Estate planning typically involves a number of tools and strategies, each aimed at achieving a different goal within the larger plan. One of the most commonly used estate planning tools is a Power of Attorney. When used properly, a Power of Attorney can accomplished, or help to accomplish several different immediate and long-term estate planning objectives; however, when used improperly, or when used by someone who doesn’t fully understand the power granted in the document, a Power of Attorney can do more harm than good. If you are considering executing a Power of Attorney in the near future, or you have been appointed as an Agent under a Power of Attorney executed by someone else, you should carefully read through the following “ 5 Power of Attorney Mistakes to Avoid. ”
A Power of Attorney, or POA, is a legal agreement that allows the “Principal” (the person executing the document) to grant authority to an “Agent” (the person receiving the powers granted) to act on the Principal’s behalf in legal matters. The extent of the authority granted, and the duration of the authority granted, depends on the type of POA executed by the Principal. As is the case with any type of legal document, it is always best to have an experienced estate planning attorney draft or review a POA in which you are a party; however, you should also beware of making the following five common mistakes:
- Granting too much, or too little, authority – there are two basic types of POAs – a “general” POA and a “limited” or “special” POA. A general POA gives your Agent almost unlimited authority to act on your behalf. This means the Agent can likely do things such as withdraw funds from your financial accounts, sell your property, and even enter into contracts in your name. A limited or special POA only grants the Agent the authority specified in the POA agreement. For example, if you want to give someone the authority to act on your behalf during the sale of a vehicle while you are out of town you would execute a limited POA and specify that the Agent is only to have that authority. General POA confers a considerable amount of power and should only be used when granting power to someone you trust implicitly, such as a spouse or adult child. Granting too much power can have tragic consequences if the Agent abuses that power. Conversely, granting too little power can make the POA effectively worthless if your Agent cannot accomplish what you wish him/her to be able to accomplish.
- Failing to understand “durability” – traditionally, a POA automatically terminated with the death or incapacity of the Principal; however, incapacity planning is often precisely why a POA is needed. To resolve this dilemma the concept of “durability” evolved. When a POA is “durable” it means the Agent’s power will survive the incapacity of the Principal. Some states consider a durable POA to be the default type, meaning you must specifically say you don’t want it to be durable while other states require you to specifically make a POA durable by using the word in the document. Make sure you understand the difference and what your state requires to make a POA durable.
- Failing to update or revoke a POA – spouses frequently give each other general POA because it can make life easier. That authority, however, can survive a divorce and will survive a separation. If you separate from your spouse or initiate divorce proceedings make sure you revoke a POA. The same applies if you gave a business partner POA for your business dealings and you ended the partnership or enter into a new partnership with someone else. Any time the dynamic between a Principal and an Agent change it is time to review the POA.
- Naming the wrong Agent – probably the most common of all mistakes is naming the wrong Agent. Remember that your Agent will be acting on your behalf in potentially important legal and financial matters. Do not name someone just because he/she is your spouse/best friend/child. Name the person who is best suited for the job.
- Allowing someone else to create the document (other than your attorney) – hospitals, long-term care facilities, real estate agents, and a wide variety of other people may ask you to execute a POA for an endless number of reasons. Some of those reasons are legitimate; however, some are not. A single word in any legal document can change the meaning of the document which is why you should never agree to sign a POA (or any other legal document) without first having your estate planning attorney review the document.
If you have additional questions or concerns about creating or using a Power of Attorney, contact the experienced North Carolina estate planning attorneys at Clarity Legal Group® by calling (919) 484-0012 to schedule an appointment.