Lerch, Early & Brewer's Legal Update
While most people are aware they need a will, there are many situations where the outcome depends on the existence of a properly drawn and exercised power of attorney. It may be helpful to review what lawyers mean when they talk about a power of attorney to better understand who needs one.
A Delegation of Authority
A power of attorney is essentially a delegation of authority from a principal to an agent to allow the agent to act on behalf of the principal when dealing with third parties. The agent may technically be referred to as an attorney-in-fact, but should not be confused with an attorney-at-law; the latter term referring exclusively to licensed legal practitioners. The delegation is usually evidenced in writing and may subsequently be revoked by the principal. The authority so granted may be limited as to scope or time, but it automatically ends upon the death of the principal. Thus if one attempts to direct an agent to make post-death distributions pursuant to a power of attorney, any distributions so attempted can be challenged by rightful heirs and will not be upheld by the courts. Instead, a valid Will should be used for such estate planning. Perhaps the most common instance of the use of a limited power of attorney occurs when shareholders of publicly held companies sign “proxy” cards to authorize a company agent to vote on the shareholder’s behalf at annual stockholder meetings. Another common use of a limited power of attorney occurs when a party to a transaction, such as a real estate closing, cannot attend a settlement and authorizes an agent to attend and act on behalf of the absent party.
Financial POAs and Health Care POAs
In practice, estate planning lawyers are often called upon to draft two main types of documents effecting powers of attorney: the first is a traditional general financial power of attorney which is broad in scope; the second is a health-care power of attorney (called an “advance directive appointing an agent” in Maryland). In both cases, an individual names as agent to act on his or her behalf to make decisions and take actions for the individual. The agent under either of these documents is typically authorized to act when the principal cannot so act due to physical or mental limitations ranging from a temporary absence to a permanent disability. While the same agent may be named to serve in both capacities (for example, one’s spouse), two separate legal instruments are typically used. Both documents should be considered as essential estate planning tools, especially in light of the alternatives discussed below.
What If There Is No POA?
If one becomes mentally incapacitated and has not previously executed both a valid financial power of attorney and a valid health-care power of attorney, then the incapacitated individual will need to have a judicially appointed guardian (called a “conservator” in some jurisdictions) to manage his or her affairs and make important health care decisions. The judicial process relies on state statutes to determine who will be entitled to serve as guardian, and usually includes a determination that the incapacitated individual (known as a “ward”) no longer has the legal authority to act for himself. The court-appointed guardian must account to the court with respect to the finances of the ward, and may need express judicial authorization before taking some actions or making some medical decisions. The judicial appointment of a guardian is intended by all involved to address the best interests of the ward, but all too often it can involve significant expense, the selection of a guardian without regard to the preference of the ward and the humiliation of a public forum in which the ward’s mental fitness is challenged. For these reasons, all adults should instead consider executing powers of attorney for both financial and health-care decisions.
Although one does not have to hire a lawyer to prepare a power of attorney, the drafting and execution of the document is essential to its validity. Thus a lawyer should be consulted when the subject matter is significant. As far as the proper contents of a power of attorney, Maryland state statutes offer recommended language for health-care powers of attorney but do not prescribe a particular form to be used for financial powers of attorney. (In this regard, the Maryland Legislature continues to consider adopting a Uniform Power of Attorney statute, which will be featured in a future issue of this Newsletter if it is ever enacted.) Certain financial institutions prefer that clients use a standard form prepared by the institution to effect a power of attorney designation with respect to accounts held at that institution. Some government agencies insist on it (e.g., Form 2848 issued by the Internal Revenue Service). If a financial power of attorney is to be used to transfer or encumber real estate, the legal description for the real estate must be referenced in the document, and there may be witness and notary requirements depending on the jurisdiction. Similarly, state motor vehicle departments will expect to see vehicle identification numbers specified, and banks will expect to see account numbers and safe deposit box numbers before granting access to an agent. Because such specific financial information can be sensitive, clients typically opt to prepare a separate power of attorney document for health-care matters.
Selection of Agent is Crucial
Finally, it should be emphasized that an agent acting under a power of attorney must exercise a fiduciary duty to act on behalf of the principal and not act selfishly to benefit the agent. Because court approval and supervision is not required in the ordinary exercise of authority by an agent, there is great flexibility, economy and minimal paperwork involved when using a power of attorney. However there is also great potential for abuse, especially when the principal is elderly or incapacitated and the agent proves to be untrustworthy. Thus while the use of powers of attorney is recommended for almost all adults, one must be very cautious as to the individual one chooses to serve as his or her agent, and should periodically revisit the choice of agent as circumstances change.
Richard Ruprecht advises clients on all aspects of estate planning, including the preparation of wills, trusts, financial POAs and advance medical directives to ensure his clients’ wishes are respected. To learn more about powers of attorney, contact him at rnruprecht@lerchearly.com or 301-657-0154.
