POWER OF ATTORNEY

A power of attorney is granted by one person, the “principal,” to another person who serves as an “attorney-in-fact”, and authorizes the attorney-in-fact to make legal decisions on behalf of the principal. Powers of attorney are regularly employed in the context of business transactions, financial concerns and personal affairs, and the laws governing their creation and validity vary from state to state.

The principal granting a power of attorney determines the extent of authority vested in the attorney-in-fact. A special power of attorney gives the attorney-in-fact authority to act on behalf of the principal only with regard to one particular issue or in a very limited set of circumstances. Special powers of attorney are a common facet to a wide variety of business transactions. For example, a business to which a patent is transferred often also receives a power of attorney from the transferor to execute letters of patent and other documents to evidence the new ownership of the patent. Investors often grant a power of attorney to their lawyers or financial advisors to make decisions and execute documents in negotiating and closing a particular transaction.

A principal can also grant a more general power of attorney to his or her attorney-in-fact providing for the management of a substantial portion or all of the principal’s financial and personal affairs. For example, a non-profit enterprise might grant a financial advisor a general power of attorney to make all manner of investment decisions on its behalf. A person may be travelling for an extended period of time and grant his brother a general power of attorney to manage his personal affairs until his return.

Powers of attorney generally terminate upon the incapacity of the principal. In order for a power of attorney to survive the principal’s incapacity, it must be intended to be a durable power of attorney and explicit language to this effect must be included in the document. For example, “This power of attorney shall not be affected by subsequent disability or incapacity of the principal.” Massachusetts has enacted the Uniform Probate Code, MGL 190B, which governs the law in regard to durable powers of attorney. MGL 201B (Uniform Durable Power of Attorney Act) has been repealed.

A durable health care power of attorney, also known as a health care proxy, permits a principal to designate an attorney-in-fact to make health-related decisions on behalf of the principal in the event he or she becomes incapacitated and unable to make these types of decisions. Section 201D (Health Care Proxies) of the Massachusetts General Laws governs the creation and validity of a health care power of attorney.

Competence of Principal

A principal must be competent at the time the power of attorney is prepared and executed. If he or she has already lost the capacity to make decisions for him or herself, the power of attorney will not be valid.

Attorney-in-Fact

The primary requirement of an attorney-in-fact is that he or she act in good faith and in the best interest of the principal at all times. In the context of business especially, an attorney-in-fact should be responsible for maintaining true and correct records of each transaction he or she makes on behalf of the principal. He or she must always be cognizant of the types of decisions he or she is empowered to make under the power of attorney and which he or she is not. The principal should provide the attorney-in-fact with as much guidance as reasonably possible in the letter of the power of attorney. ENDEAVORLEGAL attorneys counsel business and individuals in preparing clear and concise powers of attorney drafted specifically to suit the requirements of each business transaction or life circumstance.

An attorney-in-fact is generally paid for his services. Compensation should be a significant consideration in the preparation of a power of attorney. The principal should include a specific amount of compensation or establish a formula for the determination of an appropriate amount. If compensation is not outlined in the power of attorney, a court will be left to determine the level of the attorney-in-fact’s compensation in its discretion.

An attorney-in-fact does not need to be a lawyer. Although, in the context of special powers of attorney granted in contemplation of a business transaction, this is in fact quite common. An attorney-in-fact can be a spouse, adult child, parent, sibling, other relative, trusted friend or business advisor of the principal. It is important to remember that the acts of an attorney-in-fact are considered to be those of the principal and are legally binding on the principal. As such, selection of an attorney-in-fact is a very serious matter and should be made only after considerable deliberation.

Powers of attorney are not regulated by court or administrative oversight, providing an attorney-in-fact with opportunity to abuse granted authority. For this reason, good business judgment dictates that the principal always include restrictive language, including clauses requiring the maintenance of accurate and adequate records, regular reporting of transactions to the principal and other named parties, prohibitions or limitations on outlined activities, methods through which the authority of the attorney-in-fact can be altered and ways the power of attorney may be terminated.

