How Social Security, IRS handle durable powers of attorney

Q: My parents suffered health crises at almost the same time, and my sister and I had to jump in and start managing their health-care issues, finances and house all at once.

Fortunately, we had already convinced them to get durable powers of attorney for health and finances, naming my sister and me as their substitute decision-makers.

We then discovered some problems: One, we were often asked for a letter from my parents' doctors stating why the DPOA should be invoked, especially at banks. Two, we learned the IRS and the Social Security Administration required us to jump through their hoops to act on our parents' behalf.

A friend told us that her mom's bank and brokerages refused to recognize her DPOA. Her mom had Parkinson's and dementia. My friend had to physically bring her mother to the bank's office to sign new papers (which, given her condition, wasn't much of a protection because she would have signed anything). Fortunately, it worked out, but the situation raised red flags for what might happen to us down the road.

A: Kudos to your parents for their foresight in granting durable powers of attorney to you and your sister. Having the right forms in place is essential for all of us, not just older people, and you've certainly discovered why.

When broadly written, durable powers of attorney convey a tremendous amount of power, says Jacob Menashe of the Hickman Menashe law firm in Lynnwood and Bellevue. This means they come with a tremendous amount of responsibility. You must have 100 percent confidence in the person you name in order to protect your interests.

Some DPOAs are "springing," meaning they're effective only if a certain condition is met, such as having a primary doctor write a letter saying the person is incapable of effectively managing his or her affairs. Other durable powers of attorney are "effective immediately," which means they work without any certification and stay effective if incapacity happens later.

If your parents have a broadly written, "effective immediately" DPOA, the person named has full authority over the bank account and the bank must honor it. However, the named person may first need to present an affidavit swearing, among other things, that the DPOA is valid. If this affidavit is used (it's a recent addition to Washington state law), the financial institution likely won't be held liable for damages if the DPOA is used improperly. If the bank still refuses to honor the DPOA, the statute allows the refused party to petition a court to force compliance, and if upheld, the financial institution could be required to pay attorney fees.

None of this should require the impaired person to come to the bank.

Unfortunately, no good deed goes unpunished. The Social Security Administration does not recognize DPOAs — or, for that matter, the requests of court appointed guardians. Instead, it recognizes only "representative payees," who are usually family members or friends but can also be organizations. Representative payees are responsible for managing and spending the beneficiary's Social Security payments.

To become a representative payee, you must be interviewed face-to-face at a nearby Social Security office and complete a form. To learn more, go to www.SocialSecurity.gov/payee/index.htm or call 800-772-1213.

As for the Internal Revenue Service, Menashe says the IRS accepts a durable power of attorney when the document authorizes the named decision-maker to handle tax matters. Even so, the person will be required to execute IRS Form 2848 and file an affidavit before being recognized by the IRS. Luckily, the affidavit needs to be only a couple of sentences. To learn more, see IRS Publication 947, which you can get online at www.irs.gov/pub/irs-pdf/p947.pdf or call 800-829-1040.

There are roadblocks with DPOAs, says Menashe. However, these usually pale in comparison to the alternatives — doing nothing and having no one able to act on your behalf or having someone appointed as your guardian, which can be expensive, unpredictable and intrusive. Despite their difficulties, we should all have good DPOAs in place, "just in case."

Columbia Legal Services in Seattle has published an excellent "Questions & Answers" pamphlet about DPOAs, which you can get by calling 800-542-0794 or going online at www.washingtonlawhelp.org, then click on "Aging/Elder Law," then "Guardianship & Powers of Attorney."

For other states, go to www.lawhelp.org and press in the state you want. To receive a free copy of my favorite durable power of attorney for health and a living will that I wrote about last fall, contact Compassion & Choices in Seattle by calling toll-free at 877-222-2816, e-mailing wa@compassionandchoices.org or going online at www.CandCofWA.org.

Liz Taylor's column runs Mondays in the Northwest Life section. With 30 years experience in the field, she writes and lectures on a host of aging topics. E-mail her at growingolder@seattle times.com or write to P.O. Box 11601, Bainbridge Island, WA 98110. You can see all of her columns at www.seattletimes.com/growingolder.