This explanation of the basics of Powers of Attorney relies on your understanding of some simple legal vocabulary, as follows:
Power of Attorney:
(a) the authority to act for another person in legal or financial matters; OR
(b) the legal document that grants such power.
Principal: the person who is granting authority to one or more Agents.
Agent (or Attorney-in-fact): the person who has been granted authority to act for the Principal.
Durable: when used to describe a Power of Attorney, this means it remains in effect even after the Principal becomes incapacitated.
With that vocabulary in mind, here are answers to some questions we are often asked:
Why sign a Power of Attorney?
The best answer is as a safeguard: if you become physically or mentally incapacitated, or otherwise unable to make your own decisions, having already signed a Power of Attorney makes it possible for someone else to act on your behalf, without the difficult and expensive court process of guardianship. In addition, many fully-capacitated people simply find it more convenient to have another (trusted) person who is legally able to access and work with their financial materials, speak to their lawyer, and consult with their CPA. If there are any circumstances under which you would want someone to act for you in a legal sense, a signed Power of Attorney makes that possible.
Under what circumstances should a Power of Attorney be updated?
Consider updating your Power of Attorney if:
(1) you want to change the people you have named as your Agent and/or Successor Agent(s)
(2) you want to change any of the powers given to your Agents; and/or
(3) your attorney says that your existing document is inadequate (usually and especially due to changes in the law).
It is also a good idea to follow the “five Ds” as triggers for when to have your Power of Attorney reviewed by a good elder law attorney: Dawn of a new DECADE, DEATH of a family member or friend, DECLINE in health or capacity, DIAGNOSIS that is new, or DIVORCE.
Who should be named as Agent?
Most Principals name their spouse, or a trusted relative or friend. There are two qualities that make for a good Agent:
(1) someone who is financially responsible and will act well on your behalf; and
(2) you trust the person to use the powers you have given, for your benefit.
What are the risks involved for the Principal?
There are always risks involved in trusting someone else to take financial action on your behalf. The other person may make mistakes, or take advantage of you in his or her own self-interest. If this happens, the Agent can be held legally accountable. It is better to avoid these risks as much as possible by naming a capable and trustworthy Agent.
Here are answers to some questions often asked by the Agents named in a Power of Attorney:
What is my role?
The specific powers you will have depend on the language in the Power of Attorney. Agents are sometimes given broad powers; other documents grant only limited authority. Because a principal should only appoint someone trustworthy, documents prepared by this law firm typically grant broad authority, to empower the agent to act on behalf of the the principal as much as possible. Below are some typical examples of powers and responsibilities of an Agent to act on behalf of the Principal:
pay bills that are properly due and payable
receive income and any other funds payable to the Principal, then deposit/invest all income into an appropriate and safe account of the principal
dispute creditor claims as appropriate
file health insurance claims
seek advice from and/or engage an attorney whenever appropriate
seek appropriate investment advice from a reliable, competent professional investment advisor for any investment assets owned by the Principal
prepare or have prepared by a competent income tax return preparer, sign and file personal income tax returns
The most important things to remember are that you have NO powers beyond those specifically described in the Power of Attorney document itself, and that all of the assets owned by the Principal must be managed responsibly, for the benefit of the Principal, and SEPARATELY from your own assets.
When do I start?
That depends on the language in the Power of Attorney. A Power of Attorney may be “springing,” meaning that it will not take effect until incapacity actually occurs, or it may be effective upon execution (when the Principal signs). Most powers of attorney take effect immediately, even if the understanding is that they will not be used unless and until the grantor becomes incapacitated or asks you to handle tasks. If the Power of Attorney is effective immediately, it is important that you communicate with the Principal regularly to understand when the Principal wants you to act.
Is it a good idea to transfer the title of any assets of the Principal to my name?
