There are various kinds of power of attorney (POA). Knowing which to use is critical in making sure your goals are accomplished. For purposes of this article, we will focus on “financial” powers of attorney. Financial powers of attorney deal with a person’s assets or financial matters. This includes contract powers, signing authority, and dealing with third parties. A financial POA differs from a health care POA. A health care POA allows a health care Agent to make medical decisions for a person in the event the person is unable to communicate with a doctor.
Generally, there are only two parties to a POA: the Principal and the Agent. The Principal is the one who creates the POA. The Agent is the one to whom authority is granted to perform some function on behalf of the Principal. In order for a POA to be valid, the Principal must have “capacity.” A Principal who has capacity has the ability to make decisions for him or herself and understand what he or she is signing. Depending on state law, a POA may require witness signatures, a notary signature, or both, to be valid.
Power of Attorney: Options
A financial power of attorney can be limited (sometimes called special or specific), general, durable, or not durable.
Limited Power of Attorney
- A limited POA grants an Agent the power to deal with a specific asset or situation. It does not grant broad powers to deal with the rest of the Principal’s assets.
- A limited POA is generally time-bound. This means the power of attorney terminates at the expiration of some defined period or upon the completion of some activity.
- A limited POA is usually not “durable”, but it may be. We discuss durability below.
- A limited POA is usually effective either upon a given date or immediately upon execution. It remains effective until termination, as termination is defined in the document.
Examples of Limited Powers of Attorney
- Some financial institutions have their own power of attorney (POA) forms that someone may execute to grant an Agent the ability to deal with the assets within, say, a brokerage account. These forms are specific to the account(s) in question, and generally will terminate upon the incapacity of the Principal.
- Someone who owns real estate in another area of the country might execute a limited POA to designate an Agent local to the property the authority to work with contractors and make decisions relating to the renovation of the property. In this case, the POA might be specifically time-limited or terminate upon completion of the project.
General Power of Attorney
A general power of attorney (POA) grants an Agent the broad power to do pretty much anything the Principal would otherwise be able to do for him or herself. Exceptions may be advisable depending on context. When we draft general durable powers of attorney in the estate planning context, we normally exclude two powers in particular, unless there is a compelling reason to have them enumerated.
The first exception is to not grant an Agent the power to amend the Principal’s estate plan. Having this power vested with an Agent may lead to abuses, and we generally discourage granting it.
The second exception relates to the power to make gifts of the Principal’s assets to others. Generally an agent must use the assets subject to the power of attorney for the Principal’s benefit. This is a fiduciary duty of the Agent. If the agent has the power to gift assets to others, this may lead to a situation where the Principal outlives his assets. In this situation, the Agent has breached his fiduciary duties.
In the estate planning context, general powers of attorney are “durable.” This means that a named Agent would not have the power to act until the Principal became incapacitated or granted the Agent the ability to act. This durability is critical in the estate planning context, as the whole reason for granting this power is for when the Principal becomes incapacitated. As defined in state law, a POA does not remain in effect during the Principal’s incapacity unless the document expressly states that it is “durable” and intended to confer the powers to the Agent when the Principal is incapacitated. Without this term, if the Principal later becomes incapacitated, then the Agent no longer has the legal power to act under the POA.
Durable Powers: Considerations
As hinted at above, the effectiveness of the general durable power of attorney (POA) depends on whether the Principal wants the Agent to possess the powers to act immediately upon execution, or rather upon the Principal’s incapacity. This decision typically rests on several factors:
- First, while the Principal must have capacity to make financial decisions (otherwise he or she could not execute a POA), there are times when the Principal would prefer to have an Agent performing the duties and powers enumerated in the POA immediately. Sometimes age, illness, or physical disability make it difficult for a Principal to perform many financial duties. In this case an Agent can assist the Principal in these functions even though the Principal is not incapacitated.
- Second, the relation of the Agent to the Principal may be a deciding factor on whether to grant the Agent the power to act immediately. If the named Agent is a child (or other close relation) of the Principal and has already been assisting the Principal with many other things, it may be natural to have the POA effective immediately upon execution so that the Agent may seamlessly continue caring for the Principal. This may not make sense if the named Agent is an attorney, certified public accountant, or other non-related person.
- Finally, the physical proximity of the named Agent to the Principal often plays a role on whether the Principal grants immediate powers to the Agent. If the named Agent lives close to the Principal, it may be prudent for the powers to be granted immediately, as the Agent is readily able to assist the Principal. It may be logistically difficult if the Agent lives far from the Principal.
Determining Incapacity
In this section we assume that the power of attorney (POA) is set to become effective upon the incapacity of the Principal. Now the question remains as to what determines the Principal’s incapacity. The POA document itself should provide the criteria for what determines incapacity. Often, two licensed physicians make this determination. Others make use of a determination defined in their revocable living trust, and which is based on the majority opinion of a private disability panel. No matter how incapacity is determined, Principals need to take these steps. These steps will ensure that the Agent has everything he or she needs for financial institutions to honor the POA.
- First, the Agent must have a copy of the fully and validly executed POA, naming him or her as the Agent.
- Second, if two licensed physicians have made the determination of incapacity, the Agent must have a copy of those opinions, and include them with the full copy of the POA. If a disability panel has made the determination of incapacity, the Agent must have a copy of this and include it with the full copy of the POA.
- Finally, the Agent should sign an acceptance of the delegation of authority granted under the POA.
Signing as an Agent
If all the above is in place, the Agent should be able to act on behalf of the Principal. However, the Agent should know how to sign on behalf of the Principal. Some Agents mistakenly sign their own name on documents. However, state law makes it clear that when acting on someone else’s behalf as an Agent under a power of attorney, the Agent must sign the Principal’s name, and then write “by [name of Agent], Agent”. This makes it clear that someone is acting in their official capacity as Agent under a power of attorney.
Common Misconception
Here is one final note on a common misconception of making use of a power of attorney (POA). If the Principal of a POA has also created a revocable living trust, and his or her assets are titled to the trust (as they should be), the POA does not govern those assets owned by the trust. Thus, the Agent is unable to sign on behalf of the trust assets if the POA is otherwise activated.
It is the successor Trustee’s duty to sign on behalf of any assets owned by a trust. Many question why there is a need for a POA if someone’s assets are owned by a trust and governed by a successor Trustee. The answer is because the POA does much more than simply give signature authority over assets. The POA also grants powers to an Agent for many other reasons not strictly related to assets, such as:
- to enter into litigation on behalf of the Principal (for example if the Principal is in an accident and needs to file a lawsuit);
- to sign tax returns and otherwise deal with the IRS;
- to enter into contracts;
- to deal with the United States Postal Service;
- to buy or sell in the Principal’s own name;
- to manage digital assets;
- to operate businesses;
- to collect and settle obligations of the Principal; and
- to deal with governmental benefits
This list is not exhaustive. However, it shows that the power of attorney involves much more than just dealing with assets.
Summary
A power of attorney (POA) is a legal document that allows someone (the Agent) to act on behalf of another person (the Principal). Financial POAs are either limited or general. The latter is usually durable and can be effective immediately or upon the Principal’s incapacity. The type of POA to use depends on the specific situation. The Principal must sign the document that authorizes the POA. The signing must be witnessed or notarized, depending on state law.
It is important to carefully consider the powers granted to the Agent in a general POA and to exclude certain powers, such as amending the Principal’s estate plan or making gifts of the Principal’s assets to others if there is no compelling reason to include them. Overall, a POA is an important tool for planning and managing one’s affairs. It helps ensure that one’s wishes are carried out in case of incapacity or other unforeseen circumstances.