A power of attorney is a document to be signed and notarized and allows one person, known as the “principal,” to appoint another person, known as the “agent,” to act on the principal’s behalf within the scope of authority described in the document. According to a recent article from The Gazette, “Money & the Law: Powers of attorney more complex than they might seem,” the power of attorney can be very broad or limited to a particular transaction.
You may want someone to be able to pay your bills if you are temporarily incapacitated, for instance, but not to sell your home. A personalized power of attorney document can set specific limits for your unique situation.
As part of an estate plan, the POA is likely to be “general,” granting broad authority to the agent. This may be especially useful to someone who regularly travels and can’t always be physically present to conduct transactions. It also benefits someone who faces a risk of cognitive decline or impairment due to age or illness.
With proper language, a power of attorney can be made “durable,” meaning the grant of authority contained in the document survives legal incapacity. The POA does not survive the death of the principal.
If a person doesn’t have a durable financial POA and becomes incapacitated, a conservator must be appointed to handle the person’s financial affairs. This requires a legal proceeding, which can be costly, time-consuming and divisive among family members.
A POA should be created with careful thought and planning. The agent could turn rogue. For instance, a child appointed as the POA watching their inheritance shrink because of their ill parent’s medical expenses might skimp on an elderly parent’s health needs.
Financial powers of attorney can also create risks for agents. The agent’s job is simple when the person has full capacity—most of what the agent will do is carry out directions given by the principal. However, when the person becomes incapacitated, they are responsible to act as a fiduciary, in the same way a trustee or conservator would.
What duties does the POA entail once the principal becomes incapacitated? They must round up information and become responsible for managing whatever is delineated in the POA document. This may include financial affairs, investment accounts, tax obligations, pet care, etc.
Determining when incapacity has arrived can be difficult. In some elderly people, capacity comes and goes. When should the agent begin making discretionary decisions?
There are also questions about the standard of care applicable to agents named as POA. In most states, the standard of care is more than good faith, requiring diligence, competence, and prudence.
A power of attorney is more complex than it appears, requiring serious attention by estate planning attorneys and their clients as part of the estate planning process. They should be updated, just as an estate plan is updated, every three to five years or when circumstances warrant.
Reference: The Gazette (Sep. 3, 2023) “Money & the Law: Powers of attorney more complex than they might seem”