As a general rule, do NOT transfer the title of any assets of the Principal into your name. Do not even “add yourself” as a joint owner, because when the Principal dies, the jointly titled assets will transfer directly to your ownership, which might incorrectly change the estate plan of the Principal, per her or his Will or other estate planning documents. Assets should be transferred only in rare cases, under the advice and guidance of an elder law and estate planning attorney, who will review the Power of Attorney to tell you whether or not you have the power to make gifts. Furthermore, it is important not to “commingle” (meaing mix) your own assets (such as bank accounts) with those of the Principal.
What are the benefits for me?
Financially speaking, none. As Agent, you are specifically required to make all decisions and perform all actions for the benefit of the principal and not yourself. In fact, if you personally profit from anything you do, you could face civil and criminal proceedings. The principal remains the owner of all of his or her property. Taking anything for yourself, without the clear consent of the principal, may be a crime. There are exceptions to this guiding rule, that you can understand by consulting a good elder law attorney.
Do I get paid?
Agents are not paid for their services unless the Principal has made separate arrangements to pay them (for example, some attorneys are also Agents, and are paid for all services they provide). You are, however, entitled to be reimbursed for any reasonable expenses you incur on behalf of the Principal while acting as Agent.
What are the risks involved for me? (For example, does being an Agent make me legally liable for the debts of the Principal?)
No, acting as an Agent does not make you responsible for any of the debts of the Principal. The only way you can become responsible for debts is if you agree to co-sign some obligation – an act that would have nothing to do with your role as Agent. The main risks involved in being an Agent apply only if you fail in your role, either by taking financial advantage of the principal, by neglecting to manage the finances correctly, by acting outside the powers described in the Power of Attorney, or by making a decision on your own with which the capacitated Principal disagrees. In any of those cases, you run the risk of civil or criminal prosecution, or could be held personally responsible for any costs required to reverse your decisions.
Can I ever be forced to explain what I have done to a court?
Normally, you do not have to report to a court. If someone complains to a civil court or a criminal court that you have abused your powers, you may be forced to explain what you have done and not done.
Do I have to report on my activities to anyone?
Yes, you ALWAYS have a duty to report to your principal. Whether you have more specific reporting duties depends on the language of the Power of Attorney; read it carefully to learn if you are required to give regular written reports to someone else. Even if you are not required to report, keep complete and clear records for your own files in case it is ever necessary to report in future.
How should I sign checks, contracts, and other documents when I am acting as Agent?
This law firm recommends the following format, all in cursive:
[Principal’s Name*], by [Your Name*], Agent
(*Enter all names as written in the Power of Attorney)
This type of signature makes it easy to understand three important things: who you are, who the Principal is, and that you have the legal authority to sign on behalf of the the Principal. Note: there are some important exceptions to this general rule that you can learn by consulting with a good elder law attorney.
If I want to refuse (or resign) the role of Agent, how should I do it?
If you do not agree to serve, tell the Principal as soon as possible so other arrangements can be made. The same applies if you want to resign: notify the Principal as soon as possible of your intent, so an attorney can prepare a formal document of resignation.
Under what circumstances can the Principal remove my powers?
At any time and for any reason (as long as the Principal has capacity). The Principal should tell you as soon as possible that your services are no longer needed. After you have been informed in any manner that you are no longer to serve, your authority stops.
When does my authority stop?
Your authority stops if you resign, if the principal or a court removes you, or upon the death of the principal. The Power of Attorney is relevant and valid only while the Principal is alive; after death it has no legal significance.
To whom should I provide copies of the Power of Attorney?
Any institution with whom you do business in your capacity as Agent may require a copy of the Power of Attorney. This includes financial institutions, lawyers, government agencies, tax preparers, etc. It is always a good idea to keep several copies of the entire Power of Attorney ready to be shown or distributed as necessary. Do NOT distribute an ORIGINAL Power of Attorney to any third party. If a third party requires an original, consult with the attorney who prepared the Power of Attorney. An attorney can prepare a certified copy of the document, which is in most cases as good as an original. The original document(s) must be kept in a safe place either by you, by the Principal, or by an attorney.