A clear and concise power of attorney, which defines and specifies in great detail the powers being granted, provides the attorney-in-fact a greater ability to follow the principal’s intentions. Additionally, in cases when the attorney-in-fact is found to be unsatisfactory, limiting authority by outlining restrictions on permissible action can prevent substantial hardships in the business and/or life of the principal. Quite often, the greater the specificity in the conditions and permissive and restrictive provisions contained in a power of attorney, the better it is for each party.

Safe-Guarding the Power of Attorney

It is good practice for the principal to advise a trusted person other than the attorney-in-fact of the existence of the power of attorney, the identity of the attorney-in-fact and the location of one or more copies of the power of attorney for safekeeping.

If the principal is concerned that his or her power of attorney may be challenged, the principal might consider taking the following actions to safe-guard the power of attorney:

• Create a video recording of the power of attorney evidencing the principal’s intent to execute the power of attorney. This recording should be maintained in a safe place along with an original copy of the power of attorney. One drawback of this type of recording is the fact that any behavioral or verbal irregularity on the part of the principal in this recording could later be used as evidence of incompetence to invalidate the power of attorney.

• At the time of the creation of the power of attorney, obtain the statement of the principal’s physician as to the sound state of the principal’s mental health.

• Execute the power of attorney in the presence of a number of witnesses regardless of any applicable requirements of law. Those witnesses can provide testimony as to the principal’s cognitive state and voluntary execution should the validity of the document ever be challenged.

Termination

If the power of attorney has not been registered with a public authority, which in some states is required in the case of a durable power of attorney, it can be terminated by:

• A procedure set forth in the power of attorney

• Destruction of the power of attorney during the principal’s competency

• Deliverance to the attorney-in-fact by certified mail of a notarized revocation

• Upon the death of the principal

• Upon the incapacity of the principal unless the power of attorney has been designated by the principal as a durable power of attorney

• Upon the death of the attorney-in-fact, if no alternate has been named in the power of attorney

A number of states provide that a principal’s legal separation or divorce from his or her attorney-in-fact terminates the power of attorney. If a power of attorney has been registered with a public authority, it may be necessary to file a written revocation with that public authority in order to terminate it.

In Massachusetts, a power of attorney is registered or recorded when the documentation for the transaction for which the power of attorney is being employed must be registered or recorded. For example, in the purchase of real estate a copy of the power of attorney is normally filed with the deed to the property.

Authorities Granted

Principals often are concerned with one or more of the following business and personal matters in the preparation and granting of special and general powers of attorney, whether or not durable.

• Borrowing Money

• Collecting Debts

• Access to Safety Deposit Boxes

• Handing Government-Related Matters

• Making Estate Decisions (including Gifting)

• Making Financial Decisions

• Managing Business Interests

• Managing Real Estate

• Mortgaging Real Estate

• Selling Real Estate

• Selling Personal Property

• Claim Inheritance or Other Property

• Collect Social Security or Medicare Benefits

• File tax returns and Pay Taxes

• Manage Retirement Accounts

• Oversee Transactions with Banks and Other Financial Institutions

• Pay Everyday Personal and Family expenses

• Purchase or Sell Annuities and Insurance Policies

• Employ professional assistance (Accountants and Lawyers)

• Handle Transactions involving Securities

• Settle Claims

• Enter into Contracts

• Maintain and Operate Business Interests

• Make Transfers to Revocable Trusts

It has been noted that principals to special powers of attorney often provide detailed guidelines as to how an attorney-in-fact should handle a specific event or issue relating to one or more of the foregoing, while principals to general powers of attorney regularly provide the attorney-in-fact very broad power over many or all of the concerns listed above. This being said, the principal granting each power of attorney has the power to structure the authority vested in his attorney-in-fact as generally or specifically as he, in his discretion, sees fit, regardless of whether the power of attorney is special or general in nature. ENDEAVORLEGAL lawyers regularly counsel clients in these power of attorney structuring decisions.

