompetency.
A brilliant tactic by another estate planning attorney is to have a doctor confirm capacity. He obtained a doctor’s note attesting to the grantor’s capacity which was dated the same day as the estate documents. The doctor’s letter has helped cut through red-tape when I had to contact her financial institutions and advisors without her personal introduction.
- Another best practice is derived from the American Bar Association’s model rules of professional conduct for the similar situation of attorneys working with clients suffering from diminished capacity. Specifically, those rules instruct an attorney to maintain as normal a relationship with the client as reasonably possible. Perhaps containing equal parts of common sense and simple respect, the point is to prevent the principal from becoming less than a full person or worse, an object or non-person because of cognitive limitations. Both of my diminished capacity principals called me with questions— and expected and deserved answers, even when they were seemingly unaware that this is one that I’ve answered several times already, or worse, is one which simply doesn’t make sense.
- Speak what your principal can hear. My answers to these people have to be at an appropriate technical and emotional level. I continued to provide them with monthly accounting summaries of income and disbursements as well as the status of their investments. But these are one-page documents in large type, removing a lot of detail. When I mail it to them, I include simple and short bullet points. I also find that an encouraging emotional affect is critical, whether there is good news or not.
- Redirect the principal to the essential points and away from emotional and other distractions. This strategy is occasionally necessary for both my principals. They can get tangled in uncertainties or perceived wrongs of the past— or simply in falsehoods. My current best example was provided by a staffer at one of the top facilities in Chicago, where one of my principal’s resides. This was in response to the principal’s complaint that she hadn’t been fed or received her medications in several days! These complaints were simply untrue— but were asserted vigorously by the principal. Instead of arguing or feeding into the negativity, the staffer exclaimed that she was going to make sure that the principal would get her food and meds asap! The principal beamed happily in response.
- Know what’s going on medically with your principal and how that manifests. Understanding their medical condition is important not only to understand their medical needs and expenses, but also to be able to relate to and support them! The care managers for both of these principals warned me that their diagnoses would manifest in part as being critical of advisors who are not present, and could mischaracterize their advice. Whether that was caused by the dementia or a function of their feisty personalities, I found the same result. So, along with other members of their professional team, I independently investigate their criticisms. While I take everything they say seriously, I also continue to do some careful investigation before acting. Knowing this allows me to act both more professionally and compassionately.
- Get in advance a HIPAA-compliant authorization so as to be kept current on medical issues. Some health care professionals may exclude the financial power holder from key medical information by applying HIPAA rigorously. The cost of this information gap can be significant given that so much of the principal’s day-to-day revolves around their medical condition— especially including their capacity to communicate. To make sure they have complete information to execute their tasks well, financial fiduciaries should consider requesting authorization to be provided with the medical information.
- Keep others prudently advised with as proactive and open communication lines as is reasonably prudent. It’s often a surprise to those less familiar with such fiduciary work how important communication is— and also how much time it takes to keep appropriate people advised. The appropriate people are not only colleagues and successor beneficiaries but also key family members and stakeholder friends. This can be especially important when the principal is spreading misinformation. Imagine for one, the understandable distress that could be caused by one of her friends hearing the principal’s claim that she hadn’t been fed or given her medications in two days without also hearing from the advisors who knew differently.
- And so, the corollary lesson here is to get advance authorization from the principals to talk to their key family and friends, and have the principals consider extending HIPAA authorization to them as well. Some communication with other members of the professional team, as well as the family, can occur without getting too deep into financial or medical specifics. However, it can be unsatisfying to have to end the flow of information before sharing the key facts, particularly those that relate to explain why the principal may at times be an unreliable witness.
- The other tip derived from the rules of lawyers’ professional conduct: the attorney may take reasonably necessary protective action where there’s a risk of substantial physical, financial or other harm. Power holders do not have to invoke a guardianship in order to act robustly on behalf of their principals. Arguably they can substitute their judgment where the principal either (1) is clear on their goals but unclear on the necessary steps to achieve them or (2) offers conflicting goals or directions. Given that the consequences of their diminished capacity can undermine their ultimate financial security, the financial fiduciary should take prudent steps as reasonably necessary to avoid (or at least minimize) the harm that the principal can cause themselves.
- Investigate and prepare for possible transition into Medicaid. There is a high financial cost necessary to maintain a reasonable level of care during advancing incapacity, especially where the individual’s actions are less than ideally aligned with efficiency. As a result, many of these individuals can find themselves eventually requiring needs-based benefits, such as Medicaid
Simply, many older Americans run out of money.
Some can see this need because of their relatively small savings at the outset; however, others face this need further down the road because of unexpected depletion of their financial resources. Sometimes that’s a deliberate life-style choice. Either way, investigation and preparation for Medicaid can reveal time-sensitive options.
One of my principals is using Medicaid planning to determine the most efficient spend down.
There’s a variation with another of my principals who wants to let her husband die at home instead of in an institution. That was his express request as well. A contrasting Medicaid-planning strategy might be for the couple to buy and secure their places at a facility now in light of the cold financial facts. The sharp consequences of that strategy include their likely separation into different wings of the facility besides the violation of his wish to die at home. And so, with the approval of the planner and the rest of their professional team, the principals remain in their home. Their entire team is keeping an educated eye on the situation to make sure sufficient assets will remain to make the move later, allowing them to better honor their important wishes.
There are also more sophisticated planning options which are the domain of elder law attorneys.
These tips— and the true incidents which support them— show the need for some heavy-lifting on the part of the financial power of attorney: technical as well as communication savvy to help their principals enjoy the last chapters of their life. That’s important work!
Hopefully, these 10 tips will help financial fiduciaries to more successfully serve their principals.
© 2018 – 2023 Daniel P. Felix, all rights reserved.
