Power of Attorney: How to Avoid Abuse and Financial Exploitation

In estate planning, we often use Power of Attorney documents as a tool to plan for future incapacity. But with great power comes great responsibility. And power of any kind is easily abused. Thus, it’s important to carefully consider the legal effect and consequences of a Power of Attorney document.

What is a Power of Attorney?

A Power of Attorney allows a person to act on behalf of another in a financial transaction or for medical decisionmaking. A person making a Power of Attorney is called the “Principal” and the person they appoint to act on their behalf is called an “Attorney-in-Fact” or “Agent”.

The Agent isn’t really an “Attorney” (as in one who is licensed to practice law), but like a licensed Attorney, an Agent is a “fiduciary”. That means they must put the interests of the Principal above their own interests when acting as Agent. They must also account to the Principal for all actions performed, or decisions made, under the Power of Attorney. A failure to do so is an abuse of a Power of Attorney, or as we call it in legalese, a “breach of fiduciary duty”.

How Does a Power of Attorney Work?

A Power of Attorney allows an Agent to engage in transactions or make certain decisions on behalf of the Principal. Depending on the type of Power of Attorney, the Principal can also continue to engage in the same transactions and decisions. This is true of a “Durable Power of Attorney”. This is a Power of Attorney that permits the Agent to act immediately upon the Principal signing the Power of Attorney. These type of Power of Attorney documents are often used as a matter of convenience for a Principal who wants assistance with managing their assets or business, and who trusts their Agent. The appointment of an agent under a Durable Power of Attorney is effective immediately and continues until the Principal revokes it, dies, or a guardianship is created by a court. Consequently, an Agent is free to act under the Durable Power of Attorney even if the Principal later becomes incapacitated.

With a “springing” Power of Attorney, the Agent acts on behalf of the Principal only in the event of “incapacity”; when the Principal can no longer make decisions concerning their healthcare and/or finances. In Texas, a Medical Power of Attorney is always a “springing” Power of Attorney because the Agent is only permitted to make medical decisions when medical doctors have certified in writing that the Principal is incapacitated. Similarly, a Principal can create a “springing” Power of Attorney for financial transactions by specifying in the document that the Agent can act on their assets and financial accounts only in the event of the Principal’s incapacity.

Although a springing Power of Attorney may seem like a safe option, these documents are also subject to abuse since they are used in the context of a Principal who has lost mental capacity. Thus, it’s important to understand how and when a Power of Attorney can be used. For example, in Texas, a Power of Attorney cannot be used to change a person’s permanent place of residence or to “move” them to a skilled nursing facility. Nor is it permissible to use a Power of Attorney to admit a person to a psychiatric facility for in-patient care. Additionally, an Agent on a Power of Attorney may only engage in those financial transactions specified in the Power of Attorney document.

Who Can Make a Power of Attorney?

A person making a Power of Attorney, or “Principal”, must be able to understand the business they are transacting and the legal effect or consequences of the transaction. Thus, it is essential that at the time that they are making the Power of Attorney, the Principal understands they are granting certain powers to another person that can be exercised on the Principal’s behalf. The Principal must also be able to understand the legal consequences of those powers being exercised without the Principal’s participation.

If a Principal is unable to understand these concepts then they lack “capacity” and should not make a Power of Attorney. If a person makes a Power of Attorney at a time when they lack capacity, the Power of Attorney is voidable.  An Agent who engages in a transaction or makes a decision under a voidable Power of Attorney  could be held personally liable. For example, the purported Agent who sells property under a voidable financial Power of Attorney could be personally sued by third parties if the sales transaction goes awry or if someone complains about their authority to sell the property.

Power of Attorney forms are widely available on the Internet, but if the potential “Principal” is already incapacitated or if their capacity to make a Power of Attorney is questionable, potential Principals and agents should avoid using these forms. Instead, friends or family concerned about how to conduct the business transactions and medical decisionmaking of an incapacitated person, may need to consider a guardianship proceeding.

Avoiding Financial Exploitation Under a Power of Attorney

Because a Power of Attorney is a private document, courts do not oversee the actions of an Agent. Thus, anyone considering whether to make a Power of Attorney should seek legal counsel. Estate Planning Attorneys can advise about who to appoint as an Agent; what kind of powers their Agent should have; and how and when to limit those powers. When powers are not properly limited, Agents can exploit the finances of the Principal and even change their estate plans.

Similarly, appointed Agents under a Power of Attorney should seek their own legal counsel if they are aware that a Power of Attorney was made without the advice or assistance of legal counsel and are concerned about its validity, or their power to act.

Adriane S. Grace is an attorney in Frisco, Texas. If you have questions about Power of Attorney in the Frisco, Prosper, Allen, McKinney, Richardson, Dallas, Carrollton, The Colony, or Denton area, please complete the contact form to request a meeting.

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