As we review powers of attorney, keep in mind they are common conduit for fraud against family members. A power of attorney is a document that allows individuals to appoint an agent to act on their behalf if they are mentally or physically impaired or unavailable for an extended period of time. Unfortunately, many individuals have not prepared a power of attorney while others have prepared a poorly drafted document that may be ignored or open to abuse. We shall review powers of attorney from the following perspectives:
- types of powers of attorney
- using a power of attorney
- potential problems with these documents
- avoiding abuse
A simple power of attorney can be downloaded from the Internet at no cost. However, we strongly recommend such documents be professionally drafted by a lawyer. The cost is minimal and the power of attorney is often prepared in conjunction with updating a will. An unsophisticated process to complete a power of attorney may not address issues such as:
- how will individuals be held accountable for any inappropriate behaviour?
- if the person appointed under the power of attorney is unable, or unwilling, to carry out the responsibilities due to death, illness or disinterest, who will act in his or her place?
- should there be compensation for the time and effort in managing the individual’s affairs? If so, how will the compensation be determined since the length and severity of the disability will determine the effort and these factors are unknown when a power of attorney is prepared.
- If a third party believes a power of attorney is being abused, how can such issues be resolved?
Types of Powers of Attorney
There are two types of powers of attorney. The first covers property (financial affairs) and the second covers personal care. This article will only review powers of attorney for property
Power of Attorney for Property – Typical items covered in this type of power of attorney would include:
- banking and investments
- take physical possession of the property to ensure safekeeping
- filing tax returns
- paying bills
- buying or selling a home
If an individual has become mentally incompetent and does not have a continuing power of attorney, i.e., either a “standard” or no power of attorney, the situation is complicated. The general guidelines can be summarized as follows:
In Ontario, there are two types of powers of attorney for property. The first is known as the “standard” or “general” power of attorney and the second is known as a “continuing” power of attorney. The basic distinction between the two types is the standard power of attorney will no longer apply if the individual becomes mentally incompetent, whereas a continuing power of attorney will be valid despite any mental incapacity of the individual. If a standard power of attorney is used, the issue of when an individual becomes mentally incompetent becomes critical. The general power of attorney is authorized by the Power of Attorney Act, while the continuing power of attorney gets its authority from the Substitute Decisions Act.
- an individual will be judged to be mentally incompetent based upon a medical opinion
- the courts will select a guardian to act on behalf of the individual
- various people may petition the court to appoint a guardian and this may include a family member or friend
- the courts will select a guardian based upon the best interests of the individual and the guardian who is appointed is not necessarily the person that applied to have a guardian selected
- if no one is willing to act as a guardian, a public trustee may be appointed to act in that role
- the guardian may have to file certain information with the courts
Using a Power of Attorney
A power of attorney allows an individual to delegate the responsibility of handling their financial and/or personal care issues during a period of mental or physical impairment. It is most commonly used in the following three situations:
- physical impairment during one’s working years;
- mental or physical disability during one’s final years; and
- managing one’s financial affairs during an extended stay outside the country. For example, if your daughter were teaching overseas for two years, a power of attorney controlled by the parents would allow for the handling of routine financial transactions such as filing tax returns or bank transfers.
Both spouses should acquire a power of attorney in case their partner becomes incapacitated, such as suffering a stroke or being involved in an automobile accident. If bank accounts are jointly owned, both parties have access to these funds, but if the accounts were in the name of the husband, who was incapacitated, the wife could not get access to the money without either a power of attorney or the intervention of the courts. After retirement, the focus often moves from physical impairment to the possibility of mental incapacities such as senility or Alzheimer’s disease. Compared to a physical condition, mental incapacity is much more complex. If the power of attorney is to come into effect upon the mental impairment of the individual, it is very difficult to determine when an individual reaches such a state. From a power of attorney perspective, an individual is, or is not, mentally capable. However, mental conditions are not always obvious and factors to be considered, especially with aging individuals, include:
- a mental impairment may develop gradually and may affect different components of the mind in different ways, i.e., the memory may deteriorate, but financial sense may remain
- the mental incapacity may be temporary
A power of attorney is distinct from a will. A will becomes effective upon death and the power of attorney ceases. An estate plan should consider the transition of the estate from the power of attorney to a will. For example, should the individual with a power of attorney, also be the executor of your estate?
Whether one is preparing for his or her eventual demise, or that of an aging relative, one is normally in a superior position to have an enduring power of attorney, rather than being subjected to a court-appointed guardian. An enduring power of attorney allows individuals to control and implement their financial affairs after they have lost their mental facilities. Guardians will act in what they believe to be the individual’s best interest, but problems can arise if they have received no direction on your specific intentions.
A power of attorney allows an individual to have their financial affairs managed by a third party, but it does not ensure your finances will be managed in a manner consistent with your wishes. There are potential problems with a power of attorney as the holder of the document may abuse the power that has been granted by acting in a manner that is inconsistent with your wishes. It is also possible that the instructions were drafted in such a way that it was unclear regarding goals and objectives.
An agent acting in good faith may find it very difficult to make such decisions as:
- should the family home be sold
- should gifts or loans be made
- should assets be distributed to beneficiaries named in the will if there is a tax advantage or a real need of the beneficiary to receive the funds prior to the death of the individual
- how will investments be managed
A typical abuse of a power of attorney occurs when an adult child has a power of attorney for an aging parent. The child has an immediate financial need and the parent has excess cash. Since the child may eventually inherit the parent’s assets, they may help themselves to mom’s bank account. The sad part is they are seldom caught.
Granting another individual the right to manage our financial affairs is a serious responsibility. The person receiving this power may abuse the privilege that has been granted. A power of attorney should only be granted to a trusted individual, but it may be prudent to employ a number of safeguards to ensure that your assets are managed properly and reduce the opportunity for abuse. Consideration may be given to the following steps in order to safeguard your assets when utilizing a power of attorney:
- have the power of attorney prepared by a lawyer
- appoint two individuals to have the power of attorney, but they must act jointly, i.e., they cannot act independently of each other
- provide specific instructions that dictate the terms of the power of attorney. This may include comments on loans, gifts, investments, the sale of your home, etc.
- keep the actual power of attorney and letter of instructions in the possession of a third party, such as your lawyer
- consider whether a power of attorney should be absolute or contain various restrictions
- consider advising a friend or relative, who is not named in the power of attorney, as to the terms, conditions and restrictions that may apply
- make specific reference to the compensation that may be available to the individual that exercises the power of attorney on your behalf