The document that is usually included in an estate planning package is a power of attorney. So what is a financial power of attorney?
Well, it is a document that you have signed and notarized that causes one person, called the “Director,” to appoint another person, called the “Agent,” to act on behalf of the Principal within the scope of authority described in the Document. A financial power of attorney can be very broad – a “general” power of attorney – or it can be limited to a specific transaction (such as the purchase of a house for example), thus a “special” power of attorney or something in between.
As part of an estate planning package, the power of attorney is likely to be “general”, giving the agent broad authority. (Contrary to what the name suggests, an agent under a financial power of attorney cannot or is required to practice law.)
A financial power of attorney can be beneficial for someone who has to travel regularly to remote and far lands (New Zealand, Sri Lanka, Borneo, South Dakota). It can also be beneficial for someone who is at risk of mental decline and weakness due to advanced age or illness. This is because by using the appropriate language in the document, the power of attorney can be made “perpetual,” meaning that the grant of power contained in the document survives legal incapacity. (However, it does not survive the death of the principal). If a person without a permanent financial power of attorney becomes incapacitated, a trustee may have to be appointed to handle the person’s finances. This requires legal action that can be costly, divisive among family members, and humiliating to the incapacitated person.
However, despite its usefulness, a financial power of attorney should not be created without careful thought and planning. This is because the agent mentioned in the financial power of attorney can turn out to be a fraud and use the document to do bad things, including outright stealing or something more subtle. For example, a child appointed as agent in a perpetual power of attorney, who is watching his inheritance fade due to medical expenses, might engage in a small self-help program to distribute assets before death or skimp on an elderly parent’s health needs.
Also, financial powers of attorney can create risks for people who are called agents. In the beginning, before deficits start, the agent’s job is simple – do whatever the manager wants. But when the deficit comes, the agent’s responsibilities change. Now the agent becomes something of the nature of trustee or trustee.
What duties does that ensue? Should the agent collect information about, and be responsible for managing, the entirety of a principal’s finances, such as business interests, investment accounts, loans, insurance policies, tax liabilities, vehicle maintenance, pet care, etc.?
How does the agent know when the deficit occurred? In many elderly (not very old) people, ability comes and goes. When should an agent start making discretionary decisions?
There are also questions about the standard of care applicable to the agents named in the power of attorney. Is the criterion simply good faith, i.e. honesty? Or is a higher standard—which requires diligence, competence, and prudence—as applicable to an actual or court-appointed trustee? Most likely, this is the last criterion, the criterion applied to confidants.
The point here is that financial powers of attorney are more complex than they might seem at first glance. They deserve serious consideration by both attorney and client as part of the estate planning process, and perhaps the occasional update afterward.
Jim Flynn is a business columnist. He is a consultant with Flynn & Wright LLC in Colorado Springs. He can be contacted at (email protected).