With Great Power of Attorney Comes Great Responsibility
A Financial Power of Attorney is a common tool in estate planning. The basic idea is that the person creating the power of attorney (the “Principal”) authorizes an “Agent” to engage in financial transactions on his or her behalf. This authority can be limited to certain specific transactions or it can be a broad authority to engage in any transaction that the Principal would be capable of undertaking himself or herself.
The reason that people use powers of attorney as an estate planning tool is to authorize someone to take care of their finances in the event the Principal is incapacitated (but not yet deceased). This incapacity can result from accident or injury, or it can simply be a reduced ability to handle one’s own affairs due to aging. One way to think of this is that the Agent is essentially administering the estate of the Principal in many of the same ways that an ‘executor’ would administer the estate of someone who is deceased.
Typically, the Principal will appoint a family member, or multiple family members, to serve as the Agent under a financial power of attorney. Making good decisions as to whom to nominate as your agent requires consideration of the role and responsibility of an Agent, as well as many of the typical problems that arise with powers of attorney.
The Main Problem with Powers of Attorney is their Potential for Abuse
Because powers of attorney grant broad access to the finances of a potentially incapacitated Principal, this power can often be abused. The law attempts to deal with this by establishing what is called a fiduciary duty between the Principal and Agent. Generally speaking, a “fiduciary duty” is a duty that requires the ‘fiduciary’ to act only in the interests of the Principal, and not himself or herself.
The Virginia Code, which is the set of laws that are passed by the legislative body of Virginia (i.e. the General Assembly) has adopted the Uniform Power of Attorney Act, which governs powers of attorney and their use. Virginia Code Section 64.2-1612 sets forth the “Agent’s duties” under a power of attorney.
These duties include (but are not limited to):
Act loyally for the principal’s benefit;
Act in the principal’s best interest;
Keep a record of all receipts, disbursements and transactions made on behalf of the principal
This code section also goes on to list more specific duties as well.
One of the other, lesser known, facts about powers of attorney is that an Agent’s failure to follow these duties can result in the Agent being financially liable for failure to comply with his or her duties. This liability is set forth in Virginia Code Section 64.2-1615 which states that an Agent may be “liable to the principal” and could be “required to:”
Restore the value of the principal’s property to what it would have been had the violation not occurred;
Reimburse the principal or the principal’s successors in interest for the attorney fees and costs paid on the agent’s behalf.
As a result, to avoid problems down the road, it is important to choose an Agent who understands and is capable of performing these duties. In addition, the Agent should be aware of his or her potential liability.
Common Problems Using Powers of Attorney
When you combine: the rules governing the Agent’s duties under a power of attorney; the fact that most laypersons are not fully aware of the rules; and problematic family dynamics that can often accompany the decline of the Principal – a power of attorney can present fertile ground for conflict.
Disputes can occur when:
Agents keep poor (or no) records regarding their use of funds for the benefit of the Principal.
Agents appear to use (or actually use!) the Principal’s funds for their own benefit (e.g. we are using Mom’s money to buy a bigger house so she will have space to stay with us).
Agents make gifts to others from the Principal’s funds that are not typical of gifts made by the Principal previously.
Circumstances such as these can lead other family members to take action against perceived abuse of the power of attorney by the Agent. Depending on the actual circumstances involved any number of things may happen:
A civil suit may be brought against the agent to reimbursement of misused funds.
Involvement by local Adult Protective Services (APS).
Criminal prosecution for crimes such as embezzlement.
Contested legal proceedings to appoint a guardian or conservator for the Principal.
Obviously the whole reason for estate planning is to try to avoid problems like these. However even the best laid (estate) plans can be thwarted if careful thought is not given to who will be managing things.
The best approach is to make sure that you are nominating someone who understands and is capable of handling the duties of managing your estate. The does not mean that this person has to necessarily know the legal intricacies of estate administration. Attorneys are always going to be available to help out with this. Rather, the consideration should be: is this person going to be capable of managing the duties I want to assign? Is this person going to be able to know when they need help and seek it out from a legal professional if necessary? Are they responsible and organized enough? Will they be able to manage any negative family dynamic that might develop?
Certainly no one can predict the future. And there is truly no estate plan capable of anticipating and dealing with every possible contingency that might arise. However careful consideration of the persons you put in charge of administering your plan can go a long way to avoiding problems down the road.