Not a week goes by that we aren’t explaining to an estate planning client- or answering a phone call, sometimes a frantic one-about the differences between durable power of attorney and springing power of attorney. In this blog entry, we will explain the function of Power of Attorney, the limits of POAs, the differences between durable and springing POAs, and last but not least, explain our unabashed bias for durable POAs.
What Does A Financial Power of Attorney Do?
The purpose of a Financial Power of Attorney is to empower someone else to be able to manage your financial decisions and related tasks if and when you cannot do so for yourself. The list of responsibilities assumed by a Financial Power of Attorney can range from simply paying bills to buying, selling, or leasing real property, managing investments, and hiring and firing caregivers. If you are the person who is signing the Power of Attorney to name someone else, then you are known as the “Principal.” The person to whom you are delegating authority to act on your behalf is the “Agent.”
Whenever possible, we like to see a Power of Attorney that lists at least one (and hopefully two) successor Agents, so that if for any reason the first-named Agent will not or cannot serve, there are others in line to serve behind them.
What Are The Limits of Financial A Power of Attorney?
Significantly, these terms of Principal and Agent are used because a Power of Attorney creates what is known in legal language as a “principal-agent” relationship. A basic tenet of Agency law is that the Agent does not have the power to do anything that the principal does not want done.
An Agent is also a “fiduciary” for the Principal, meaning that the Agent has a higher duty to the Principal than to themselves, and the Agent must always act accordingly, putting the Principal’s interests first.
If you are serving as Agent under POA for your 93 year old grandmother who has poor vision, poor reflexes, and still insists on driving to run her own errands, can you use the powers granted to you under her Power of Attorney to sell her car just because you think she can’t drive? No.
If you are serving as Agent for an aging male friend with pronounced dementia, vision problems, and alcoholism, and he has a house full of guns, can you use Power of Attorney to sell his guns if he wants to keep them? Again, no.
We use these examples because both are based on were real queries made to us, and both underscore that no matter how dire a situation may be, a Power of Attorney has limits. There are more proactive approaches to both of these situations. Driving abilities are often best assessed through the Georgia Department of Driver Services. And in the latter situation, if someone has a volatile combination of dementia, substance abuse, and threatening behavior- especially with firearms- then you may have grounds for guardianship.
What Makes Some Powers of Attorney “Durable” and Others “Springing”?
Most Powers of Attorney are “durable”, meaning that the document is effective immediately, and that it is intended to “survive” any subsequent incapacity the Principal may suffer. Some Powers of Attorney, however, have “springing” language in which the powers granted to the Agent are not effective until a medical doctor states in writing that the Principal lacks capacity to manage his or her own affairs.
While the use of such “springing” language sounds like a good idea, in reality, it often means that the Agent cannot exercise powers at the very moment when they are most needed. Springing language also creates the possibility of “dueling doctors”, in which one physician may state that the Principal has capacity to manage his or her financial decisions, while another physician states the opposite.
As absurd as this “dueling doctors” scenario may sound, it has happened many times in cases where one person (perhaps an adult child of an aging parent) wants to argue that Dad lacks capacity, while another person (Dad himself, or Mom, or perhaps a different adult child) believes that Dad should still manage his own financial decisions.
Crafting A “Smart” Durable Power of Attorney
When working with any client who is signing a Power of Attorney, we do several things. First, we ensure that the client has capacity to understand the document they are signing, or- in some cases, that another party is signing for them in their presence.
Second, we explain that Powers of Attorney can be revoked by providing a written revocation to the Agent, and hopefully to all parties who might have relied on the Power of Attorney (banks, financial advisors, others).
Third, we explain the difference between durable and “springing” powers of attorney.
One of the biggest arguments against a Durable Power of Attorney is the fear of abuse of the document. Abuse of Powers of Attorney is a growing problem. Yet if the principal fears abuse by the Agent now, should that fear not be all the greater when the Principal lacks capacity?
When we prepare POAs for clients, we discuss with the client the power inherent in a POA, and how such power should not be entrusted to anyone in whom the Principal does not have total trust.
In some cases, we even remove certain powers that a Principal fears may be too prone to abuse. If an adult child lives in Mom or Dad’s house and is the primary caregiver, for example, that does not necessarily mean that Mom or Dad (as the Principal) want their child (as Agent) to be able to borrow money against the house.
To combat the possibility of abuse, a POA can include language that requires an Agent to maintain diligent records of all of her spending and actions on behalf of the Principal. Further, a POA can include language that requires or makes available upon request an annual accounting by the Agent to specified third parties (other family members, a financial professional who knows the Principal, or both.)
Pursuing these steps can help greatly reduce the chance that a “durable” Power of Attorney will be abused, but also that when needed, the Agent can act without jumping through the hoops required by a “springing” POA.
