Uses and Abuses of Financial Power of Attorney
How Power of Attorney Can Help or Hurt You
Aug 4, 2008
What is a financial power of attorney?
When one person, the “principal,” signs a power of attorney, it authorizes someone else to serve as “attorney in fact” or “agent.” Principals don't give up any of their own power over their financial affairs, they simply delegate a representative who can sign documents, write checks or sell real estate for them.
A financial power of attorney is separate from a health care power of attorney and it gives the agent no say in health care and medical decisions.
Why a power of attorney is needed
A principal who lives in one state but has property or business interests in another may need a power of attorney to give the agent authority to represent them.
Parents who are no longer capable of managing their own affairs may use power of attorney to delegate decision-making power to one of their children.
Different forms of financial power of attorney
A power of attorney becomes void if the principal becomes incapacitated in any way. Because of the problems that can cause, most people prefer a durable power of attorney, under which the agent can act even if the principal is in a coma.
A springing power of attorney kicks in only under specific circumstances, for example if the principal is incapacitated or declared medically incompetent.
Revoking an agent's authority
Principals can remove an agent at any time. This can be a problem in elder care: A mentally confused parent could cancel their power of attorney even if they need their adult child's financial guidance. An agent has no grounds to challenge this decision.
Abusing an agent's power
In 2007, the Pittsburgh Gazette reported on a military wife who used her husband’s power of attorney to sell his house while he was overseas, then left with the money. Agents have used their principal’s money to line their own pockets, give gifts to friends or change the beneficiaries of wills.
Precautions against abuse
More and more principals are placing restrictions on the power of attorney, even if that makes it tougher for the agent. Common restrictions is that the agent make regular reports to the principal, or that the agent can’t give away the principal’s property.
It’s possible to use power of attorney to create two co-agents, but if they don’t agree on what to do, that can make decisions impossible.
The American Bar Association recommends that principals list any powers they don’t want the agent to have, such as changing a will. The power of attorney document should also specify any powers the agent wants the principal to have.
Springing vs. durable powers
Springing power of attorney only activates when it's needed, which may seem the safer way to go. However, it doesn't happen instantly: If a parent is incompetent but functional, for instance, the agent will have to wait for a doctor to find them incompetent before the power of attorney can be invoked.
One alternative is for the principal to draft a durable power of attorney but give it to their laywer or some other trusted person until the agent needs it. This limits the opportunity for abuse, but doesn't involve the delay that springing powers of attorney might.
