Power of Attorney (POA)
Power of Attorney Form and Durable Power of Attorney Basics
A power of attorney is a way of giving authority to another person or people. There are two basic types: (1) a limited power of attorney (also called a special power of attorney) and (2) a general power of attorney. Laws that govern powers of attorney are state-specific and this guide is based on Virginia law. A power of attorney is a straightforward and flexible component of most estate plans and having one saves a great deal of stress and money. The law behind a power of attorney is detailed and this guide is not a substitute for consulting with an attorney whose practice focus relates to laws that control drafting and enforcement of a power of attorney.
The power of attorney is not the same as a medical power of attorney (called an advance medical directive or living will in Virginia). Instead, it deals with property and assets that a person owns and benefits to which a person may be entitled. If written correctly, it can also be used to deal with matters related to a house or land. Properly drafted POAs can last for many years and can be used to avoid a guardianship proceeding which is necessary if someone is over 18 but incapacitated (this does not mean physical incapacity – it means that they do not know what it means to take an action or not take an action). Incapacity can be temporary or permanent.
A durable power of attorney is one that works even when the person who created it is incapacitated. If a power of attorney is not durable or if it is incorrectly written, this will not work, which means that the only option for paying someone’s bills or protecting their property is a guardianship petition. Using a power of attorney form is not recommended because a form or a power of attorney template is often not enforceable.
Virginia and other states have adopted uniform power of attorney statutes. This means that even though there is no single general power of attorney that works in all states there are now common elements recognized across jurisdictions. An estate planning lawyer can tell you if an existing POA is valid or enforceable. Sometimes, laws called reciprocity statutes allow for a power of attorney document that was executed in another state to be used for some or all purposes.
Many people think that being a spouse or a family member gives them the ability to help with someone’s bills and finances if they become ill or injured. This belief is incorrect. Without a power of attorney, even a person’s husband or wife cannot so much as deal with a utility company, much less deal with things related to medical expenses or property. Although laws prefer certain persons such as a spouse or children if someone becomes incapacitated, the only way to avoid going to court is to have a well-drafted POA in place before someone needs to use it.
Elements – Power of Attorney Virginia
Several of the elements of the power attorney form in Virginia are similar to the rules in other states. A person who creates a power of attorney is called a grantor. The person who acts under the power of attorney is called an attorney-in-fact or agent. Another term for the attorney in fact (AIF) is fiduciary. There can be more than one AIF and they can act unanimously or separately. It is also possible to name an entity as an attorney in fact, although this is usually done only with a limited power of attorney. As with other basic estate planning documents (like a will or advance medical directive) a POA can name a substitute agent or agents.
In order to create a power of attorney a person has to be over the age of 18. They have to have capacity, which means the ability to manage their own affairs and to understand how to act in their best interests. Adults are presumed to have capacity unless an illness, injury or conditions related to advanced age (such as dementia) diminishes or causes them to lose capacity. If a person begins to lose capacity or if there is a question about their capacity it is often not possible to create a valid and enforceable power of attorney, which means that nothing can be done without going to court.
A valid grant of power of attorney could be something as simple as, “I Susan give John the ability to do on my behalf anything I could do if acting on my own.” As with anything, the potentials for error are in the details and over time there has also been a trend of people or entities refusing to act or delaying an action when asked to taken an action under an existing POA. Although attorneys can win these arguments, the point is to not have an argument to begin with because asking a court to resolve these kinds of matters is expensive, slow, and costs money. Therefore a kind of competition between those required to act and people writing a general power of attorney has developed.
In response to these problems, estate planning attorneys have begun to enumerate specific actions that may be taken within the power of attorney. Even though the law says that a power of attorney that says an attorney-in-fact may take any action the grantor could do, the reaction of many banks and government offices is that no, you can’t do that because the power of attorney doesn’t say you can. This may be understandable for two reasons. First, the easiest answer to any request is usually no or sometimes no answer at all! Second, companies and their insurance carriers are very concerned about being sued. They reason that if someone presents a do-it-yourself power of attorney or a power of attorney form, it may be fraudulent.
