Most families understand the importance of having a Will – even if many put off creating one – but few ascribe the same weight to drafting a power of attorney (POA). More often than not, a POA is an afterthought, but in Chris Markou’s experience, not having one in place can be disastrous if you’re ever in a position where you can’t make decisions on your own.
The laws regarding substitute decision-making vary among the Provinces and Territories and the terminology is slightly different. The document may be referred to as a POA, Health Care Directive or Mandate and the person being appointed may be referred to as an attorney or mandatary.
Chris Markou, Director of Estate Planning at BMO Private Wealth, believes a well-thought-out POA – a legal document that identifies a person who can make health or financial decisions (or both) on your behalf when you can no longer make them yourself – may be even more important than a Will. When you don’t have a Will, there is at least a system in place to distribute your wealth, even though it may not reflect your wishes. While there are some provisions for healthcare decisions, with doctors defaulting to your family if you’re ever incapacitated, there is no clear pathway to take care of your wealth without a POA.
“It’s almost better to die without a Will than to lose your capacity without having a power of attorney in place,” he says. “The process of going through a guardianship application through the courts is time consuming and costly.”In Ontario, a guardian for property may be appointed by the court or the Office of the Public Guardian and Trustee. A guardian of the person (for personal care decisions) must be appointed by the court. It can be a costly and complex process that can stretch for months, time you and your family may not have when you need to make swift decisions to protect your assets and meet your needs.
Without a POA, no one has the authority to sign any paperwork or tend to your financial affairs. Yet, there are still bills to pay, matters to attend to, investments to manage and more. Sometimes, you may even need to sell property or assets to create liquidity to pay expenses.
Executors versus POA
Many people use the terms executor and POA interchangeably, says Markou, but they are different roles and responsibilities. An executor carries out your wishes after you pass away, and an attorney pursuant to a POA makes financial decisions on your behalf while you’re alive. In many cases, your wishes in death won’t be the same as what you need if you become incapacitated.
Although you can name the same person as executor and POA, the responsibilities of those roles are limited and don’t necessarily overlap. “Your Will does not take effect while you're still alive, however powers of attorney are effective before you die," explains Markou.
Considerations when drafting a POA
An attorney’s authority is limited to what is spelled out in the POA document or what is otherwise permissible by law. Just as you might include clauses in a Will that detail the charities you want to support and how you’d like to see your assets distributed, you might also include clauses that ensure your wealth is being managed as it would if you were making those decisions. In addition to making sure someone is overseeing your investments and paying your bills, you might instruct the POA to continue giving to charity or family members in accordance with your usual gifting patterns, says Markou.
Whatever you put into the document, it’s important to have language that guides the person appointed as your attorney. An attorney has a responsibility to act in your best interest – called a fiduciary duty – so if your wishes are not specified, they may not be able to make financial decisions that you would have made due to legal constraints.
It’s worth thinking through different scenarios your attorney could encounter. For instance, an attorney for property can’t name or change beneficiaries on an investment account. This can become a problem if you’re incapacitated when you turn 71 and have to transition your Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund, as beneficiaries must be redesignated when the account change happens. One solution is to include a clause that authorizes your power of attorney to keep the same beneficiary designation you had on your RRSP.
Choosing an attorney
Attorneys are typically people you trust, such as a spouse, close family member or friend. Some also make their lawyer or accountant their attorney for property or, increasingly, a professional such as BMO Trust Company to oversee your wealth decisions.
There are two types of POAs, one for health and one for finances, and while they can be the same person, many also split the jobs. For example, you may choose a spouse to manage health and an adult child or advisor to oversee the financial side.
It’s critical to make sure the person has the experience and skill set to take on this role – and the time. As well, just as most advisors and lawyers advise clients to review their Will every five years or after any major life event, the same advice applies to POA.
Other roles for the attorney
Depending on your needs, you can also draft a limited power of attorney to carry out your wishes for a specific period of time or for the purpose of a specific transaction. For instance, if you were travelling for a month and knew about a pending real estate deal, you could put a limited POA in place for that transaction while you are absent, explains Markou.
Suppose you own a private business or have business partners. In that case, you might need a separate POA for those assets outlining who could step in to make decisions and vote on your behalf. That’s often a separate document from a shareholder agreement, says Markou.
Likewise, if you own property in different jurisdictions, consider having separate POAs for those assets. Although a POA signed in one part of the country will generally be acceptable in another jurisdiction, that’s not true of every jurisdiction, especially if you have assets outside of Canada. It can be a hurdle, especially if you have to sell an asset, notes Markou.
Ultimately, whether a POA is recognized in another province or outside of Canada depends on the rules of that jurisdiction. There could be a conflict of laws, explains Markou. “It gets potentially messy, so you definitely need to get some proper advice.”
Proving incapacity
A common misconception about a power of attorney for property is that it doesn’t become effective until you lose capacity, but most lawyers tend to make them effective the moment they’re signed to avoid the hurdle of having to prove incapacity, says Markou. “It just delays things and makes it a little more complicated for the person to step in and take control,” he notes.
While that might worry some families that an attorney can take control of assets while you still have the capacity to manage them yourself, you can put safeguards in place to protect against abuse. For instance, since your attorney needs a copy of the original signed document to exercise their authority, families will often ask their lawyer to retain control of the document and release it under certain circumstances or clear evidence that you’ve become incapacitated, Markou explains.
It gets complicated if the POA requires an official to designate you as being incapacitated before it takes effect. Not only do you have to find someone licensed to conduct an assessment, but you also must agree to the process, explains Markou. If you’re in denial or refuse to meet with the assessor, it can be hard to move that process forward.
While everyone needs a Will, most people will go through life and never lose capacity, says Markou. It’s one of the reasons why he thinks POAs are not always top of mind, but in his experience families who have one in place are far better off. “Think about the months and thousands of dollars you might have to spend if you don’t have a POA,” he says. “If people understood that, maybe it would be a little bit more forefront on their mind.”
