Money & the Law: Powers of attorney more complex than they might seem

Business columnist Jim Flynn.

by JIM FLYNN

A document usually included in an estate planning package is a financial power of attorney. So what is a financial power of attorney?

Well, it’s a document you sign and have notarized that causes one person, called the "principal," to appoint another person, called the "agent," to act on the principal’s behalf within the scope of authority described in the document. A financial power of attorney can be very broad — a "general" power of attorney — or it can be limited to a particular transaction (like, say, buying a house), thus a "special" power of attorney, or anything in between.

As part of an estate planning package, a power of attorney is likely to be “general,” granting broad authority to the agent. (Contrary to what the name implies, an agent under a financial power of attorney does not get to — or have to — practice law.)

A financial power of attorney can be of benefit to someone who must regularly travel to remote and distant lands (New Zealand, Sri Lanka, Borneo, South Dakota). It can also be of benefit to someone who, due to age or illness, is facing a risk of mental decline and impairment. That’s because, with proper language in the document, a power of attorney can be made "durable," meaning the grant of authority contained in the document survives legal incapacity. (It does not, however, survive the death of the principal). If a person not having a durable financial power of attorney becomes incapacitated, a conservator may have to be appointed to handle the person's financial affairs. This requires a legal proceeding that can be costly, divisive among family members, and humiliating to the incapacitated person.

However, notwithstanding its utility, a financial power of attorney should not be created without careful thought and planning. That’s because an agent named in a financial power of attorney can turn rogue and use the document to do bad things, including outright theft or something more subtle. For example, a child appointed as agent in a durable power of attorney, watching his or her inheritance melt away by reason of medical expense, might engage in a little self-help program of pre-death asset distribution or skimp on an elderly parent's health needs.

Also, financial powers of attorney can create risks for people named as agents. In the beginning, before incapacity sets in, the agent’s job is simple — do whatever the principal wants done. But when incapacity comes along, the agent’s responsibilities change. Now the agent becomes something in the nature of a trustee or conservator.

What duties does this entail? Must the agent round up information about, and become responsible for managing, the entirety of the principal’s financial affairs, such as business interests, investment accounts, loans, insurance policies, tax obligations, vehicle maintenance, pet care, etc.?

And how does the agent know when incapacity has set in? In many elderly (and not so elderly) people, capacity comes and goes. When should the agent start making discretionary decisions?

There are also questions about the standard of care applicable to agents named in a power of attorney. Is the standard simply good faith — meaning honesty? Or is the standard higher — requiring diligence, competence and prudence — as would be applicable to an actual trustee or a court-appointed conservator? Most likely, it’s the latter standard, the standard applicable to fiduciaries.

The point here is that financial powers of attorney are more complex than they might at first glance appear to be. They deserve serious attention by both lawyer and client as part of an estate planning process, and perhaps occasional updating thereafter.

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Money & the Law: Powers of attorney more complex than they might seem