Practical Thoughts for an Agent under a Power of Attorney
Category: Elder Law, Estate Planning
The simple General Durable Power of Attorney ("POA") is arguably the most important document in a person's estate plan. A properly drafted POA will let another person make financial decisions for you when you are not able - such as if you are incapacitated, or on even on an extended trip out of the country. As you age, a POA could also assist you in avoiding a costly and burdensome Guardianship provision - if you have not named someone to act on your behalf, the court will have to.
While many articles have described questions regarding the formation of a Power of Attorney (an excellent FAQ from the Office of New York State Attorney General Eliot Spitzer can be found here), one items that is discussed less often is what does it mean to be named an agent under a POA? If you are acting as agent to your spouse, or in a limited capacity (ie: a real estate closing) then the responsibilities of being an agent under a POA are not that burdensome. However, if being named agent under a POA involves suddenly managing another persons finances, with which you have no familiarity, the task can seem enormous.
Below are some practical tips that focus on what it means to act as a Power of Attorney, emphasizing the need to be organized and to understand your role as another person's agent. Note that the person executing the POA is the "principal" and the person empowered by and acting under the POA is the "agent":
- An Attorney to Advise You: If you find yourself suddenly acting as an agent under a POA, one of the first things you should do is speak to an attorney to clarify your role and advise you of some do's and don'ts. Not all POA are drafted the same: some have broad sweeping powers, others very limited powers that only apply in a small set of circumstances; some allow gifting or modifying beneficiary designations, others do not; some give the agent total discretion, others give the agent limited direction. You cannot act as the agent unless empowered under (i) the Power of Attorney document itself, and (ii) state law. Sometime state law will fill in powers not stated in the POA itself; other times state law might limit or forbid an action stated in the POA.
- Understand that you are a Fiduciary: When you are acting as an agent under a POA, you are acting in that person's best interest, not your own. Being named a fiduciary is being in a position of trust. This is manifest in clear concepts, like don't take another person's money for yourself (such as making accounts joint so they go to you on death, not through the Will). However, this tenent also colors all your actions as agent: how you invest, who you invest with, how you budget, who you pay and when, how you deal with third parties, how and if you take compensation. A general rule is that you owe the principal a higher duty of care then you would pay to yourself, as most people take shortcuts here and there that are not permissible for a fiduciary.
Furthermore, as a Fiduciary, you are not only responsible to the principal, but to other interested parties that might question you on the principal's behalf, such as other family members, a third party who you are dealing with, or a court. If a court were to find that you did not act in a prudent manner as a Fiduciary, or that you are self-dealing (ie: taking advantage of being an agent to forward your own interests) then you can be found personally liable for any waste of the assets.
- Get a good Accountant: If the principal had an accountant, a top item should be to set up a meeting with him or her. At the meeting, you can learn about a person's customary income and expenses, as well as find out all the account information by looking at copies of the 1099s and other supporting income tax documents in the accountants files. Armed with this information, you will be in a position to take two more important steps (i) consolidate and control assets, and (ii) budget for income and expenses.
- Consolidate Assets and Income: When you are examining someone else assets, you will find it is amazing how many large and small accounts people can have (remember when you got a free toaster if you opened a new account?) When the multiple accounts are yours, they tend to be an annoyance, generally to be dealt with on another day. When the accounts are another persons, and you aren't familiar with them, nor the underlying investment, multiple accounts present a huge headache. First, you need to have all account statements directed to you. Next, as a Fiduciary you need to have a reasonable investment scheme. This is all much easier to accomplish with one or two accounts then ten. So, you may want to direct assets to be consolidated. Beware, however, of the tax consequences of large scale liquidation. You may want to speak to a financial planner with a tax background before you act.
Also, you should try to get all income direct deposited to a single account from which you can write checks. This can be arranged with most employers, pension plans and investment houses.
- Prepare a Budget: Once you know the assets, anticipated income stream and expenses, prepare a budget to forecast where you will be if things don't change in 6, 12, 18 months. Then factor in the cost of anticipated changes (ie: might a move from assisted living to a nursing home be required?). Do you have enough money? If not, what other sources of financing the costs of living are available (Medicaid, Long Term Care insurance, Reverse Mortgage, etc.) From the budget you will be able to work with the Financial Planner to prepare an investment scheme to meet the principal's needs.
- Communication is Key: Do yourself a favor, tell your the principal's family what is going on. Get Quicken and email a report on a quarterly basis. Keeping everyone in the loop avoids problem, like your sister claiming she is going to sue you because you stole mom's money. The information in the report would be available if a claim were made anyway, so let everyone know what is going on so the family can deal with issues together.
- You are not Alone: As a follow up to the point above, another benefit of communication is that other people can help you. Just because you are the named agent, you don't have to do everything. You can delegate tasks to other people. Not only are other family member's there to support you, but there are knowledgeable professionals you can rely on. The principal likely didn't name you as the agent for your financial expertise - the principal probably named you because he or she thought you would make the best decisions. To assist you in making those decisions, professional advisors such attorneys, accountants, financial planners and social workers can inform you of your options, and in some cases reduce your burden by carrying out your wishes.
- You are not Personally Financially responsible: Unless you did something bad (or are married to the principal), when you are an agent, you are charged with spending the principal's assets on the principal's behalf. You are not obligated to use your own money, and there are laws in New Jersey and other states making it illegal to condition acceptance of a facially valid Power of Attorney on a personal guarantee of the agent named in the documents. Having said this, I have seen many examples of poor drafting in legal agreements, particularly with assisted living facilities and nursing homes, that appear to make the agent liable on the principal's behalf. This might manifest in language that the "agent guarantees the principal's obligations". While you can agree to use the principal's assets to meet his or her obligations, you cannot be forced to put your own assets at risk when the principals run out - you are the agent, not the bank. So rest assured that you can do a good thing for someone you care about without putting yourself at risk.