Shortcomings of the Statutory Power of Attorney

-William D. Clements, Esq.-

 

            If you ever speak to an attorney about estate planning, one of the documents that undoubtedly will be discussed is the durable power of attorney. It is one of the most basic estate planning tools. Unfortunately, it is often misunderstood (even by some attorneys) and either misused or not used at all.

 

At a legal conference last spring, I heard another attorney comment that he never advises his clients to sign durable power of attorney forms because he has heard too many horror stories about attorneys-in-fact (your “agent”) abusing the power granted to them and stealing from their principals (you). Admittedly, theft does occur on occasion, but with careful planning and drafting, the benefits of having a durable power of attorney vastly outweigh the risks.

 

So, what is a power of attorney? Powers of attorney are used to grant authority to someone else to act on your behalf. They can be divided into two categories: (1) General, and (2) Durable. A general power of attorney is typically used for specific and limited transactions. For example, if you are attempting to sell a piece of real estate located several hundred miles from where you currently reside, you might use a general power of attorney to allow someone else (your attorney-in-fact) to attend the closing for you. You authorize a friend or family member to sign on your behalf so that you don’t have to travel. The biggest limitation of general powers of attorney is their duration, either by their terms or by operation of law. The general power of attorney may only be effective for so long as you are capable of acting on your own. Said differently, the general power of attorney will cease to grant any authority to your agent if and when you become unable (due to disability, incapacity, or death) to act on your own.

 

The durable power of attorney is typically, though need not be, broader in scope and will continue to be effective even if you become unable (due to disability or incapacity, but not death) to act on your own. For this reason, the durable power of attorney is the tool used in estate planning. If you designate an agent to act on your behalf when you become disabled, then you can potentially avoid the necessity for hurtful and costly guardianship or conservatorship proceedings.

 

There are, of course, alternatives to using a durable power of attorney in certain situations. For instance, elderly parents often add one of their adult children to their bank accounts, typically with the designation “JWRS.” Unfortunately, this designation can have unintended consequences. The letters “JWRS” (or similar) mean the account is jointly owned by the individuals named, and each has a right of survivorship. On the death of the parent, the adult child who had been given access to the account simply to make the parent’s life easier now owns the entire account, regardless of the parent’s testamentary wishes. Additionally, the opportunity for wrongfully taking advantage of the original account holder is even greater in this situation.

 

If, on the other hand, the elderly parent had executed a durable power of attorney naming his/her adult son or daughter as attorney-in-fact, that son or daughter could assist the parent in day-to-day financial transactions but would not be an owner of the account, nor would he/she become the sole owner of the account on the parent’s death. Furthermore, the durable power of attorney gives rise to a fiduciary relationship between the principal and agent. The agent owes the principal certain duties, the violation of which can result in substantial penalties. At the very least, the principal has the opportunity to recover any property the agent steals.

 

In most states, legislatures have codified what is usually called a “statutory power of attorney” or “statutory short form power of attorney.” It is available to the public and contains basic provisions, some of which the individual can modify simply by striking through specific language. Use these forms at your own risk. They’re free, but in this author’s opinion, a standard form written for everyone will not truly accomplish the goals of anyone. Consider the following language contained in the Arkansas Statutory Power of Attorney (Ark. Code Ann. § 28-68-401):

 

“Unless you direct otherwise above, this power of attorney is effective immediately and will continue until it is revoked.”

 

What this means is that as soon as you sign the form, your agent can start acting on your behalf. Is that really what you want? For most people, it makes more sense to delay the effectiveness of the power of attorney until the principal is unable to manage his/her own affairs.

 

Another prudent practice is to specify the person(s) who will determine the point at which you are unable to act on your own (triggering your agent’s authority under the power of attorney). Most of my clients prefer this decision to be made by a close family member, normally their spouse or an adult child who lives in the same city and visits with them often. However, in some situations it is advisable to leave the decision to one or two of the principal’s regularly attending physicians.

 

You can protect yourself even further by requiring affidavits to accompany your power of attorney whenever your agent attempts to act on your behalf. Example: If you designate your eldest son as your agent, and your primary care physician will be deciding when you are incapacitated, then the son would sign and attach to the power of attorney an affidavit stating, under oath, that he knows you, that you are still alive, that the attached power of attorney is true, correct, and has not been revoked or modified, and the physician would sign and attach an affidavit stating that you are incapacitated. Some states either require such an affidavit, or allow third parties (such as banks) to require one before they rely on a power of attorney.

 

The statutory form is a great starting point, and there is definitely something to be said for uniformity – it’s cheaper and more readily accepted by third parties. But the form can be, and this author believes should be, modified to better protect clients and their financial interests. While it is probably impossible to completely eliminate the possibility of an agent taking advantage of his/her principal, the practices discussed above help minimize that risk.

 

 

This article is intended for general information purposes only and should not be taken as legal advice. You should speak to a licensed attorney before attempting to use any of the information contained in this article.

Copyright 2010. All rights reserved.