To start things off, many people have both a legal power of attorney document, that was prepared by a lawyer or notary, and power of attorney documents done through a financial institution.
The power of attorney documents prepared through a financial institution are often referred to as either banking power of attorney or financial power of attorney. To set up banking and financial power of attorney you do not need to visit a lawyer or a notary.
Banking and financial power of attorney are set up directly through the financial institution you are working with. The financial institution will have specific forms for you to sign to set this up. Below are some thoughts with respect to banking and financial power of attorney.
Reasons to set up a power of attorney
Banking and financial power of attorney are set up for many of the same reasons as a legal power of attorney. They can be set up so the attorney can simply monitor activity, which is often the case with our aging clients. They can also be set up when a client wishes for the attorney to be involved in some of the decisions.
When a client sets up financial power of attorney, they are typically immediately involved with the account and can exercise their powers. Banking and financial power of attorney can also be set up so that the attorney can be called upon in the future.
Like legal power of attorney, it is possible to set up banking and financial power of attorney for a shorter time period or set up for a longer period. Accidents may occur unexpectedly at any age. Those fortunate enough to avoid health problems at a younger age may become mentally and/or physically incapacitated later in life.
Other benefits at Scotia Wealth Management
Some may feel that the likelihood of becoming incapacitated soon is remote, but we often talk to clients about the other benefits of setting up financial power of attorney documents.
One common reason for setting up financial power of attorney is to provide online access. As an example, we may have aging clients where we have set up one or more adult children as financial power of attorney on the investment accounts.
Once they are set up as a power of attorney, they are able to obtain full access to viewing the accounts online, and/or receive paper copies of all documents (such asconfirmation slips and monthly statements).
This immediate access has been beneficial for the following clients who want to delegate the monitoring of the account to others:
• People who travel or work in areas where communication is an issue.
• Individuals whose lifestyle is not conducive to timely contact.
• Assigning an individual who is more familiar with financial matters.
• Linking younger family members, or trusted individual, to assist you as you age.
• Assistance in the event you become incapacitated.
Spouse providing instructions
If an account owner would like us to speak with their spouse or another individual regarding their investment accounts, then they must have the appropriate power of attorney documentation completed. For example, if a spouse calls up and wants to provide instructions on an account where they are not the owner, they must have power of attorney on file with us.
Wealth Advisors who must call clients to get verbal confirmation on trades can talk to the attorney if the account owner is not available. As Portfolio Managers we can do trades on behalf of our clients and the power of attorney for doing trades is not as relevant.
Viewing all accounts
When we open investment accounts for clients, they can set up online access to view their investment accounts. This would include all registered accounts solely in their name (i.e. Registered Retirement Income Fund and Tax Free Savings Account). Clients are also able to view any investment account that they are joint on or have signing authority (non-registered joint with right of survivorship or corporate account).
Most couples would like to view all of their investment accounts online, so they have a consolidated view. Registered accounts such as RRSP, RRIF, and TFSA accounts are only in one person’s name and can not be held jointly.
For clients to see their spouses registered accounts, they have to have financial power of attorney on those accounts.This is relatively easy to set up with one form, and once set up, they can see all accounts when logging into Scotia online.
Who to name?
It is important to remember that, although the individual is referred to as an “attorney,” it is not necessary that the individual be a lawyer. Common choices amongst individuals with children are to name a spouse or an adult child.
Naming someone you fully trust is a logical first choice. It is important the individual named understands their powers and are able and willing to make appropriate decisions regarding the banking and financial accounts when required.
One item we discuss is ensuring that the individual(s) that you have named, for banking and financial power of attorney, are consistent with the estate plan and legal power of attorney document (or the very least do not conflict with each other).
Challenges with joint bank accounts
When our clients age, they may need assistance with paying bills and general banking. This can be the result of eyesight deteriorating, poor mobility or deteriorating capacity. One approach that has been used is to open a joint bank account.
When our clients have only one child that they fully trust then this was on option worth considering. The cautionary components were that with joint bank accounts, legal ownership is transferred. As a legal owner of the account, there is no protection for how the money is spent. If the joint owner was ever sued, then it is possible that the joint account could be at risk.
The more common issue we have seen with a joint account is the confusion it can cause when distributing the estate of the original owner, especially if the owners have more than one child. The natural question that is raised, was the account with the joint owner intended to be a gift to the one child? In most cases, one child’s name is put on for convenience only. Joint bank accounts can cause confusion, and conflict, when it comes to estate distribution.
Another challenge with joint bank accounts
As noted above, many aging parents have added a child as a joint owner to a bank account to assist them in managing their finances. In other cases, joint bank accounts have been used in estate planning as they are easy to open, costs are low, and helps reduce probate fees. In both cases, when a joint bank account is opened you may be obligated to comply with new Canada Revenue Agency tax reporting requirements for bare trusts.
In the past, bare trusts have generally been exempted from the requirements to file a T3 tax return, that are otherwise applicable to many trust arrangements. Bill C-32 was introduced which will result in trustees of bare trusts now being required to file a T3 tax return and disclosure forms for tax years ending on or after Dec. 31, 2023.
Trustees who fail to comply with this new requirement will potentially face significant penalties. With these new rules we are encouraging clients not to open joint bank accounts. If a joint bank account is opened with an adult child, then they may be obligated to file a T3 tax return, with appropriate disclosures and schedules — again, failure to do so could result in significant penalties.
Banking power of attorney a better option
With the potential confusion and conflict with joint bank accounts, and new disclosure rules on bare trusts, we feel setting up banking power of attorney is a better option.