To address this problem, a modern power of attorney prepared by a capable attorney will list specific powers by type, as well as include the general “any act I could do myself” language. Take opening a bank account for example. One of the listed powers among many says “to open a bank account”. In this way a person can have confidence that the power of attorney can actually be used when it is needed. One other way to ensure that third parties will act is to write the power of attorney in such a way that the third party (the bank clerk or manager, or an insurance agent, for example) becomes liable for failing or refusing to act when such failure or refusal causes harm or other losses.
Although estate planners frequently recommend a general power of attorney (that is to say, one that is as broad as possible), they are not without risks. Restricting powers is advisable in some situations, however, because none of us can see the future, these restrictions should be imposed with care. An example of a restriction that might be necessary and desirable would be a circumstance where someone has already or might someday inherit family land. The power of attorney could say that the attorney(s) in fact have the ability to deal with real estate, including the ability to contract for the sale, lease or purchase of real estate. It might also say that the power is limited in that if it is possible to retain ownership of the family land this should be done (perhaps with an eye toward preserving the land so that it may be conveyed in a last will and testament after the grantor’s death). It is also possible to place limitations that are practical and do not unduly restrict the action of an attorney in fact. Keeping with the same example of family land, the person writing the power of attorney could require an agent or attorney in fact to consult with his or her cousins before selling an interest in the family land. There can even be more specific instructions depending on the circumstances, including the formula for determining a sales price and the terms and timing upon which the land shall be offered.
Any action taken under a power of attorney can only be done legally if it is in accordance with the grantor’s wishes and in the best interest of the grantor. A power of attorney can make gifts of property in certain circumstances (often to achieve the goals of a last will and testament during a final illness). Often these gifts of property or money are done to prevent assets from being wasted or lost to nursing care costs. There are very specific laws and regulations about these kinds of transfers with steep financial penalties for violations. An attorney should be consulted before making transfers for no value or for compensation below an asset’s market value.
A general durable power of attorney is the best means of ensuring that no unnecessary delays or financial losses will result if you become incapacitated. Circuit court is slow and expensive should be avoided if possible. Even an “easy” case related to a an uncontested guardianship or conservatorship can cost over twenty(!) times as much as a well-drafted POA. If a person writes a power of attorney but ends up not needing it (because they never lose their capacity during life), then they have enjoyed the benefits and peace of mind of knowing that things were taken care of if they became incapacitated. Perhaps think of it as cheap insurance.
The benefits of a correctly-written power of attorney do not extend only to the grantor. Agents or attorneys in fact can act without fear that their own actions will subject themselves to personal liability. Similarly, no one has to guess as to whom will act or what the wishes of the grantor might be. This is a valuable part of a person’s legacy, even (and sometimes especially) if those called upon to act are close family members.
POAs are an important estate planning tool. They are very powerful and can eliminate the need for court hearings if someone becomes incapacitated. Because there is so much authority inherent within a general power of attorney, it is important for those who create them to name only a person that they trust. This person is often (though not always) a spouse. Sometimes, the solution to this challenge is to name more than one person so that there is built-in oversight for the people who are authorized to act. It is also possible to require that accountings be made on an annual or other basis. If this is done, however, it is important to structure the requirement so that no more money than necessary is expended as a result of the accountings and the attorney in fact’s powers are not unreasonably restricted.
Remember that the attorney in fact should be someone who either knows what to do or knows when to get help if they need it. The agent may or may not be a family member. If it is a family member, not all families have an attorney or an accountant. Even those that do have professionals do not mean that these persons are the ones who are best situated to do the job. There are plenty of lawyers who know little or nothing about estate planning and administration.
An often-overlooked aspect of powers of attorney involves the default provisions that are built into state law. Nearly every state has some means of challenging a power of attorney through the courts. Some states have fast-tracked this authority through default rules by requiring that if any person within a listed group demands information as to what authorities have been exercised under a power of attorney, the attorney-in-fact must supply that information promptly or face court hearings and potential penalties, which can be quite costly. If there are people in one’s family that you would not want to meddle in your affairs, then the power of attorney can be written in such a way as to prevent them from doing so.
