A Power of Attorney is a document by which one person (the principal) can appoint another person (the agent) to act on the principal’s behalf in regard to financial and property matters (Property Power of Attorney) and health care and personal matters (Health Care power of Attorney). In other words, one person (the principal) can appoint another person (the agent) to do things for himself or herself that otherwise only he or she (the principal) would only be authorized to do.
Powers of Attorney are prepared to address the concern about losing one’s ability to manage one’s own affairs. Without Powers of Attorney, the only way one person could manage the affairs of another person, legally, is by establishing a guardianship through the court system. Sometimes, a person may already be “slipping” mentally when the Powers of Attorney are signed. Powers of Attorney are also done routinely as part of an estate plan in the event of the possibility of future incapacity.
Powers of Attorney are a very handy tool. Without a Power of Attorney in place, when one person becomes incapacitated, the only option that would allow another person to step in and manage the affairs of the incapacitated person would be to file a petition for guardianship with the circuit court and try to become the legal guardian. The court process for legal guardianship requires an attorney. It involves statutory processes, attorneys’ fees, court costs and time. Satisfying the various procedural and substantive requirements not only takes time and cost money, it can be burdensome. A Power of Attorney eliminates all of that.
As an estate planning attorney for many years, I prepare Powers of Attorney for healthcare and property on a regular basis. Sometimes people even it do it themselves. They are fairly simple to prepare and sign, but the implications of Powers of Attorney are often not well understood. This blog piece is a warning about failing to understand those implications of Powers of Attorney.
When one person (the principal – the person creating the Power of Attorney) creates a Power of Attorney and appoints another person as the agent, the agent can step in and take over the management of the principal’s financial affairs and personal and medical decision making without the involvement of the court system, attorneys or judges. Powers of Attorney make the transition for someone who becomes unable to manage their own affairs or make their own decisions smoother and easier because the agent steps in by authority of the Power of Attorney and takes over… but that is also where the danger lies.
Powers of Attorney, however, can create situations in which agents take advantage of the principals who have given them the authority. Sometimes, well meaning (or not so well meaning) family members get people to sign Powers of Attorney who don’t really know or appreciate what they are doing. A Power of Attorney gives an agent access to bank accounts and control over assets. A Power of Attorney for healthcare gives an agent control over medical and personal decision-making. If the principal is no longer able to manage his affairs or make his own decisions, an agent pursuant to a Power of Attorney assumes that control and authority. And, this creates a potential for abuse.
In fact, the law anticipates that possibility. Anytime that anyone is in such a position of authority and influence over another person, even if that other person has consented to that authority and influence, a fiduciary duty arises by operation of law. Thus, an agent pursuant to a Power of Attorney is a fiduciary.
The fiduciary duty is the highest standard of duty in the law. That fiduciary duty forbids any self-dealing. This means that an agent who uses the authority of the Power of Attorney to benefit himself or herself violates that fiduciary duty. An agent can even violate a fiduciary duty in some very innocuous circumstances, such as when the principal consents or even directs the agent to take assets for himself or herself.
For instance, parents are often generous towards their children, paying for meals, paying for gas when a child is driving on a trip to somewhere and in many other ways. These things are perfectly normal and typical in the usual parent/child relationship. But, when a child becomes an agent pursuant to a Power of Attorney for a parent, however, those things become a violation of fiduciary duty.
Anytime an agent benefits from a principal while acting in fiduciary capacity, a violation of the fiduciary duty is presumed. That presumption places an affirmative burden on the agent to show by clear and convincing evidence that the benefit was knowingly authorized by the principal without undo influence, or there was some primary benefit to the principal of which the agent’s benefit was only incidental. This is a very difficult thing to prove.
Consider the fact that Powers of Attorney are usually only put in place when a person has become frail, forgetful, and begins to lack understanding and appreciation of the principal’s own affairs. How do you prove a principal knowingly authorized and consented to benefit an agent when the very reason for the Power of Attorney is due to the growing incapacity of the principal?
Powers of Attorney are so commonplace today, and they are prepared and signed so often, that people often fail to realize the significance of the fiduciary duty that goes along with them. I met recently with a young woman who became the agent for her mother when her mother’s health took a turn for the worse. Her mother always paid her bills in cash so this young woman withdrew her mother’s funds from her mother’s bank account and continued paying the bills in cash. She kept no receipts or records because her mother didn’t keep receipts or records.
When someone at the bank began to suspect something amiss, they called Senior Services, and an investigation was begun. Fiduciaries are required by law to keep an accounting of everything they do, but children who find themselves suddenly having to manage their parents’ affairs often don’t think about these things. Now this young woman faces the possibility of a criminal investigation, and the presumption is against her because she is a fiduciary. The burden is on her to prove the funds were withdrawn and used for her mother’s benefit, but she has no proof.
This is a story I have seen repeated over and over again. Sometimes it involves the police. Sometimes it just involves family members or others (like live in “friends” or significant others) who are suspicious and file lawsuits.
Anyone who agrees to take on the responsibility as an agent pursuant to a Power of Attorney must be aware of and observe the requirements of being a fiduciary. This means being loyal to the interests of the agent, not benefiting personally at the expense of the principal, keeping an accounting of the assets, expenditures and everything that is done, among other things. A fiduciary is also required to protect the principal’s assets, maintain them and even to invest them so they grow, providing that the investments are “prudent”.
The fiduciary duty shouldn’t be taken lightly, and the person preparing a Power of Attorney should think very carefully about who they are authorizing to have control of their decisions and assets. Not only should the agent by trustworthy; the agent should understand and be prepared to fulfill the fiduciary duty he or she is being assigned.
Powers of Attorney are a very useful tool, but they can be abused in the wrong hands. Powers of Attorney can also cause some very difficult issues to address if the agent isn’t aware of and careful about the observance of the fiduciary requirements that the law imposes. Fortunately, the instructions in a statutory Power of Attorney describe those requirements, but people don’t always read them or take them seriously.
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