Durable Power of Attorney

While you may be very capable of handling your financial and personal affairs today, unforeseen events such as illness and memory or sensory loss can make self-management of these concerns difficult or impossible. Because life is uncertain, you might consider giving a power of attorney to another responsible individual in whom you have complete trust. Events of incapacitation are unpredictable and can happen to persons of any age and state of health. If you wish your power of attorney to remain effective passed the time your health has deteriorated to the point you are no longer competent to manage your own affairs, you will need to create a durable power of attorney. Although everyone should consider a a durable power of attorney, it is especially important when a person’s age, illness, or disability is likely to lead to incompetency or incapacitation.

A durable power of attorney is generally thought of as an important tool in one’s personal affairs; however, in the case of a sole proprietor or a corporation or limited liability company which is owned and operated solely by one individual, a durable power of attorney should also receive serious consideration.

A durable power of attorney permits an attorney-in-fact to manage the personal and financial matters of the principal without going through lengthy court proceedings. Even where a spouse continues to be present to manage such affairs, a person’s incapacity can make management of financial matters very difficult because spouses possess limited rights to manage jointly-held property or the spouse not suffering from a incapacity may not possess the sophistication necessary to successfully manage certain financial and/or business matters.

One type of durable power of attorney allows the designated person to continue to act for the principal even if the principal becomes incompetent. A second type permits the attorney-in-fact to act on behalf of the principal only in the event the principal becomes incompetent. This second type can be an effective tool for small business owners. Many consider a durable power of attorney to be important because it means that if a person becomes incompetent he will have a person of his own choosing ready to make decisions on her behalf, and it costs much less to put in place than the process of having a guardian appointed by a court.

Power of Attorney: Advantages and Disadvantages

Advantages:

• Establishing a power of attorney is inexpensive

• You can decide who should make decisions on your behalf

• You control whether the agent has general or specific powers

• The document can require the agent to become bonded or to give an account of his or her transactions

Disadvantages:

• You competence at the time of writing the power of attorney might be questioned later.

• If the powers granted are too general, the agent could abuse them.

• The agent could turn out to be untrustworthy or incompetent.

Durable Health Care Power of Attorney

A durable health care power of attorney is considered an “advance medical directive” because the individual provides instructions to be followed in the event he or she cannot make decisions on his or her own. A durable health care power of attorney permits the principal to designate an attorney-in-fact, also known as a health care agent, to make health-related decisions in the event of incapacity of the principal. If the principal is not incapacitated, he or she maintains the right to give medical direction on his or her own behalf.

The health care agent can use his or her knowledge of the patient’s personal desires as well as information about the patient’s condition to make decisions regarding medical care. If authorized in the health care power of attorney, the agent can also make decisions on whether life sustaining procedures should be used to prolong the patient’s life.

In Massachusetts, durable health care powers of attorney are governed by Ch. 201D of the Massachusetts General Laws, and are known as health care proxies.

A Massachusetts health care proxy grants power to make health care decisions on principal’s behalf that principal could have made on his or her own, including decisions regarding life-sustaining treatment but not procedures for comfort or pain alleviation. These powers are subject to any express limitations of health care proxy’s authority.

The attorney-in-fact is required to be a competent adult, and the health care proxy must be a writing signed by the principal in presence of two adult witnesses who subscribe that the principal appeared to be eighteen years of age, of sound mind and under no undue influence. The health care proxy must contain the identities of principal and health care agent and indicate that the principal intends the health care agent to possess authority to make health care decisions on his or her behalf. The document should also detail any limitations on the agent’s authority and indicate that the agent’s authority is effective at such time as it is determined that principal lacks decision-making capacity.

A health care proxy is revocable by notification to the agent or the health care provider orally or in writing or by any other action evidencing specific intent to revoke the proxy; execution of a subsequent health care proxy; and upon the legal separation or divorce where spouse was principal’s agent under health care proxy.