With banking power of attorney, you can name a power of attorney (for example, an adult child) that is able to view transactions online, pay bills, and withdraw funds. The attorney can help monitor transactions to ensure that a parent is not a victim of financial elder abuse.
A power of attorney has an obligation to keep an accounting of transactions. To ensure transparency we would encourage anyone exercising banking power of attorney to keep good records. The benefit of banking power of attorney is that legal ownership does not change hands.
When it comes to estate distributions there is less confusion which is a benefit. The downside is that the account may be subject to probate fees and there is no guarantee that the power of attorney will exercise their full fiduciary responsibility. Probate fees are minimal in comparison to other issues that could arise.
Financial power of attorney
Many financial institutions provide individuals the ability to designate a power of attorney on their investment account. This specific type of power of attorney would not cover other financial affairs of the individual and should not be confused with a legal power of attorney.
When establishing this type of power of attorney document at financial institutions people still need to make the decision between “limited financial power of attorney” or “full financial power of attorney.”
A limited financial power of attorney provides the attorney the right to make buy and sell decisions but not the right to withdraw funds from the investment accounts. A full financial power of attorney provides the ability to make all types of decisions, including withdrawal of funds.
Some may be concerned about the full financial power of attorney being able to withdraw funds. We explain to clients that the attorney can only request withdrawals that would result in a cheque being issued in the client’s name, Canada Revenue Agency (i.e. tax payment with the client’s social insurance number) payments, or a transfer to the client’s bank account. The funds are never made payable to the power of attorney or sent to the power of attorney’s bank account.
Knowing this, we always tell clients that who they name as banking power of attorney is also very important, as they do have the ability to withdraw funds. Often the financial power of attorney and the banking financial attorney are the same individual.
Don’t procrastinate
Provided people know someone that they are comfortable naming as their attorney, we recommend establishing either limited or full power of attorney at the time the investment account is set up. This is often the easiest time for you to set up the attorney and there is no doubt as to your wishes.
If you have an investment account and an attorney is not currently named, then it is possible to add one or more attorneys. When you add the attorney at the account opening stage or later, the financial institution requires forms to be signed and witnessed. Along with these forms, most financial institutions now require additional information about your attorney. The good news is that this is free to set up.
A word of caution for those individuals who choose to wait — it is too late after an owner becomes incapacitated and may or may not be possible if the owner’s mental abilities are questioned. It is also important to highlight that an individual may cancel a financial power of attorney at any time provided clear written instructions are provided.
Documentation
It is relatively easy to establish a power of attorney at a financial institution. If the attorney is already a client of ours (i.e. the spouse) then we already have the information to complete the form. We may need to get a copy of the latest identification (such as a driver’s licence) if the one we have on file is expired.
If one of clients wants to appoint an attorney, who is not an existing client, we are required to gather the know your client type information — most of the same information as if the attorney was opening an account (this typically takes 15 minutes to complete on the phone). We would also require a copy of the latest identification (i.e. driver’s licence).
Both the client and the attorney must sign the form to set this up. It is possible to have more than one attorney.
Cancelling a financial power of attorney
When a client sets up a financial power of attorney with us, it is registered on our system and the form is linked to the account.
If, at a later date, our client wishes to cancel the financial power of attorney we will request that they provide us a signed letter. There is no specific form for this and we will draft a simple letter on their behalf stating, “I revoke my financial power of attorney, dated [month, day, year], effective immediately” that they sign.
In our article, Legal power of attorney is essential, we noted that there is no registry regarding legal power of attorney documents. The one benefit of banking and financial power of attorney is that they are linked to the account at the financial institution and if they are cancelled then it is easy to see. It is not always as easy to verify if a legal power of attorney has been revoked or is still in force, apart from talking to the client if they have capacity.
The power of attorney documents ceases at death at which point your will takes over. To ensure your estate goals are met it is important to ensure your will is up to date with a properly named executor and alternate executor.
Duplication
Banking and financial power of attorney are free to set up. They are limited to the bank account or the investment account that it is set up on.
These types of power of attorney documents are limited and are not meant to replace a legal power of attorney. We have had some clients mention to us that they have legal power of attorney so why do we need to set up bank or financial power of attorney.
If a person comes into our office one day and presents to us a legal power of attorney for one of our clients, we can not act on this immediately. In fact, we can’t provide them any information at that stage. We would have to send a copy of the legal power of attorney document to our back office and together we try to validate whether it is authentic.
The first question that we will ask the person claiming they are the power of attorney is: “Why is the client not able to call us directly?” If the response is that they are incapacitated, then we will request a letter from the doctor that states our client is no longer able to handle their own financial affairs.
Our team will also provide a copy of the professional checklist to our back office, that we review with clients at every meeting. On this checklist it states the name(s) of the legal power of attorney, if any. If the name matches up, then this provides additional support to register the legal power of attorney on our system — this is one of the many reasons for clients to prepare the professional checklist.
Our back office will call the law firm that prepared the power of attorney, and possibly the person who witnessed the document, to get the best assurance that the document is authentic and has not been revoked.
The power of attorney is reviewed to see if it is a general power of attorney or an enduring power of attorney. Once validated, the legal power of attorney is placed on our system, and we may discuss the accounts with the legal power of attorney.
This entire process is not required if financial and banking power of attorney are put into place. It is also not necessary, if a client provides a copy of an enduring power of attorney, while they have capacity.
Provided the individuals named on the legal power of attorney and the banking/financial power of attorney are the same people, there is no harm in having both documents. We would recommend that you talk to your lawyer if they are not the same people to avoid any confusion.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit greenardgroup.com.
