Banks and Powers of Attorney

One of the more frustrating aspects of estate planning is drafting powers of attorneys (also known as POAs) so that banks and other financial institutions will accept them.  The reason that it is frustrating is that banks often adopt policies which are designed to protect them from liability; however, in reality, these policies have the effect of invalidating an otherwise valid power of attorney and they do not always protect the financial institution from any risk.

A common example is the joint attorney-in-fact.  In order for this to make sense, a few definitions are in order.  A “Power of Attorney” is a document whereby the “Principal” appoints an “attorney-in-fact” to act in the place of the principal.  So, for example, if I were to execute a power of attorney and appoint my wife to make decisions for me, I would be the principal and she would be the attorney-in-fact.  (By the way, don’t let the terminology fool you; an “attorney-in-fact” need not actually be an attorney.)  Powers of attorney come in several flavors and I will discuss the differences in more detail in a later post.  For now, a “Durable Power of Attorney” is one that remains in effect after the principal becomes incapacitated whereas a power of attorney that is not durable terminates upon the principal’s incapacity.

Some principals choose to appoint more than one person to act as attorney-in-fact.  Multiple attorneys-in-fact can either be appointed to act independently (meaning that either attorney-in-fact can take all the power given in the power of attorney) or jointly (meaning that all the attorneys-in-fact must agree before any action can be taken).  Many clients think that appointing, for example, their children as joint attorneys-in-fact will require them to work together and avoid disputes.  However, setting aside the issue of disputes among children for a moment, the bigger problem will be with the financial institution.

Many financial institutions, especially the large, national banks, refuse to accept powers of attorney with joint attorneys-in-fact.  I recently dealt with one such institution that was not able to articular the particular risk that they were concerned with but it likely had something to do with the fact that they are not set up to require two signatures on checks and other instructions.  Remember, that in order for joint attorneys-in-fact to take action, they must act together and if a bank does not have a system to require two signatures on a check, the bank cannot police itself.

A power of attorney is only good if the third party to whom it is presented is willing to accept it.  If the third party accepts it and it later turns out to be invalid, the third party can be liable for losses.  In Washington, we have a safe harbor rule as well as a process to force a financial institution to accept a power of attorney.  I will post articles on these topics later.

The moral of the story, however, is that you cannot just look to the law for limitations on powers of attorney.  A power of attorney with a joint attorney-in-fact is perfectly legal in Washington but a bank may not be willing to accept it.