A Power of Attorney or POA is a legal document whereby you give someone (referred to as your “agent”) written permission to help you now or in the future regarding financial decisions while you are living. A Power of Attorney is not valid once you die. it “dies” with you and then your Executor (Personal Representative of your estate) or Trustee take over. A POA is durable if it states that it will remain in effect regardless of your subsequent incapacity. While you can find on the internet standard POA forms that cover most basic planning needs, but many probate attorneys, after consulting with their clients, add provisions that are unique to the given situation so that the agent will have more or less power and authority than a standard form provides. You should only name someone in a POA if you have full, total and complete trust in the person because a Power of Attorney is a very powerful document.
There are two types of POA’s. One takes effect on signing and gives your agent immediate authority to handle certain financial affairs. The other type, called a springing Power of Attorney, only takes effect if you are incapacitated and your doctor signs a statement that you require someone to handle your affairs.
In a financial planning and Medicaid context, it is best to give a POA that conveys the broadest possible authority, limited only by the principal's concerns. Oftentimes the power of attorney will give the agent the ability to make gifts of your money or to set up a trust for your benefit. These are very useful provisions, but must be tailored to your individual situation and family structure. Without an express gift or trust making provision, it is very difficult to transfers assets to your beneficiaries to reduce taxes or to protect your assets from nursing home costs, even though this is what you would have wanted. Even so, gift giving provisions should not be automatically included in all POAs without first pondering the need and ramifications of such a power. Medicaid has a five year look back provision for gifts so that is something that your Power of Attorney agent should be required to consider prior to making any gifts.
Other powers that are often expressly added to a POA include authority to deal with the State of South Carolina and the IRS on all tax matters including income and gift taxes; accessing safe deposit boxes; changing your residence; creating, funding and requesting distributions from revocable and irrevocable trusts; and changing beneficiary designations on life insurance, annuities, and retirement plans. Usually the probate attorney will add a paragraph to the POA stating that, unless the third party has actual notice of revocation, they may rely on the agent's authority and include a hold harmless or indemnification of the third party.
One of the most common lawsuits that is brought in the probate court is for the Power of Attorney to provide an accounting for their actions while the principal was incapacitated. Therefore it is imperative that the POA keep accurate records of their actions. One of the best ways is to use a software program such as Quickbooks to keep track of any income or expenditures. The program is very easy to use and reports can be produced at the touch of a button. This is also important since often the POA is now responsible for filing the principal’s State and Federal tax returns.
The Power of Attorney has to be careful to avoid any actions that could be construed as self dealing. If allowed, the POA is entitled to compensation for their time and expenses but again accurate records must be kept and the charges must be reasonable. Often the POA document will include specific allowances or there could even be a written contract between the agent and the principal. Any payments directly to the POA for their services are considered income and are required to be reported and income taxes paid. The POA has a fiduciary duty to the principal. Beneficiaries or creditors of an estate may take issue with the actions of a fiduciary and make claims based upon the fiduciary's breach of duty, self-dealing or negligence.
The potential for fraud exists in every power of attorney arrangement, through self-dealing, embezzlement, and unlawful gifting. In some situations, a power of attorney holder will significantly deplete an estate, leaving the heirs of the principal with little or no inheritance. Other ways in which a power of attorney can be abused include changing beneficiary designations on life insurance or annuities, and opening bank accounts with joint title or pay-on-death provisions in favor of the agent.
The creation of a power of attorney can be challenged on the basis that the principal lacked mental capacity, or that the creation did not follow proper formalities. If a validly granted power of attorney has been abused by the agent, grounds may exist to sue the agent for the return of embezzled property or for monetary damages. If the principal is still living at the time of the action, the principal can sue the agent directly. In many situations, the power of attorney abuse is part of a broader pattern of elder abuse. If the principal has passed away by the time the power of attorney abuse has been discovered, the principal's estate or the intended beneficiaries of the property may be able to sue the agent for breach of fiduciary duty, tortious interference with estate planning, or a number of other causes of action.
Financial exploitation, a type of domestic elder abuse, is defined as the illegal or improper use of an elder's assets and can lead to criminal charges. Examples include cashing an elderly person's checks without permission; forging an older person's signature; misusing or stealing an older person's money or possessions; coercing or deceiving an older person into signing any documents like a power of attorney or will; and the improper use of a conservatorship, guardianship, or power of attorney.
A durable power of attorney allows a person, the principal, to designate another as his or her attorney in fact to act on the principal's behalf as provided in the document even if the principal becomes mentally incompetent. S.C.Code Ann. § 62-5-501 (Supp.2000); see also 3 Am.Jur.2d Agency § 23 (1986) ("A power of attorney is an instrument in writing by which one person, as principal, appoints another as his agent and confers upon him the authority to perform certain specified acts or kinds of acts on behalf of the principal. The written authorization itself is the power of attorney."
With a durable power of attorney, a principal creates an agency in another that continues despite the principal's later physical disability or mental incompetency. See § 62-5-501; see also 3 Am.Jur.2d Agency § 28 ("The only requirement is that an instrument creating a durable power contain language showing that the principal intends the agency to remain effective in spite of his later incompetency."). Moreover, in order for the principal to create the agency relationship in the first instance, the principal must have the mental capacity to contract. 3 Am.Jur.2d Agency § 12 ("A person who is not in a mental condition to contract and conduct his business is not in a condition to appoint an agent for that purpose."). Therefore, in order to execute or revoke a valid power of attorney, the principal must possess contractual capacity. SeeIn re Thames, 544 S.E.2d 854, 344 S.C. 564 (S.C.App. 2001