Here are 10 things you should know about powers of attorney before you draft one.
Table of Contents
1. Incapacity Isn’t the Only Reason to Have a Power of Attorney
Many people decide to draft a power of attorney (POA) as part of their estate planning because they are concerned about who will make decisions for them if they later suffer from dementia, are seriously injured in an accident, or are dying. Authorizing a person to act on your behalf in a crisis is a good reason to have a POA.
If you have a POA and cannot act on your own behalf due to mental or physical incapacity, your agent or attorney-in-fact is called upon to make financial decisions to ensure your well-being and care. For example, they may need to pay bills, sell assets to pay for medical expenses, and start Medicaid planning for you.
But incapacity is only one reason why someone might want a POA.
- Members of the military and others working and living out of the country may need a power of attorney so someone can take care of their affairs at home.
- Single people may want to ensure someone can make decisions on their behalf because they don’t have a spouse who can do so.
- A solo or small business owner may want to give someone authority to make financial decisions for their business.
Considering all the things an agent can do, it’s easy to see how a general power of attorney can help you. You can authorize your agent to:
- Buy or sell real estate or real property
- File taxes
- Apply for or manage government benefits
- Hire an accountant or a lawyer
- Carry out banking transactions such as investing money, cashing checks, collecting debts, opening and closing bank accounts
- Manage investments and other financial decisions in general
- File a lawsuit on your behalf
2. A Power of Attorney Can Prevent the Need for Guardianship
Although some people can lose competency instantly, most people lose capacity gradually. It’s not always clear when they’ve crossed the line from competent to incompetent. That is one of the challenges that an elder law attorney must help families consider.
No one wants to give up control until they absolutely have to, but if one waits too long to turn to a trusted person for help, they may end up with an untrusted person taking guardianship. Or no one with the legal authority to help them.
A durable power of attorney allows for the gradual assumption of decision-making authority by a trusted person, often a family member. The “agent” named in the durable POA may initially provide oversight of financial matters, with the principal making their own decisions until their judgment is too impaired.
In the best case, the agent gradually makes more decisions, and the principal makes fewer as their competency decreases. In the worst case, if the agent and the principal disagree, the agent may have to go to court to prove incompetency.
If there is no power of attorney, a family member or loved one may have to ask a judge to name them as a guardian of a person or conservator of the estate. This requires going to court and proving incapacity. In the meantime, no one is looking out for the best interest of the incompetent person.
A guardianship or conservatorship case is emotionally challenging for the person whose competency is questioned and costly to prove. That’s why a power of attorney is so important.
3. A Power of Attorney Does Not Prevent You From Acting on Your Own Behalf
Depending on the provisions in your document, a power of attorney document could become effective immediately upon signing or upon a date or event you specify. That means the designated agent could begin to make decisions immediately only if you allow them to.
As long as the principal is of sound mind, they can revoke a power of attorney at any time.
4. There Are Some Things You Can’t Ask Someone To Do for You
Even if you wanted them to, there are some things a principal cannot ask their agent to do through a power of attorney. Your agent cannot:
- Vote for you in an election
- Draft a last will and testament on your behalf
- Amend a last will and testament on your behalf
- Perform a personal services contract for you
- Make an affidavit as to your personal knowledge
- Take your place as a trustee or court-appointed fiduciary
There are also powers you must specifically authorize in the financial power of attorney document. Failing to do so means the agent does not have the authority to exercise those powers. Examples of specific authority are:
- Gifting the principal’s money and property to another
- Designating beneficiaries of an insurance policy or a bank account
- Changing a living trust
- Transferring property from a disabled spouse to a healthy spouse
- Changing a community property agreement
5. You Can Name More Than One Person as an Agent
The person drafting the power of attorney has the ability to name more than one agent to act on their behalf. They can name one agent and a successor agent who can act if the first agent is unwilling or unable to serve. The principal can also name co-agents.
Co-agents are tricky. They may disagree, which causes confusion, conflict, and a delay in taking action. This is problematic when your agents need to make important decisions and could be particularly serious with a healthcare power of attorney when critical medical care hangs in the balance.
6. Agents Can Abuse Their Authority – And Do
A person entrusted with power of attorney is in a special position of authority. They have a responsibility as a fiduciary to act only in the best interest of the principal. But in reality, it’s not uncommon for agents to take advantage of their privileged situation.
Sometimes financial abuse is a matter of poor management. If an agent unwisely signs a business contract, the principal is bound by that contract. If an agent has authority to manage financial affairs and takes out a loan, the principal must make payment.
Sometimes financial abuse is a matter of family finagling. A sibling may direct money away from other siblings; a spouse may direct money away from the beneficiary children from a prior marriage.
And sometimes, financial abuse is outright criminal conduct. An agent might steal from the principal.
When creating a power of attorney, make sure your agent is someone you trust implicitly, and that they know your wishes.
7. An Agent May Do Things You Would Not Want
An agent has broad powers to make decisions on behalf of a principal. While the principal is competent to make decisions, the agent should only act in accordance with their wishes. But sometimes the agent may make a decision that the principal doesn’t like. If the principal can undo the decision, that’s one thing. If it can’t, the principal will have to live with it.
If the principal is not competent to make decisions, there are situations when they cannot tell the agent what they want. The principal simply has to trust that the agent will act as best as possible on their behalf. It is a good idea to outline your wishes. This is especially true with regard to medical decisions in the event of incapacitation — you can use a living will to ensure your wishes are followed.
8. Your Agent May Have Trouble Exercising Their Authority
There are different types of power of attorney. A springing power of attorney becomes effective upon a specified date or event. For example, two physicians must state in writing that the principal is unable to manage their affairs before the agent becomes attorney-in-fact.
A financial institution likely will not take an agent’s word that the principal is suffering incapacity. They may need to secure a doctor’s opinion, get a competency evaluation, and appear before a probate court judge. You may need a lawyer’s help in those circumstances.
Your agent does not have control over assets in a revocable living trust, even if the principal is the trustee. An agent could have the power to manage a revocable living trust only if the principal gives that authority in the power of attorney legal document. Some states also require a trust agreement signed by the principal/trustee granting access to assets held in the trust.
9. You Can Change Your Power of Attorney Document
Suppose you’ve named someone as your power of attorney, and you later discover they are unreliable, untrustworthy, or have a difference of opinion about health care decisions and are unwilling to abide by your instructions. In that case, you can revoke your power of attorney. Once revoked, your agent cannot act on your behalf.
You can also destroy the power of attorney form and create a new form that explicitly states it supersedes an earlier form. To be on the safe side, you will want to notify and file this new form with any financial institutions that had a copy of your previous power of attorney form.
10. A Power of Attorney Should Be Notarized but Not Necessarily Recorded
Strictly speaking, although your state may not require to have a power of attorney notarized, it is a good idea. Banks, financial institutions, or individuals may not honor a power of attorney unless it is notarized.
When you use a power of attorney to buy, sell, transfer or encumber a property, it should be notarized and recorded. The power of attorney document must be recorded with the office of the Recorder of Deeds when the deed to the property transfers hands. A copy of the power of attorney document is a matter of public record.
Get Legal Advice Before You Sign a Power of Attorney
If you are considering a financial power of attorney, medical power of attorney, or limited power of attorney for a special purpose, understand your options. A law firm specializing in estate planning or elder law can help you decide the details of your POA. Contact an estate planning attorney in your area.