A financial power of attorney — sometimes called a “power of attorney for property” or a “general power of attorney” — can be a valuable estate planning tool. The main disadvantage is that it is susceptible to abuse by scam artists, dishonest caretakers, or greedy relatives.
Help or Harm?
The most common type is the durable power of attorney, which allows someone (the agent) to act on behalf of another person (the principal) even if the person becomes mentally incompetent or otherwise incapacitated. It authorizes the agent to manage the principal’s investments, pay bills, file tax returns and handle other financial matters if the principal is unable to do so stemming from illness, advancing age, or other circumstances.
A broadly written power of attorney gives an agent unfettered access to the principal’s bank and brokerage accounts, real estate, and other assets. In the right hands, this can be a huge help in managing a person’s financial affairs when the person isn’t capable. But in the wrong hands, it provides many opportunities for financial harm.
Steps to Prevent Abuse
If you or a family member plans to execute a power of attorney, there are steps you can take to minimize the risk of abuse:
- Make sure the agent is someone you know and trust.
- Consider using a “springing” power of attorney, which does not take effect until certain conditions are met.
- Use a “special” or “limited” power of attorney that details the agent’s specific powers.
- Appoint a “monitor” or other third party to review transactions executed by the agent, and require the monitor’s approval of transactions over a certain dollar amount.
- Provide that the appointment of a guardian automatically revokes the power of attorney.
Some state laws contain special requirements, such as a separate rider, to authorize an agent to make large gifts or conduct other major transactions.
If you have elderly parents who have signed powers of attorney, keep an eye on their agents’ activities. When dealing with powers of attorney, the sooner you act, the better. If you are pursuing legal remedies against an agent, the sooner you proceed, the greater your chances of recovery. And if you wish to execute or revoke a power of attorney for yourself, you need to do so while you are mentally competent. This can be a sensitive matter and if you have questions, you can reach me at SDitman@BerdonLLP.com or contact to your Berdon advisor.
Scott T. Ditman, CPA/PFS, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.