Make It Last – Ep 13 – Chasing Investments & Powers of Attorney
For lucky episode number 13, Victor discusses what happens when you get too emotional about a single investment, and how to correct it. In addition, Victor covers powers of attorney. Is it a simple document? Can you use a form downloaded from the Internet? Listen to the show to learn how to test whether your power of attorney is worth the paper on which it’s written.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Private Client Capital Group.
Click the link below to watch the show:
Click below to read the full transcript…
Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host Victor Medina, an estate planning and elder law attorney and certified financial planner.
Victor J. Medina: Hey, everybody. Welcome back to Make It Last. This is the show that helps you keep your legal ducks in a row and your financial nest egg secure. I’m your host, Victor Medina. I am a practicing estate and elder law attorney and a certified financial planner, which is what they said at the beginning of the show.
Why am I repeating it now? It’s a good way to introduce what we’ve got going on. Listen, I wanted to cover a big subject this week. I want to talk about powers of attorney, because everybody knows that you’re supposed to have one. Not everybody knows that they’re not all made the same.
I’m going to go over what you should be looking for in your power of attorney as you try to figure out whether or not that’s worth the paper that it’s written on.
Before we get to that, I wanted to talk to you a little bit about a client’s case that I had coming in. It’s an illustration of a problem that happens a lot with respect to investments.
As you often are told in all of the media, the radio announcements, things like that, not all investments are guaranteed, no particular investments guaranteed. Stocks are volatile. They can go up, they can go down. There’s no real way to know what’s going to be happening.
Yet, human behavior is such that when we get presented with the next great idea, our mind attaches to that like it’s going to absolutely happen. We rationalize everything about making that kind of a decision. We hold on to it tightly, with both hands, and we decide there’s no way that anything can go wrong with it.
I had a client of mine who was absolutely convinced that there was going to be a particular merger that was going to go forward. This merger had been announced already in the media and people knew what was going on with that deal. It was under certain government regulation.
The news was reporting that the expected stock price was going to increase by $3 or $4 per share. My client called me and said, “What do you think about this?” I said, “I don’t invest in specific stocks. It’s just not what we do.”
We believe that markets are efficient, which is to say that over time the price of any particular stock already factors in all of the information that’s knowable, so there’s no way to gain an advantage in that, and that the goal of our investing is long‑term. We’re thinking down the future. We don’t gamble that things are going to go up and down.
The client said, “What? I appreciate that. Thank you very much, but I think it’s going to go up. Can you buy that for me?” I said, “Look, you have enough money for you to have fun with this investment, but I’m not going to allow you to invest more than one percent of it.”
Not that I had to threaten them at all, I mean, but it was the idea that, “Look. If you’re going to put more than one percent, then maybe I’m not the adviser for you.” The client agreed and we put about one percent into it. That was back in March.
The news came out. The news kept coming out. The stock price continued to drop to the point where it came across my radar again because I Iargely forgot about this investment. It wasn’t part of what I was managing.
I emailed him, and I said, “Have you looked at the stock price lately? It’s not looking good. I don’t know what to tell you, but do you want out?” He said, “Well, let’s hold on a little bit longer.” I said, “OK. As long as you’re comfortable that you could lose it all. If you’re OK with that, sure, we can hold on a little longer.”
Fast‑forward maybe two weeks, loses another half of its value. I finally got an email saying, “OK. I’ve had enough. You were right. Can we get out of it?” “Sure. We can get out of it. We can cut our losses and go home. That would be fun. We can use those losses to offset some other gains that you might have and try to get diversified again in some of your other portfolio.”
It goes to complicated into this situation but the idea was he had a concentrated position someplace and he needed to diversify over time, so this was a good time to do it, offset some of those taxes.
We got out, but it was a lesson because the stock that he was investing in was in a business that he knew. This was his business for a lot of years. It wasn’t his company, but he knew the business well. He was certain about what was going to happen and wanted to take a flier on it.
Thankfully, he didn’t lose a lot of money. At the end of it, it’s half of a percent of the entire value of his estate, or his investments, anyway.
He’s not going to be hurting by doing it. It’s a good illustration of what happens when we try to predict what’s going to happen in the stock market.
People ask me all the time, “What’s the stock market going to do? Is it going to go up?” Yeah, at some point in time, it’s going to go up. “Was it going to go down?” Yeah, at some point in time, it’s going to go down. “What is it going to do tomorrow?” I don’t know. I don’t have the slightest clue.
By the way, neither does anybody else. Anyone else who is pretending to know whether it’s going to go up or down is just guessing. The strength of the confidence that they have in telling you that it’s going to go up or down is probably going to get you to feel one way or the other about whether or not you’ll believe them.
