Power of Attorney, or “POA,” refers to a legal document that grants one person the authority to act on behalf of another person. The person granted the authority is referred to as the agent or the “attorney in fact.” The person on whose behalf the agent may act is known as the principal. Despite the terms used, the person granted a power of attorney is not always an actual attorney, nor do they need to be.
The principal, or person who grants power of attorney, does not entirely surrender their right to make their own decisions. The attorney has the ability and legal authority to simply act on their behalf. The “attorney in fact” must defer to the decisions made by the principal so long as the principal has the mental capacity to do so. The principal may revoke the Power of Attorney designation at any time and for any reason.
Power of Attorney authorization must be in writing. An agent may exercise all rights and powers granted to them under the Power of Attorney. However, the agent may not act beyond the scope of their authorization. In general, a Power of Attorney document must be signed and dated by the principal to be valid. The principal must have sufficient mental capacity to enter into the arrangement.
When Can a Power of Attorney be Used?
Powers of Attorney may be used for general or specific purposes. A general Power of Attorney generally grants an agent all of the rights and powers that the principal has. An example would be that the attorney in fact is authorized to sign documents, pay bills, and make all decisions regarding the principal’s real and personal property. General Power of Attorney may be used regardless of whether or not the principal is incapacitated and ends when the principal dies or becomes incapacitated. The principal may terminate the Power of Attorney at any time.
A Power of Attorney may authorize the attorney in fact to make decisions regarding something more specific, such as a single transaction involving a single piece of property. This is referred to as a limited or specific Power of Attorney.
A specific type of Power of Attorney, known as a health care proxy, is commonly used when a principal needs to appoint someone to make healthcare decisions on their behalf. Health care proxies do not become effective until the principal becomes incapacitated, and the proxy is to remain in effect despite the incapacity. Generally, for a health care proxy to be valid, it must be in writing and signed by the principal.
Some states may require that the proxy signing be witnessed by one or more adults not associated with the proxy. The proxy must contain a provision stating that the principal appears to have executed the proxy free from coercion.
Does a Power of Attorney Give Control Over the Principal’s Money?
Another common legal occurrence that utilizes a Power of Attorney is estate planning. A Power of Attorney may give an agent the right to manage assets that could become the property of the principal’s estate when the principal dies. An example would be if the principal owns a 401(k) account and has created a power of attorney. If the principal becomes incapacitated, the agent may make investment decisions regarding the 401(k) up until the principal dies.
Attorneys in fact do have the power to spend the principal’s money to cover pre-existing obligations such as bills and debts. It is illegal for the attorney in fact to mix their funds with those of the principal. The attorney in fact does not have the authority to make unauthorized gifts on behalf of the principal. An example of a gift would be a conditional gift or a provision in a will that states that money or property will only be distributed from the estate when a specific event occurs.
The attorney in fact owes the principal a fiduciary duty. That means the attorney must act per the principal’s benefit and always with the principal’s best interests in mind. The attorney in fact should never “donate” the principal’s money to themselves or anyone else without the express permission of the principal.
Suppose the attorney in fact breaches their fiduciary duty and does not act in the best interests of the principal. In that case, the principal may sue for the violation and recover significant damages. Additionally, the principal can and should terminate the Power of Attorney, preventing the attorney in fact from distributing any more unauthorized gifts.
Gifting Clauses in Powers of Attorney
In a durable power of attorney, the principal appoints someone to oversee their financial affairs, including if they become incompetent as a result of injury or illness. However, even the most broadly stated power of attorney does not authorize the agent to make gifts on behalf of the principal unless a power of attorney expressly grants the agent such power. The law requires that gifting powers be expressly stated in the durable power of attorney to reduce the risk that the agent will engage in financial abuse of the principal.
Gifts are an important estate planning tool. Making gifts during life often results in significant tax savings at the principal’s death. It is advantageous for an agent under a durable power of attorney to make gifts for estate planning purposes. Generally, it is best if the scope of an agent’s power to make gifts on behalf of the principal is limited to reduce the potential for abuse.
A durable power of attorney may expressly provide that the agent is only authorized to make gifts to specified people, such as the principal’s descendants. Such a provision may be advisable if the agent is someone other than the principal’s spouse or family member to reduce the risk that the agent will make gifts to himself or third parties they wish to benefit from.
A durable power of attorney may also expressly require that the agent make gifts only in a manner that continues the principal’s previously established pattern of gift-making for estate planning purposes. Such a provision helps ensure that the agent makes gifts that align with the principal’s desires and objectives.
A durable power of attorney may expressly provide that the sum of all gifts to any one recipient in any one year shall not exceed the amount of the annual federal gift tax exclusion. Such a provision provides the agent with the flexibility to maximize tax-free annual gifts for estate planning purposes. It reduces the risk that the agent will deplete the principal’s estate.
In drafting a durable power of attorney as part of a comprehensive estate plan, it is essential to consider what gifting powers should be granted in light of the principal’s personal and financial situation. While gifting powers are helpful for estate planning purposes, it is also vital to limit gifts to those the principal might have made and minimize the risk for financial abuse.
Do I Need an Attorney for Gifts and Power of Attorney?
A skilled and knowledgeable estate attorney should be consulted before you decide to execute a Power of Attorney. An experienced estate attorney can ensure someone is chosen who will keep your best interests in mind and protect your estate. Additionally, an attorney can represent you in court as needed if any issues arise.
