Who Can You Trust?

October 11, 2011

Authored by: Stephanie Moll and Mary McMath

As Luke Lantta recently wrote in our sister-blog, bryancavefiduciarylitigation.com, “A power of attorney in the wrong hands can be a dangerous thing, undoing years of asset protection and estate planning.  The rise in estate litigation concerning powers of attorney and increased media attention on elder abuse and exploitation have revealed powers of attorney to be potential ‘vehicles for fraud.’  The danger lies in the sweeping power afforded to the agent under a power of attorney.”

A Power of Attorney for financial purposes designates an attorney-in-fact to act on your behalf in all financial, tax, legal, investment, and insurance matters (these powers can be limited as you feel appropriate).  In most states, powers of attorney can become effective (1) upon a certain date; (2) only  if you are declared incapacitated and no longer able to make decisions for yourself relating to your financial matters; or (3) immediately upon execution of the power of attorney.  As the principal under a power of attorney, it is your decision as to when your power of attorney becomes effective.

Sometimes, you know in advance that you are going to be unavailable or unable to handle your financial affairs for a certain period of time.  For example, when I studied abroad in college, I executed a power of attorney, granting my parents the right to act on my behalf for any financial matters that arose during the 10 months I was out of the country.  This type of power of attorney is generally limited as to the amount of time it is effective, and also as to the scope of the powers that the attorney-in-fact is given.  However, sometimes you want to plan ahead for the unexpected and want to give someone the power to handle your financial affairs over an extended period of time, with no end date, just in case.

Some people want their power of attorney to only be effective if they are incapacitated and cannot handle their own affairs.  This avoids the necessity of your loved ones having to go to court to have the court declare you incapacitated and appoint a conservator to handle your financial affairs until such time as you regain capacity.   Court proceedings can be time-consuming, costly, and emotionally draining.  By appointing someone in advance under a power of attorney, you ensure that the person you want handling your affairs when you are incapacitated is the person who actually has the authority to act, instead of a person appointed by the court.

As Luke’s post shows, a power of attorney can be a potential “vehicle for fraud” if your attorney-in-fact is not trustworthy.  Luckily, an attorney-in-fact owes a fiduciary duty to you, as the principal, to act in your best interests.  Therefore, if he or she acts inappropriately, a court can attempt to rectify the matter.  However, that can be time-consuming and costly, and you may never see results.  Therefore, when creating a power of attorney, it is very important that you choose someone who you know you can trust.