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The power of attorney for finance is an essential part of a comprehensive estate plan. So, what is it and why is it important?

As with the agent for healthcare, the trustee, and the executor, the agent under a power of attorney acts as a fiduciary. This is someone authorized to act on behalf of another. The agent under a power of attorney is granted the authority to step into the shoes of the principal, who is the person on whose behalf the agent will act. The agent will make financial decisions when the principal is unable or unwilling to act on his or her own behalf. The agent has a duty to operate in good faith, keeping in mind the best interests of both the principal and her affairs. The agent is required to consider how the principal would handle a situation. As a fiduciary, if the agent abuses her power, she can be held liable for whatever actions she’s taken.

Limited and General Power of Attorney

An agent acting under a limited power of attorney is only authorized to do a specific thing. Their grant of power is limited and narrow in scope. An example: suppose the principal is traveling and at the same time needs to sign a document at home. Since  she cannot be in two places at the same time, she designates someone to execute the document on her behalf. The scope of that agency relationship is limited to executing documents relating to that one transaction. Nothing more.

Conversely, a grant of authority under a general power of attorney is broader. Here, an agent has the authority to handle all the principal’s financial affairs. This authority is limited only by any restrictions included in the power of attorney document. This authority might include dealing with financial institutions (e.g., banks brokerage houses, mortgage companies, IRS), working with realtors, having access to the principal’s digital accounts, and much more. This type of agent literally steps into the shoes of the principal and is permitted to do almost as much as the principal.  

Durable Power vs Springing Power of Attorney.

An agent’s responsibilities under a durable power of attorney start as soon as the principal signs the agreement. That said, in most cases the agent is not expected to take control until the principal becomes incapacitated. On the other hand, an agent appointed under a springing power of attorney only steps in when the principal becomes incapacitated. It is important that the principal make clear her expectations as soon as possible. Imprecise expectations can create unwanted problems down the road for all involved.

It is also imperative that agents document everything. Leaving a paper trail of all actions and reasons for those actions can protect the agent in the event of a challenge. Documentation is the best way to protect yourself. Agents should avoid comingling of funds—at all costs. Their finances should be kept separate from those of the principal.

By now you might be wondering if you can do the job. If you find yourself questioning whether you are suited to be an agent or unclear as to what is expected of you, talk to the principal. They had a reason for appointing you. And after having that conversation if you feel the responsibility is too much, then graciously bow out. There is no shame in admitting you cannot or choose not to take on such a responsibility. Better that than find yourself in hot water later.

Francine D. Ward
Attorney-At-Law, Author, Speaker

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