Bank Accounts and the Power of Attorney Designation

June 4, 2019

NAELA News:

Michael P. Affuso, EVP/Director of Government Relations, NJBankers

A power of attorney is a useful document for people to appoint someone to handle their financial affairs if, for some reason, they cannot do so themselves. It is one of the three important documents prepared by attorneys for their estate planning clients. This document allows the “agent” or “attorney-in-fact” identified in the document, to sign checks, open and close accounts, sell real estate, sign tax returns and other financial acts, on behalf of the “principal”, the person signing the document.

The agent is a fiduciary under the law. This mean that the agent must act in the best interest of the principal. Money belonging to the principal cannot be spent on the needs of the agent, or for the interests of the agent. If this duty is violated, legal liability may ensue. This raises the issue of how banks should designate an agent on the account of a principal.

Many times an agent will ask to be added to the account of a principal. Often, this is a daughter or son of a parent depositor. The power of attorney document will be presented, or the child will appear at the bank branch with the parent asking to be placed on the parent’s account. It is important that the agent not be added to the account as a joint owner, but as agent under a power of attorney.

Joint Owners Have Full Rights of Ownership

A joint owner of an account has an ownership right to all of the money in the account. If the account merely says, “Jane Smith and Susan Smith”, both can use all of the account proceeds for their own purposes, by law. This is not what the power of attorney intended, nor is it consistent with the legal duties of the agent. In fact, it is not an uncommon complaint that the agent took all of the parent’s money and disappeared, or used the money for their own needs. Financial exploitation by the elderly is common, and, statistically, it is often inflicted by family members.

Law enforcement officials are reluctant to pursue this type of theft because the joint owner has a legal right to take the money out of the account. The legal duties of the agent are irrelevant, because the account was jointly held. This would not be the case if the letters, “POA” appeared after the agent’s name on the account.

Joint Accounts Are Subject To The Liabilities Of The Agent

If an agent is placed as a joint owner on a bank account, such as a daughter on her mother’s account,  the account is subject to the liabilities of the agent/daughter. Any number of things can unexpectedly happen to the daughter and expose the mother’s money to creditors and others. For example, the daughter could be sued, file bankruptcy, get divorced or die. If this happens, the mother’s money in that account will be subject to pay the judgment, be placed under the control of the bankruptcy trustee, be involved in the divorce proceedings, or be part of the daughter’s estate. This could cause serious problems for the true owner of the account.

Properly Designate All Accounts By Using “POA”

If an account holder wants to add someone to their account as power of attorney, it is extremely important that the agent be designated properly. The agent should be designated on the account as “POA”. In this way it is clear that the son or daughter is acting on the account in a fiduciary capacity.

This will empower law enforcement officials to take action in the event of financial abuse and will protect the principal’s money from claims involving the agent. This designation of “POA” is crucial to avoiding the financial abuse of the elderly.  It will also prevent catastrophic loss of money belonging to the principal if creditors or others have claims against the agent.