Powers of Attorney Are Both Powerful And Dangerous Tools

FEBRARY 9, 1998 VOLUME 5, NUMBER 32

Durable powers of attorney are a relatively new idea in the law. Until 1974 (in Arizona), all powers of attorney automatically terminated when the person signing the power of attorney became incompetent. Two decades later, every U.S. state and territory has authorized powers of attorney which survive incompetence, and the “durable” power of attorney is a favorite planning tool for lawyers and clients.

Durable powers of attorney can be powerful tools to provide for financial management after incapacity. They can also be dangerous, and often amount to a literal license to steal. Understanding both the value and the danger requires some familiarity with the language and rules of powers of attorney.

The person signing a power of attorney is usually called the “principal.” The person given the power to act for the principal is referred to as the “agent” or “attorney-in-fact” (to distinguish the role from that of an “attorney-at-law”).

In order for a power of attorney to be durable, it must include language indicating either that it will become effective upon the principal’s disability (a so-called “springing” power of attorney, because it “springs” into existence upon incapacity) or that it exists now and will survive the subsequent incapacity of the principal (a “surviving” power of attorney). A given power of attorney may relate to financial matters, health care matters, or both; most powers of attorney drafted by lawyers are one or the other, and principals frequently sign two separate powers of attorney to deal with the two kinds of issues.

A power can grant broad authority (a “general” power) or be limited to very specific authority (a “limited” power). Typically, limited powers of attorney are granted to authorize a single transaction while not conveying any authority over other property of the principal.

Although a power of attorney may be general, there are still some things an agent may be unable to accomplish. In some cases, there is no legal authority to grant certain powers; in others, common practice may make it difficult to complete certain transactions. Among the limitations of powers of attorney:

  • Voting. An agent may not exercise the principal’s right to vote.
  • Marriage and divorce. An agent may not enter into a marriage contract for the principal, and probably can not initiate a divorce proceeding (though the latter may vary by state and by circumstance).
  • Real estate. Even when a power expressly includes authority to buy and sell real estate, title insurance companies may decline to accept the power, making it of limited use for real estate transactions.
  • Taxes. IRS rules require a special form of power of attorney. In practice, general powers of attorney may be sufficient to report and pay taxes due, but inadequate when a refund is claimed.
  • Gifts. Although a power of attorney may include the authority to make gifts (including to the agent), the general rule is that gifting authority must be specifically included. Since the agent has a general duty to preserve the principal’s estate, and to use it only for the principal’s benefit, gifts are not permitted unless clearly authorized.

One other limitation: only competent individuals can execute powers of attorney. If the principal is incapacitated, it is too late to initiate this powerful tool.

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