Two articles published in the last few days highlight concerns that arise when people aren’t paying attention to their “stuff” We are reading lots about hackers from Eastern Europe and Asia who are trying to get into our accounts. But sometimes it’s the family that is hacking because the victims aren’t looking.

One story was about one of the most dangerous weapons created. It’s called the power of attorney. Most of them are broadly written to allow your kids to keep your financial house in order while you are in some form of care. These docs are part of any estate lawyer’s standard package along with a will and a medical power. The article referenced a child who had liquidated a parent’s 401K account.

Here’s the scenario we have come to fear most. You are becoming infirm and you have one child who lives locally and two others spread across the planet. The ones in California and Belgium aren’t much help these days and someone needs to pay your rent and other bills. So, you designate your local child to manage your affairs with that big broad power of attorney the lawyer wrote up a couple years ago. You never really read the damn thing. It’s all legalese. But most of these documents are VERY broad in scope. And, there is no one to account to except you. You can revoke the power at any time but then you better notify everyone holding your money that you have done so.

Let’s assume that local child has some financial problems such as debt or unpaid taxes. Or the local child has developed some kind of addiction to gambling or worse. Under most powers they have complete authority to do anything you might do with your assets. They can withdraw all of your 401K balance. They can cash out your life insurance. They can take a mortgage on your house or open a margin account with your broker. Now these institutions might decline to do so in the case of loans. But if you have $700,000 in a 401K and your local kid needs the money for her care, comfort and maintenance (in contrast to yours), she has the “power” to take the cash and create a huge taxable event for you.

Your kid would never do that, right? Well families and money are complicated things and in many cases the next generation sees you with an $800,000 house and a $700,000 retirement account and concludes you have more than enough while they are struggling. Local kids also can become resentful that the siblings in Europe and the Left Coast are not doing their part caring for you. It often starts in subtle ways. Cable and phone bills get combined but you are the one paying. Your kid takes you to your medical appointments but her car is falling apart. You suggest she needs a new car and the next week she picks you up in a new Escalade paid for with your 401K. On Sundays she always makes dinner for you at her house. That new Subzero that’s chilling your vodka? “Thanks dad. I knew you wouldn’t want your booze chilled in a Frigidaire.”

We are being silly. But the problems are quite real. Usually this kind of looting starts innocently. Lawyers constantly lose their licenses while holding client money because one week they need to “borrow” some money to meet payroll or pay a car payment. They intend to pay it back to their client’s account but the payback is delayed or augmented with other loans. They aren’t thieves by nature but matters get out of hand. Family members do this too.

What is there to do? How about a joint account with a meaningful amount of money that would cover 90 days of your expenses. That gives your local kid access to pay the bills. You can always replenish it if you recover. But if you don’t, your child knows that your attorney is authorized to release other powers you have on file with the attorney. These powers are graduated to meet needs on an annual basis. The idea is to have someone with no skin in the game out there to make certain that the funds are available but suited to fit the need. Realize as well that a typical power of attorney is effective the day you sign it. Clients tend to think it only works when they are disabled but there is no one out in the world who decides when/if you are. An attorney is a useful (albeit expensive) resource who owes his/her client the duty to do right by the client. The attorney would never hold the accounts or assets but would be authorized to withold the added powers until he/she met with your kid to discuss the scope of the need.

This can’t happen to you, right? Well, we live in a fast evolving world. In 2020, I was consulted in a case involving a retired physician with four kids. His wife of 50 years was seeing his mental decline as were his kids. For reasons that can’t be explained he gave each of his kids a power of attorney. They were agreed on one topic; hatred of the wife of 50 years. She had broken up their family half a century ago and job 1 was to make sure she got as little a possible. Well, each kid had a separate approach and one involved liquidating a well funded 401K. Did anyone consider the tax consequence of that transaction? No. Was there any looting? I was able to stop the transactions with a guardianship but that was only after the wife filed for divorce. She didn’t want a divorce but I informed her that she was powerless to stop the madness unless she pulled that trigger. A guardianship is a much more protracted proceeding.

A solution here is:

  1. Make a reasoned risk assessment of what conflict might exist between your kids and whether there is risk of looting. If yours is a second marriage think about that as well.
  2. Discuss this with your attorney.
  3. Discuss how to create a power of attorney with firewalls that don’t give your kids access to all of your wealth at any one time.

4. If one of your kids is taking the laboring oar of your care think about how that assistance should be compensated presently or in the estate plan.