Avoiding Power of Attorney Abuse

/ July 26, 2013

Pen_And_Signature

In a previous post I spelled out the basics of the changes made to Minnesota’s Statutory Short Form Power of Attorney that will take effect January 1, 2014. As I mentioned, many of these changes were made to address the potential for abuse. Indeed, a Power of Attorney document gives broad and sweeping powers to the Attorney-in-Fact (AIF) named in the document. Depending on the language in the Power of Attorney document, an AIF may be able to sell or transfer real estate, liquidate or transfer ownership of securities, open and close bank accounts, and possibly transfer funds to him or herself (this amount is limited, however, to federal annual gift tax exclusion effective during the year when the gift was made – currently $14,000). An AIF can potentially do anything the individual granting the power can do him or herself.

As scary as all of this sounds, having a valid Power of Attorney in place is a very important, effective, and useful tool. For many clients, the Power of Attorney is the cornerstone of “incapacity planning.” And there are numerous reasons why anyone could potentially experience at least some period of incapacity during their lifetime. People are living longer and Alzheimer’s disease, dementia, other age related health problems and accidents are more common among the population. Even young people may face at least some period of incapacity during their lifetimes. A valid Power of Attorney can empower the named AIF (typically a family member) to act without the necessity of acquiring guardianship, which involves time, expense, and delay. But the downside of empowerment is the potential for abuse. ‘

Avoiding potential abuse is probably best achieved when both the person granting the power (the “principal”) and the AIF understand what is involved in granting and acting on the powers granted in a Power of Attorney document. Here is a brief list of potential topics to consider before signing a Power of Attorney document . . .

  • Supervision and Accountability. An AIF can act independently and is not supervised by the court. However, creating other means of accountability can lessen this problem of oversight. Perhaps, accountings could be required and reviewed by your attorney, accountant, or another family member. Alternatively, having more than one AIF acting together could create a simple means of accountability and supervision.
  • Financial Savvy. An AIF may “abuse” his or her powers simply due to limited knowledge of finance and banking. Many individuals do not understand the intricacies of annuities, life insurance, and retirement accounts. You would hope your AIF does. This could also be framed as how willing do you think your AIF is to learn new things? Or how can you educate them effectively?
  • Compensation. Payment could incentivize the AIF to take their duties and responsibilities seriously.
  • Family Dynamics. This is the quagmire nearly everyone faces. Will making your son your AIF, for example, upset his seven angry older sisters?

The possibilities here are too numerous to consider, but I’m sure you get the idea. Of course, as with all blog posts, this list is limited and meeting with an attorney will certainly answer more questions and open more “problems areas” of potential abuse unique to your specific family situation. The moral of story is . . . don’t let potential abuse necessarily scare you away from having a valid Power of Attorney, but do consider the details carefully. The mantra of the estate planner is “planning a little now, saves a lot of time and expense later.”