If they’re super confident, you might believe that it’s going to go up or down or whatever they’re telling you. One place we shouldn’t be looking for our news on whether it’s going to go up and down are any of the news channels that are the finance news channels where people get paid to say whether or not it goes up and down.
Here, we have to pause briefly to realize what these financial news channels, the CNBCs of the world and whatever else, what they’re there to do. They are not there to inform, which is usually eye‑opening. They don’t exist to give you information. They exist to sell commercial time.
The way that they sell commercial time is ensuring that there are eyeballs on the screen that they can prove to advertisers. The way they do that is to say lots of stuff that will get you to continue to watch. Why the screen is full of scrolling information on the bottom as though that’s helpful to anything, but it’s not.
It’s important to realize that no one’s going to be able to predict the future, specifically with respect to the stock market. At some in time, it’s going to go down. At some time later, it’ll go back up. It will continue on this cycle. I can’t tell you which one it’s going to be.
I can tell you that it’s not going to be good for you to put all of your eggs in one basket thinking one thing is going to happen, whatever that thing is. The best play is always to hedge against the future.
Victor: Anyway, quick story about a client. Thankfully took my advice, didn’t risk too much. We’re moving on from that. You should take that advice, too.
Anyway, when we come back, we’re going to talk about powers of attorney. I’m going to tell you how to determine whether or not you’ve got a good one. Stay tuned here on Make It Last where we help you keep your legal ducks in a row and your financial nest egg secure. We’ll be back.
Victor: Everybody, welcome back to Make It Last. Just talked a little bit about some stock picking. Quick cheat sheet, don’t do it. Now we’re going to talk about powers of attorney. You definitely need one of these. Let’s talk about how to determine whether you got a good one.
First segment, we’ll start talking about what a power of attorney is. In the second segment, third segment for today anyway, we’ll talk about how you can find out whether or not yours is any good. We’ll put all of that together.
Powers of attorney are one of those documents that everybody says that you need. When they tell you that you need the big three in documents, they’ll tell you need a will, you need a power of attorney, and you need a healthcare directive or a living will.
They’re right. You should need those at basics. It’s not a full plan. It’s not everything that you’re going to need, but you definitely need to start with those.
Most people know that you’re going to get a power of attorney and some people believe that a power of attorney is cookie cutter. That one power of attorney is as good as another, and if they just sign something that says power of attorney, then they’re all set.
The problem with that is that they don’t figure out whether or not they are right, until sometime in the future. The time that they figure out whether or not they’re right about their power of attorney is when they go to use it.
Now, they don’t go to use it, because they’re incapacitated, but their agent goes to use it. When their agent goes to use it, they figure out very quickly whether or not that document is going to be accepted or rejected.
Now, let’s talk about, first, what a power of attorney is. When we talk about a power of attorney, most people think about a financial power of attorney. That is, that document that allows you to manage financial matters for someone else.
That’s not the only kind of power of attorney. You can get a power of attorney for healthcare. You could get a limited power of attorney to conduct business for some transaction.
In fact, you often give one. If you’ve ever bought a home, or sold a home, you’ve signed, in many of those cases a limited power of attorney to your lawyer to conduct the closing, to just stand in your shoes and then sign the documents.
Power of attorney really just is an agency relationship where you’re asking somebody to help you do something. You don’t always have to be incapacitated to use a power of attorney.
As I illustrated, you can have one for a situation where you’re perfectly lucid, nothing wrong with you. You just don’t want to be there, and so you can give a limited power of attorney just to conduct that transaction and move on.
It’s fine, but when we think about it from an estate planning perspective, the power of attorney that most people are concerned about having is a power of attorney that is there to handle financial matters and will be effective when they are incapacitated.
As I mentioned, we don’t know when that’s going to be. If you listened to the first segment, my crystal ball was broken. Not only can I not tell what stock’s going to go up and down, but I also can’t tell when you’re going to become incapacitated.
We have to think about making sure that this document has the best chance of working when we need it. There are tests that you can perform on the power of attorney to try to figure that out. In fact, in the last segment, we’ll talk about what they are.
The financial power of attorney is a document that you sign generally when you’re in full well capacity. You don’t do it as you’re starting to lose capacity. You do it ahead of time.
You name one person to be in charge. Sometimes, you name two people to be in charge. We’re asked, “Hey, is it OK if I name two people as my agents?” The answer is yes. It’s totally OK to do that.
Where it’s not OK to name two people is when we’re doing a healthcare directive. When you’re going to name somebody to make decisions for you for healthcare, at least according to New Jersey law, you can only name one person at a time. No committees.
For financial matters, it’s perfectly fine. You can name more than one person, and probably should. Now, you don’t have to name the both at the same time but we got to have some backups, because I don’t know when you’re going to use this power of attorney.
