Power of Attorney – Life Saver or License to Steal?

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Power of Attorney – Life Saver or License to Steal?

5/25/12

A power of attorney is a document in which the “principal” designates an “attorney in fact” and gives him or her power to act in the principal's place.  The powers granted can range from making health care decisions for the principal to handling the principal's real estate, bank accounts, and other assets.

The power of attorney is a powerful, and potentially dangerous, document, but it has many uses.  It can allow a person to authorize business transactions without being physically present (such as at a real estate closing).  It can enable adult offspring to help an aging parent with day to day financial transactions.  Perhaps most crucially, a power of attorney can nominate someone to act for the principal if the principal becomes incompetent from dementia or other causes, thus preventing the need for a formal guardianship when the principal is no longer able to act in his or her own interest. 

Powers of attorney come in three basic flavors.  A limited power of attorney typically grants a few, specific powers (such as acting in a real estate transaction) and usually has a specific expiration date.  A springing power of attorney only comes into effect when a specific set of conditions is reached (typically, the incompetence of the principal as determined by the principal's physician).  Finally, a durable power of attorney grants the attorney in fact immediate authority until the death of the principal (or until revocation of the power of attorney by a competent principal).

With health care matters, it makes sense to use a springing power of attorney, since the principal will typically be in a hospital or other care facility with a clear diagnosis of incompetence before such a power would need to be exercised. 

For financial powers of attorney, however, I typically advise executing a durable power of attorney.  The difficulty with a springing financial power of attorney is that banks and other institutions may be afraid to honor it, since the institution may not be comfortable with the responsibility of determining whether or not there is sufficient evidence of the principal's incompetence.  Also, if the principal  is not confident enough to grant their attorney in fact immediate authority, secure in the knowledge that the attorney in fact will not use the power granted until appropriate, it may be unwise to trust the attorney in fact to act properly when the principal is incompetent.

A power of attorney puts a clear “succession plan” in place for the principal, in case later in the life the principal becomes temporarily or permanently incompetent.  I have worked with several families confronted with a loved one whose incompetence has “crept up” on everyone, and who waited until it was too late for the principal to execute a power of attorney.  In these cases, a guardianship supervised by the court is often the only recourse to gain authority over the loved one's health and financial decisions.  A power of attorney is a much less expensive, cumbersome and public solution to caring for an incompetent principal than opening a guardianship.

On the other hand, I have represented parties in litigation where a power of attorney was used to enrich the attorney in fact, rather than to aid the principal or honor the principal’s estate planning choices.  Whenever a client executes a power of attorney, I am careful to tell him or her that it is “a license to steal in the wrong hands.”  As inconvenient as a guardianship can be, it is far better to have a court supervising an incompetent principal’s financial affairs than to rely on a rogue agent acting under a power of attorney!

In the end, the decision comes down to weighing the benefits of having a power of attorney in place against the risks of it being abused.  Trust is crucial when a principal appoints an attorney in fact, just as a deep sense of personal responsibility is crucial for the attorney in fact chosen.