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Power of Attorney: Too Much Power?

28/11/2017


This article was originally published by CPA Canada and is reproduced with permission.

Power of attorney. It’s a simple phrase, but full of complex meaning. Granting someone power of attorney means to give someone else the authority to act on your behalf in personal matters.

All North American jurisdictions have legislation to instruct how power of attorney is granted, used, documented and reported. Most legislation is similar, derived from common law and contains the following base requirements:

  • Duty to act in the best interests of the principal (also known as the donor, the person granting power of attorney)
  • Duty to provide a standard of care expected of a prudent person
  • Duty to ensure the assets and finances of the principal are maintained separately from anyone else
  • Duty to only act within the powers granted the attorney
  • Duty to avoid conflicts of interest

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. Most often, power of attorney is granted to the same person, for all matters – 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.

Real stories

Anne: Power of attorney for her elderly aunt

Anne did a marvellous job as attorney for Aunt Alice and ensured she had good care until the end of her life. What Anne did not do, however, was 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: Power of attorney for both his mother and father

Brian was a sentimental choice; he was the only son. But Brian was 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: Power of attorney for her father

As her Dad’s Alzheimer’s quickly took hold of his faculties, she resented her brother’s lack of 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 self-determined 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.

The Pitfalls

In my practice, I’m often asked to investigate what really happened in power of attorney matters gone awry. Many of these cases sadly 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
  • Not seeking the advice of experts such as lawyers or accountants for financial or business matters
  • A sense of entitlement to funds in trust with the attorney, without understanding the impact on the principal and his / her estate and heirs
  • Commingling of funds or business operations between the attorney and the principal
  • Indifference to the seriousness of a power of attorney, in law

Remedies: An ounce of prevention

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

First, understand that familial relationships don’t always necessitate 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 keep meticulous records. