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Power of Attorney: The Basics

Power of Attorney: The Basics by Tom Sciacca{Read in 6 minutes} A Power of Attorney is an important legal document that a person (called the Principal) can sign to appoint an Agent to manage the Principal’s financial affairs during the lifetime of the Principal. This is a simple but powerful legal document that can be used to greatly enhance the life of the Principal and ensure management of assets into old age and potential loss of capacity — but it can also be abused if the Principal chooses an Agent who doesn’t do their job faithfully and honestly.

How do I select the appropriate Power of Attorney form?

When most people sign the Power of Attorney form, they are signing something called the “statutory short form.” The statutory short form is a pre-approved form that actually exists in New York’s statutes and is designed for easy acceptance by those people who receive the Principal’s Power of Attorney, such as banks, brokerage houses, etc. The statutory short form contains a list of powers that the Principal can give to Agents allowing them to manage a variety of things (discussed more fully below).

Just because a Principal signs a Power of Attorney form that is not a statutory short form does not mean that it is invalid. Many attorneys prepare their own forms with additional powers. Personally, I always use the statutory short form because I know banks and brokerage houses accept it most readily. For those interested in preparing their own legal forms: Be sure to look for a New York-specific (as opposed to a “nationwide” form) statutory short form.

What is the purpose of the document and what powers are included?

I always tell people, think of signing a Power of Attorney like cloning yourself: anything that you can do that affects your financial house, you are now giving your Agent permission to do.

What are some of the common tasks delegated? Well they would include, but are certainly not limited to, banking transactions, managing your real estate (whether that means paying your mortgage, purchasing or selling a home, or renewing that all-important rent-regulated lease for your New York City apartment), filing income tax returns, applying for benefits on a person’s behalf in case of an injury or disability, etc. The powers are very broad ranging and are designed to do so, so that the Agents can take all steps necessary to protect the Principal’s financial interests. A Principal may also authorize the Agent to make gifts of the Principal’s assets while the Principal is still alive in some circumstances, which may be desirable for tax or long-term care planning (discussed more fully below).

Who should you choose as your Agent on the Power of Attorney?

The answer is someone that you trust implicitly. Given the powers you are delegating above, you are actually giving this person the legal authority to clean out all of your bank and brokerage accounts…so choose wisely! The statutory short form, which consists of several pages, now has a bold-font preamble that warns the Principal of just this issue. It basically says, “Look, this is someone who can really help you out in a pinch, but wow you better trust them because they can rob you blind!” And the warning now consumes over three-quarters of the first page. So choose wisely.

So long as the person is someone you trust, it is not necessarily important that they live in the immediate proximity of your home. It used to be that the Agent needed to dig through the Principal’s mail every day and come over and pay bills on a monthly or semi-monthly basis using the checkbook that the Principal kept in their home. In today’s world of online banking and brokerage statements and bill payment online, it is very easy for the Agent to manage the Principal’s finances just about anywhere in the world.

What are the limitations of a Power of Attorney?

There are certain things that a Principal cannot allow their Agents to do:

  1. The Principal cannot allow the Agent to transact on their accounts after the Principal’s death. The Agent’s authority dies with the Principal. Once the Principal dies, the Agent cannot write any more checks or transact any more business, even if it is to do something practical like arranging for the Principal’s funeral or final expenses.
  2. The Agent cannot treat the Principal’s money as the Agent’s own. The instructions on the statutory short form are very specific that the Agent is not to commingle assets that belong to the Agent with those that belong to the Principal. And the Agent must spend every single nickel on doing what the Agent believes is in the Principal’s best interests.
  3. Unless the Principal states otherwise, the Agent may not make large gifts of the Principal’s assets during the Principal’s lifetime. This is, of course, something that would generally be delegated to the Principal’s Will, and the Executor will be in charge of collecting assets and making payments of those requests when the Principal dies. If the Principal wishes for the Agent to make lifetime gifts of the Principal’s assets, that requires a separate rider that the Principal should really discuss with his or her attorney.

As the title of this article suggests, this information is basic and designed to be introductory material to understanding the purpose and the need for a Power of Attorney. There are plenty of other issues which we will discuss in a later article. However, if you’re curious about Powers of Attorney, please contact Tom Sciacca here.