Just as much as I don’t know when you’re going to use it and what your health condition is going to be like at the time, I don’t know what the agent that you’ve named, what they’re going to be like at the time.
It would be good to have a backup. Now, if you’re going to name two people to serve at the same time, you’ve got a decision to make. That decision is, do you want them to be able to act independently, or are you going to require them to sign everything? There’s no right answer for that, but there are certainly trade‑offs.
If you require them to sign everything together, you’re going to have some checks and balances so that the two people are always working together, and they’re always agreeing.
If you do that, it might be inconvenient for them down the road. You might want them to be able to act independently. Again, no right answer but you got to choose. It’s a little talk to switch on there.
Next thing you have to decide is, do you want a power of attorney that’s immediately effective, or do you want one that only becomes effective when you become incapacitated?
Again, there’s no right answer. There’re trade‑offs. If you craft a power of attorney that is immediately effective, the good thing is there’ll be nobody to question whether or not they should accept it, like, “Do you meet the conditions that’s in there?”
The down side is that there’s somebody walking around with a blank check to your life. It’s immediately effective. They’re your agent. No one’s going to ask them if you’re incapacitated. They’re just going to handle the power of attorney. [coughs]
The other way, which we call a springing power of attorney, that way has the exact mirror opposites of the trade‑offs. On the one hand, nobody’s walking around with a blank check to your life. That could be a good thing.
On the down side, you’ve just put up another obstacle to the financial institutions honoring this power of attorney. You’ve got to prove to them that you’re incapacitated. There’s a long discussion about that test. How do you make that determination, and do they accept the evidence that’s in there?
Now, granted, I just talked about two elements of the design of a power of attorney that will change from client to client. This is a good point to pause and realize that these documents are not cookie cutter.
It will not suffice for you to just download one off the Internet and then sign it, because it may not work when you need it. We just covered two areas.
When we come back, I’m going to talk about a couple more. It’s incredible how many people believe that a power of attorney is just a very simple document, that they’re all the same, just sign one. No, these are very important documents.
Victor: When we come back from the break, I’m going to talk to you about when they fail, how to test whether or not yours will be accepted. Stick with us, this is an important topic.
When we come back, we’ll talk about powers of attorney and how to determine if they’re effective. We’ll be right back after this break. See you soon.
Victor: Everybody, welcome back to Make It Last. We’re talking about powers of attorney. In the last segment, I talked to you a little bit about what’s important in drafting one, what powers of attorney are. In this segment, I’m going to cover the important stuff, which is how to figure out whether or not yours is any good.
These powers of attorney, they’re not one‑size‑fits‑all. In fact, there’s lots of ways that you can draft them that they might cause problems in the future. To understand why they might cause problems in the future, you have to understand a little bit about what financial institutions are thinking about when they look at your power of attorney.
If you have named your son, and they take this document, and they bring it to Merrill Lynch, and they say, “I want to manage my father’s IRA,” or tell you to make distributions, Merrill Lynch has got to look at that document and try to figure out whether or not it’s effective.
What they’re worried about when they’re reviewing this is they’re worrying about getting sued. They don’t want to get sued. They worry about whether or not if they authorize this distribution, someone else in the family or you, if you recover competency, is going to sue them for improperly releasing money.
To make that determination, they look at a document. They perform a few tests on the document. One of the tests that they look at is the age of the document. These financial institutions will look at the date that it was signed and compare it to an internal policy about how old the power of attorney can be before it is deemed to being too stale to accept.
Of course, they’re not just going to go on your document. They’re going to have a standardized policy. That policy might say that anything over three years is too old, or they’re going to have a policy that says anything over a year is too old.
There’s no standard. There’s no law that says that you have to accept one that is younger than a certain period of time. It’s important to understand that when you present this document to a financial institution, they’re going to be reviewing it from a liability standpoint.
They’ll look at the age. That’s one test. Another thing that they’ll look at is how broad that power of attorney is. They’ll look to see how many provisions are in there and whether it covers the circumstance that they’re being presented with.
I actually had a case on this one. I guess this is an important topic, hope that I get to it. When powers of attorney fail, you have to go to get a guardianship. In that guardianship, you’re basically petitioning the court to name you under a court order as the person who is in charge.
When you go through that, the person who is bringing the guardianship, they usually have a lawyer. You, the incapacitated person, you get your own lawyer. That’s a pro bono gig if you have no money, but it’s a paid gig if you’ve got money, to the lawyer anyway.
I was appointed to represent a guy who had suffered a stroke visiting his dad. He was only 53 years old and took him about six months to stabilize, but the guardianship was brought by his wife. There was a time pressure on here because they needed access to this money to pay for their son’s second year in Bucknell.
