Moderate the power in power of attorney

Power of attorney. It’s a simple phrase, but full of complex meaning. A Power of attorney (POA) is a legal document that provides one or more persons the authority to manage finances and property on your behalf. The person designated is referred to as the attorney, but they do not necessarily need to be a lawyer.

A POA is a good option for an individual who is not able to manage financial affairs during specific times. It is often part of planning for mental or physical incapacity or as part of estate planning. However, if not properly planned with oversight and accountability, a POA can be abused, resulting in damaged financial well-being, interpersonal conflict, and even legal consequences.

Let’s take a closer look at power of attorney, the potential pitfalls, and how to protect against the risks associated with them.

What does it mean to be power of attorney?

The appointed attorney has the authority to make and enact decisions with respect to financial affairs, including banking and investing, buying or selling real estate, and making other purchases. In the case of a small business owner, the attorney may also have the authority to manage the business affairs as part of the power of attorney responsibilities. The attorney does not become the owner of assets, but they are granted decision-making power over those assets. There are some limitations.

What are the duties of an attorney?

All North American jurisdictions have legislation to instruct how a power of attorney is granted, used, documented, and reported. Most legislation, including the Powers of Attorney Act^[1], is similar, derived from common law, and contains the following base requirements or duties:

• To act in the best interests of the principal, the person granting the POA;
• To provide a standard of care expected of a prudent person;
• To ensure the assets and finances of the principal are maintained separately from anyone else;
• To only act within the powers granted the attorney; and
• To avoid conflicts of interest.

Even with those commonalities, it is important to distinguish the different types of POA. In Canada, there are two main types of POA commonly used:

• General Power of Attorney — Gives a person authority over some or all of your finances or property, providing authority only while you are mentally capable of managing your own affairs. This general POA can be limited to a specific task or period of time.

• Enduring (Continuing) Power of Attorney — Provides for the POA to continue if you become mentally incapable of managing your finances and property, with authority over some or all areas.

People generally grant power of attorney to trusted family members, such as spouses, siblings, or grown children, in circumstances where they cannot manage their own affairs — legal, financial, medical, or otherwise. Many people take on the power of attorney role for a friend or family member without fully contemplating or understanding the responsibilities that come with it, ultimately causing personal and legal problems.

Real stories

Consider Anne, who had power of attorney for her elderly aunt, who lived nearby. Anne did a marvelous job as attorney for Aunt Alice and ensured she had good care until the end of her life. However, Anne failed to keep records of purchases or financial transactions conducted on Alice’s behalf. Now, she faces accusations from Anne’s sons of defrauding their mother and her estate.

Brian had power of attorney for both his mother and father until their deaths. Brian was a sentimental choice — he was the only son — but also a poor choice. He lived across the country from his parents and sisters, was not interested in their large family farm operation, and did not visit or check in often. As a result, Brian mismanaged the farm causing great business losses and unexpected payments. His sisters sued him for negligence and depletion of their parents’ estate.

Sarah took on the role of power of attorney as Alzheimer’s quickly took hold of her dad’s faculties. She resented that her brother did not share in her burden; he no longer lived in the same region. Sarah struggled financially and often helped herself to her father’s funds. She felt entitled to compensation for the time and hardships she bore in his care and monitoring. Sarah soon found herself embroiled in litigation with her brother and her father’s estate regarding the funds she removed from the accounts.

Be aware of the risks

MNP’s Forensics and Litigation Support Services Team is often asked to investigate what really happened in power of attorney matters gone awry. Many of these cases have similar characteristics, such as:

• A lack of understanding of what is required of the attorney, and the records to be kept;
• Allowing emotion to cloud financial decisions;
• Attorneys do not seek the advice of experts such as lawyers or accountants for financial or business matters;
• A sense of entitlement to assets managed by the attorney, without understanding the impact on the principal and his/her estate and heirs;
• Commingling of funds or business operations covered by the POA and the attorney’s personal assets and affairs
• Indifference to the seriousness of a power of attorney, in law.

How to choose who gets power of attorney

A few easy steps can alleviate power of attorney issues and avoid painful family issues and costly litigation.

First, understand that familial relationships don’t always equal good financial decisions. If you are considering granting power of attorney to a loved one, ask yourself honestly if this person is up for the task. Attorneys are required to make prudent financial decisions — and sometimes business decisions — in the best interest of the principal and must keep meticulous records. Consider granting power of attorney for financial matters to an arm’s-length individual or ensuring oversight of the attorney’s actions by someone else, to mitigate potential problems down the road.

Think about the financial circumstances of the potential attorney when making such decisions. Family members are human, and humans are fallible. Easy access to money can be an overwhelming lure when a person is not used to it or is struggling financially. They really just do not think of consequences to the principal or their estate and heirs, until it is too late to be undone.

In some provinces, unless stated otherwise, an attorney may be entitled to be paid for their services. It is important to define any agreement for compensation to ensure any funds taken by the attorney for their personal benefit are authorized and may not be later explained as compensation not contemplated in the POA.

You can add conditions to limit your attorney’s power and decision-making. For example, you can require your attorney to consult with other family members or experts before conducting a transaction or making a decision. You can restrict the types of investments or business decisions your attorney can make or specify that your attorney cannot loan your money to anyone or sell your property.

Be specific and consistent about what powers the attorney has in all your legal documents and ensure the attorney is aware of all legal requirements in your jurisdiction. Ensure you have independent legal advice and know that no one can force you to grant power of attorney.

For more information, contact:

Lisa Majeau Gordon
[email protected]
780.453.5375

Bailey Rivard
[email protected]
403-536-2185