Tuesday, April 7, 2009

Powers Of Attorney: Useful But Dangerous

Powers of attorney are great legal tools when used properly and with good intentions, as is most often the case. Recently, however, I have seen an increase in cases involving abuse and misuse of POAs.

A power of attorney (POA) is a legal document where you (the principal) give someone else (the attorney-in-fact or agent) the power to do one or any number of things on your behalf, from selling real estate to signing checks to entering into contracts. A "general" power of attorney grants the power to do most anything, in theory anyway. A "special" power of attorney grants the power to do one or a limited number of things (like sell a particular piece of real estate). A "durable" power of attorney means that the POA stays in effect even if the principal becomes mentally incapacitated. The most common POA is a durable general POA.

A power of attorney should be part of most people's estate planning (along with a will and an advanced medical directive or living will). If you are in a car accident, for example, and are seriously hurt, a POA allows the attorney-in-fact to handle your business affairs while you are unable to.

But giving someone the power to act on your behalf in legal or business matters is giving someone else a great deal of power. In the recent cases of misuse, we are seeing family members take control over the principal's finances, including taking over bank accounts and essentially taking the money.

Generally speaking, if you are acting as attorney-in-fact for someone else, you cannot do anything using the POA that benefits yourself. This is called "self-dealing" and is considered a breach of fiduciary duty. The courts consider such self-dealing as presumptively fraudulent. If you do it, you are inviting a lawsuit down the road, often even if the principal directs you to do it. (For example, a principal tells you to make a gift to yourself or your family, you do it, the principal dies, and the only evidence that the principal told you to do it is your own testimony. Not a good situation to be in.).

There are circumstances where such might not be the case, but if you use a POA to get money that belongs to the person that granted you the power, chances are it will not hold up in court.

I'll have more to say about ways to avoid POA problems in upcoming posts, both as the person granting the power and the person named as attorney-in-fact.