Powers of Attorney can be a powerful tool for handling financial and other affairs. The importance of a power of attorney increases if you become incapacitated in any way. The power of attorney is a legal document by which one person (called the creator, grantor, or principal) appoints another person (called the attorney-in-fact) to make personal and/or financial decisions and perform certain acts on behalf of the principal. The principal signs this document and the signature is notarized. Each power of attorney document pertains to one principal. The attorney-in-fact does not sign the power of attorney.
The attorney-in-fact acts as an agent of the principal and can make substitute decisions for the principal. However, the attorney-in-fact is bound by a set of legal rules called agency. The attorney-in-fact acts on behalf of the principal without owning the property or assets. Authority is granted by the principal to the attorney-in-fact to act as the principal would act. The powers may be adjusted to the principal's current, future or potential needs. The powers may range from complete control or specific control. Generally, when planning for incapacity, broad powers are given to a trusted agent to cope with unforeseen or unforeseeable circumstances as well as known issues and concerns. The power of attorney has many uses beyond situatios of incapacity.
The power of attorney usually becomes effective immediately, granting the attorney-in-fact immediate authority to act. However, the principal does not lose the ability to act on his or her own behalf. Both the principal and attorney-in-fact simultaneously hold authority and both may act.
The attorney-in-fact need not be, and usually is not, an attorney-at-law. You should appoint as your attorney-in-fact someone in whom you can place total trust. A family member or trusted friend usually serves under a power of attorney. It is important to understand that the person holding your power of attorney is under a fiduciary duty (duty to act in good faith, use sound judgment and act with fidelity). Any violation of that duty will subject the attorney- in- fact to criminal and civil penalties. It is important that you select someone who has outstanding personal and business qualifications to act in your stead.
Many people question the need for a power of attorney. A common fallacy holds that if you become incapacitated, the executor of your will or administrator of your estate may act on your behalf. However, the executor or administrator possesses no power until your death and authorization by the court (see VCE publications 448-080, Wills, and 448-067 Probate and the Probate Process). Therefore, the power of attorney controls during your lifetime, while the executor or administrator possesses no power. At the moment you die, the power of the attorney-in-fact disappears.
The main purpose of a power of attorney is to appoint someone to make decisions, sign documents and carry out other important acts when you are unable. Disability can strike any of us at any time. If you are married, you may feel that joint bank accounts solve any problems that may arise due to disability. You may also believe that your spouse may automatically act for you if you become incapacitated. Similarly, unmarried persons often believe that their parents can act on their behalf. These beliefs are not reflected in the law.
A parent holds authority as guardian of any minor child. Once a child attains the age of eighteen years, the parent's authority ceases. A spouse never holds the authority to act for the other spouse without a power of attorney or court action. If a person becomes incapacitated and failed to appoint an attorney-in-fact, then no person may sign deeds, make gifts, or make other decisions without court intervention. A joint bank account fails to address many of these issues. In these cases, the spouse, parent or other interested party must petition the appropriate court to be appointed as guardian of the incapacitated person. This process usually costs between $2,500.00 and $5,000.00. When children become disabled, parents must initiate this process when the child turns eighteen.
The guardianship proceeding results in a person being appointed by the court to conduct the affairs of the incapacitated person under court supervision. The guardian makes financial and/or personal decisions for the incapacitated person, acting as an agent. The powers of the guardian derive from the order issued by the judge.
If the incapacitated person signed a durable power of attorney (see discussion below) prior to incapacity, a guardianship proceeding can usually be avoided and the attorney-in-fact can usually act on behalf of the incapacitated person in all regards. The fee for preparation of a power of attorney amounts to a fraction of the cost of a guardianship proceeding. Therefore, the power of attorney serves as inexpensive insurance, perhaps its greatest function.
Various types of powers of attorney exist. The choices include general, special, durable, non-durable, and springing. The types of powers of attorney may be combined. For example, you may choose a durable general power of attorney. The following sections describe the various types of powers of attorney.
A special power of attorney is limited in time and/or scope. For example, if you were to travel overseas and need someone to sign papers to sell your house while you are away, you could sign a special power of attorney appointing Sally as your attorney-in-fact to sign the documents to sell Ye Old House for the sum of $150,000 to Bill Buyer. Sally could sign the documents to convey the house during your absence(s) as your agent. But Sally lacks the authority to sign a deed to convey your interest in the Family Farm to Bill Buyer (or anyone else). A special power of attorney is not a useful tool for creating a substitute decision-maker. It is a valuable tool to answer specific needs.
A durable power of attorney contains provisions that allow the power of attorney to survive the incapacity (mental or physical) of the principal. Without this provision, a power of attorney terminates upon the physical or mental incapacity of the principal, and is non-durable. Since the principal often relies most on powers of attorney to create a substitute decision-maker during incapacity, it is important that the power of attorney contain the durable or enduring authority. An attorney-of-law must carefully draft the power of attorney to indicate that a durable power is given to the attorney-in-fact.
Generally, the attorney-in-fact immediately possesses the authority contained in the document upon the signing of the power of attorney. Many individuals who appoint a substitute decision-maker want assurances that the attorney-in-fact does not act prematurely or while the individual is capable. One way is to select a trusted person (often the attorney-at-law who prepared the document) to hold the power of attorney until certain circumstances are met. The arrangement amounts to an escrow agreement.
You may also specify in the power of attorney the circumstances under which the attorney-in-fact may begin to act (usually when the principal becomes incapacitated). This type of power, which becomes valid only when certain events or specified conditions are satisfied, is called a springing power of attorney. The power springs to life when the specifications are met and not before. Events can be specified when the power is to be undertaken on your behalf, such as in the case of medical incapacity or absence due to travel.
The authors urge caution when using escrow agreements and springing powers of attorney. The conditions must be carefully drafted to avoid uncertainty. For example, if the springing power of attorney becomes effective "upon the principal's incapacity," what does "incapacity" mean? If your family members disagree, the discussions, or even litigation, could defeat the purpose of the power of attorney by delaying the effectiveness of the document. You may be better served by using good judgment to select an attorney-in-fact in which you may place total trust.
Special issues arise when an attorney-in-fact signs a deed or other document pertaining to real estate matters which must be recorded in an appropriate Clerk's Office. In these situations, the power of attorney must be recorded prior to any other document signed by the attorney-in-fact. However, the power of attorney need not be recorded immediately after signing it to cover future contingencies. The power of attorney is normally recorded immediately prior to recordation of the document signed by the attorney-in-fact. If an attorney-in-fact will sign closing documents for real estate, the closing agent should be notified as soon as possible. In addition, a copy of the power of attorney should be provided to the closing agent well in advance of the closing date.
Powers of attorney provide valuable benefits to an estate plan when properly considered and drafted. At a minimum, the power of attorney may avoid costly guardianship proceedings. However, many issues must be considered when tailoring a power of attorney. The authors believe that every individual should consult with a legal advisor to craft one or more powers of attorney.
Jesse J. Richardson, Jr. can be reached at (540) 231-7508 (phone); (540) 231-3367 (facsimile); and firstname.lastname@example.org (email).
L. Leon Geyer can be reached at (540) 231-4528 (phone); (540) 231-7417 (facsimile); and email@example.com (email).
Reviewed by Leon Geyer, Professor, Agricultural and Applied Economics
Virginia Cooperative Extension materials are available for public use, reprint, or citation without further permission, provided the use includes credit to the author and to Virginia Cooperative Extension, Virginia Tech, and Virginia State University.
Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Edwin J. Jones, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; M. Ray McKinnie, Interim Administrator, 1890 Extension Program, Virginia State University, Petersburg.
May 1, 2009