The University was sympathetic that this had happened to his father, but they needed their tuition money if the kid is going to re‑enroll. We were rushing to try to get it done. The wife was named as the beneficiary on the account, but the guy wasn’t dead yet, so that didn’t matter.
You might think that in my story, a person doesn’t have a power of attorney, but that’s also not true. He had a power of attorney, but the power of attorney did not cover in the provisions that it was written everything that the gentleman could do in his investment account. What he could do in his investment account was broader than what the power of attorney said.
Merrill Lynch ‑‑ and this was Merrill Lynch ‑‑ looked at that and said, “We’re going to deny the power of attorney because it was clear by the terms of the power of attorney that your husband did not want you to be able to manage this account. If he wanted you to manage this account, he would’ve given you all of the powers that are capable of being exercised in here.”
That little mistake ended up costing about $12,000 in fees for guardianship and delaying access to that account by about four months. Honestly, I don’t know which was worse.
It’s important to realize that the power of attorney needs to be as broad as possible with as many provisions because I don’t know what it’s going to be used to manage. Therefore, a little four or five‑page job is not going to be as effective as what we use in our office, which is a power of attorney that’s almost 26 pages.
26 pages really matter to our clients in terms of is it impressive? No, not really. It’s what we need to sign, but the truth of the matter is that the paper is cheap. Why do we care how long it is? It’s going to get scanned and put on a thumb drive. It’s going to sit in a binder. Who cares how long it is?
We’re going to make it as broad as possible because we don’t know what the weather is going to be like in the future. We’re going to throw some extra sweaters in the suitcase to make sure that we cover that circumstance.
I’ve given you a couple of clues onto how to test your power of attorney. Look at the age. Look at how broad it is. Figure out whether or not you’ve named one or two agents and if you’ve named them to act when together or independently. Look at when it’s effective, whether it’s immediate or sometime in the future.
The absolute best thing that you can do is to go field‑test that power of attorney now while you still have capacity because the time to figure out whether or not your power of attorney is any good is while you still have the ability to fix it by signing a new one.
This advice is the same advice that we give our clients with the powers of attorney that we’ve written because I don’t know all the financial institutions that are out there ‑‑ 500, 1,000 of them. I don’t know what they’re all going say.
I’ve made a promise to our clients that if they come back with the field test and it turns out that that power of attorney was rejected for any reason, we will draft it again for free right there so that they get one that works when we need it, with our thanks to figure out what that particular financial institution was looking for.
It’s important to go field‑test it because if we don’t do that, we won’t know if it’s any good. By the way, if you get an answer to the question that says, “Yes, this is a good power of attorney,” the next follow‑up question is, “How long is that answer good for?” because their policies can change over time.
Power of attorney seems like it’s a throwaway document in an estate plan ‑‑ just get one done ‑‑ but that’s often the most crucial document to have because that’s where we’re rushing around, trying to make sure we get our hands and access to money where the failure to have that one could cost tons of money later, be expensive and really, really inconvenient.
I would not think of a power of attorney as a layup. You need to get one done. It needs to be comprehensive. It needs to be a great document in order for it to be effective.
We’ll leave the conversation there for this week on powers of attorney. If you liked this and you’d like to hear more, don’t hesitate to send us an email at firstname.lastname@example.org. We’d love to hear your show ideas, what you think about what we’re talking about now, incorporate those for the future.
Also wanted to thank the production crew that puts this show together. They make us sound great. That helps us sound more important to you. Anyway, they do a great work. We want to thank them for all of that.
Listen, if you like this show, I’d appreciate it if you do me a favor, which is I’d like you to share it with a friend. Find somebody that you care about. Send them the link to the show. Tell them it’s on iTunes. Tell them to download this episode or any of our prior episodes so that they can get on the same page with the same great information that you know.
Victor: Just one more favor, which is to go on to iTunes and leave us a great review. They rank these shows based on how much people like them. If you like this show, it’ll really help it climb the ranks of the best loved podcasts out there on retirement legal and financial planning.
Anyway, thanks so much for listening to us today. This has been Victor Medina with Make It Last. We help you keep your legal ducks in a row and your financial nest egg secure. We’ll catch you next Saturday. Bye‑bye.
Announcer: The foregoing content reflects the opinions of Medina Law Group, LLC and Private Client Capital Group, LLC and is subject to change at any time without notice.
Content provided herein is for informational purposes only and should not be used or construed as investment, or legal advice, or a recommendation regarding the purchase or sale of any security, or to follow any legal strategy.
There’s no guarantee that the strategies, statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
All investing involves risk, including the potential for loss of principal. There’s no guarantee that any investment plan or strategy will be successful. We recommend that you consult with a professional dedicated to your needs.
Ready to Take The Next Step?
For more information about any of the products and services listed here, schedule a meeting today or register to attend a seminar.