Do I Need A Power Of Attorney?

A power of attorney can be a vital financial and estate planning document. However, it can be a double edged sword!  Let’s take a close look at this important document. 
A power of attorney (POA)  is simply a grant of authority or power by one person to another. The person signing or granting the POA is called the “principal” or the “grantor.” The person to whom the POA is given is called the “attorney-in-fact” or the “agent.” For purposes of our present discussion, we will deal only with financial powers of attorney. In a future column we will address healthcare powers of attorney and other so called “advance directives.” POAs may be LIMITED  (LPOAs) OR  or GENERAL (GPOAs).    An LPOA may authorize the agent to perform certain specified functions, and his authority to act for the principal is limited to the matters specified in the POA. A GPOA is a broad grant of authority, and can authorize the agent to do ALMOST any act involving property that the principal could have done himself. The one big exception is that of making a will. An agent acting under a GPOA has no authority to make a will for the principal. An agent acting under a GPOA may execute a document establishing a trust on behalf of the principal, but not a will.

A DURABLE POA  (DPOA) contains a clause that states that the POA remains in full force and effect even if the principal become incompetent. This is extremely important!  Most POAs prepared by attorneys for their clients are DURABLE POAs. In addition, the general DPOA should contain a clause specifically authorizing the agent to make gifts on behalf of the principal. The taxing authorities may refuse to recognize gifts made with a DPOA unless such a specific clause is present. A  DPOA may become effective when executed, or it may be a “SPRINGING POWER” that becomes effective upon the happening of a certain event. For example, the DPOA may contain a clause stating that the agent’s authority to act ”springs to life” when the principal’s physician  states in writing that  in her opinion, the principal is no longer capable of managing his affairs.

DPOAs can be extremely useful documents in many situations. Perhaps the greatest benefit of DPOA is the avoidance of conservatorship proceedings. If a person becomes unable to properly handle their affairs due to mental incapacity, physical infirmity, or advanced age, then family members may be forced to have the person declared incompetent and placed under conservatorship. This can be an expensive, time consuming and humiliating process.  A properly prepared DPOA can make conservatorship proceedings unnecessary.

While DPOAs can be extremely useful, they should not be taken lightly! DPOAs are serious legal documents. If you give someone a DPOA, they can act fully in your place, and you will be responsible for the acts of the agent.  Thus, DPOAs should be given only to those persons whom you completely trust. A POA may be revoked by recording a notice of revocation at the office of the county register of deeds.

Lets look at four cases that illustrate the uses and misuses of DPOAs.

Case #1.  Clark has several parcels of real property for sale. Before he can sell them, his  National Guard unit is called   to active duty to serve in Iraq. Clark gives his brother Kelly a limited DPOA allowing him to sign the deeds and other transfer documents on Clark’s behalf.

Case #2.  Mrs. Entwhistle has a large estate, and executes a DPOA naming her daughter as agent. Shortly thereafter she suffers a massive stroke which leaves her completely paralyzed and unable to speak. Using the DPOA, her daughter arranges for her mother’s care in a nursing home, sells real property, establishes a living trust to avoid probate and transfers her mother’s assets to the trust. She also uses her DPOA to make gifts to grandchildren and other family members to reduce the size of her mother’s estate. Conservatorship is avoided!

Case #3.  Achmed and Miriam are naturalized U.S. citizens. They immigrated to the U.S. several years ago from a Mideastern country where they were born and married. Achmed gets into serious legal trouble in the U.S. and flees the country to avoid prosecution. Just before fleeing, he empties some of their joint U.S. bank  and investment accounts, and hides the funds in a Swiss bank account. In his homeland, women are treated like property and have few rights, so Achmed easily obtains a divorce from Miriam by simply filing a form with the appropriate government office.  But here is the good news!  Before their troubles began, Achmed and Miriam had given each other DPOAs, and Miriam has all of the originals. Acting on her lawyer’s advice,  as agent she uses Achmed’s DPOA to transfer all of their jointly owned  U.S. real estate to her name alone. She also files the appropriate documents to revoke the DPOA that she had given Achmed. She simply used his DPOA to protect herself.

Case #4. Sabrina has a responsible job with a large multinational corporation. She is married to Carlo, who took early retirement due to a disability.  Sabrina is offered a temporary assignment at one of her employer’s foreign subsidiaries. She will be out of the country for six months, but will receive a substantial bonus. She accepts the posting, leaving Carlo to manage the valuable rental property that she inherited from her parents. Before going, she updates her will and executes a DPOA, naming Carlo as agent.   Some buddies take Carlo to Tunica for his first visit. Although he has never before gambled, he loves the atmosphere and the attention he receives from the attractive casino employees. He returns again and again. Although he won initially, soon his losses are mounting. He empties their joint savings account. When a certificate of deposit matures, he does not renew it. The rental income from Sabrina’s properties does not get deposited to her rent account. Knowing that she will be furious, Carlo gets desperate!  He seeks advice from a “friend” he met at the casinos. This “friend” always brags about the betting system that he uses to “beat the house” at Tunica. Seeking to win back the money he has lost, Carlo uses the DPOAs to take out  90% mortgages on Sabrina’s rental properties.  Worried to death, Carlo become distracted. In fact, he is so distracted that he forgets to pay the insurance premiums on the rental property. One of the heavily mortgaged properties burns to the ground.  The stress of this mess causes Carlo to have a heart attack. Sabrina returns from overseas to find her properties mortgaged to the hilt and the money gone!  She is legally obligated to pay the mortgage on the uninsured property destroyed by fire.

As we can see from the above cases, DPOAs can be a blessing if properly used and a curse if misused. That is why you should be very, very careful in your choice of agent. Circumstances change, people change, and circumstances change people. Although DPOAs may seem to be straight forward,  simple documents, “don’t try this at home!” Consult an experienced estate planning attorney. You will be glad that you did.