Regardless of whether you design your power of attorney to protect against children or other family members interfering with your power of attorney and estate plan, there are other considerations to keep in mind when writing one. With some basic instruction about record keeping for the grantor and the agent, both of them will know what the law requires (this is not optional – a POA creates a “confidential relationship”, which means that property must be handled in certain ways and certain records must be kept) and be able to protect themselves in the event of a challenge.
Complicating the usage of powers of attorney is the fact that some entities do not recognize them. The Social Security Administration and the IRS, for example, have rules that say they will not recognize powers of attorney that have been prepared elsewhere. This means that the careful planner should ascertain where a power of attorney might need to be used and consult with those entities before he becomes ill. It is possible to execute forms at many institutions that will allow someone to act on another’s behalf without affecting the validity of the general power of attorney. Be careful, though, and here is another area where there is no substitute for dealing with a good lawyer, because sometimes banks or other offices give bad advice. The classic mistake is creating a joint account either because someone did not know better or they were told to do this by the bank.
In this particular scenario, people (often elderly) name someone else (usually an adult child) as a joint account holder. They do this because they think it will be “easy” or will provide a simple means for someone to pay their bills if something happens to them. They do not realize that they are putting all these assets at risk, even if their child is extremely trustworthy and has good business sense. The reason this is a bad idea is that joint accounts are considered 100% owned by either or any of the owners. An agreement between the original owner and an adult child means nothing if a creditor makes a claim against the adult child – all of the assets may be taken. If you think there is never any potential for creditor trouble, imagine the scenarios of divorce, child support or an automobile accident, even where the adult child has insurance. If there is a judgment in excess of the insurance coverage or if there is a coverage problem (maybe the insurance carrier argues that it doesn’t have to cover the accident and wins), then 100% of the parents’ assets are reachable. A properly-drafted power of attorney will avoid these risks (because an attorney-in-fact is not an actual owner). Don’t chance it.
Two other commonly encountered challenges are the situation where the person who granted the power of attorney does not want to give up control. As discussed above, all adults are presumed to have capacity to make their own decisions. With a power of attorney, there is not a taking away of the authority to make these decisions (like in the case of a guardianship), but instead there is a sharing of power. This means that a person who is acting in their best interests some of the time but not all of the time can do things that are detrimental to their financial well-being and can frustrate the efforts of a power of attorney. Persons who have intermittent capacity can revoke or attempt to revoke an existing power of attorney, which can leave the agent in the awkward spot where they are potentially without the authority to act when that authority is needed most.
As with wills, powers of attorney are sometimes a result of undue influence or even fraud. If this happens there are ways to address it, however, it is easier to head off the problem before it grows too large than to try and fix things after they have gone wrong. Be careful of scenarios where non-family (or sometimes family) caregivers or anyone else in a position of potential authority or control try to control a person’s finances in a way that may not be to that person’s benefits. If you have questions about this kind of problem it is always better to ask an attorney sooner than later as it becomes harder to correct as more time goes by.
Things to Consider
A power of attorney is one part of nearly every basic estate plan (with a last will and testament and advance medical directive [living will] being the other two components). Remember that like an advance medical directive, a power of attorney only works during life. It does not do anything after someone has died and no actions may be taken by an attorney in fact after the grantor has died. Any such authority can only come from a will or a trust, which is a separate document.
Many of the problems related to a power of attorney are based on communication. Too many people say far too little about what they want to happen and whom they want to help them. Because powers of attorney involve substantial liability for the attorney in fact (agent), there should be a discussion of wishes and expectations upfront when the grantor is healthy and not under duress or in a crisis. It is also possible for a person who writes a power of attorney to say too much or to give conflicting signals to family members about what their plans may be. This can creates a situation where it is not practically feasible to change plans if circumstances change. Powers of attorney can and should change with a person’s needs. If a person is divorced, for example, their agent is likely going to be someone different than their future spouse – at least for a time. If conflicting messages are given (especially to adult children) there can be hurt feelings and the potential for disagreement about what needs to be done or who is the person to do it. These considerations should be part of your plan, as well. There is no good reason for delaying – make a commitment to create or update yours today.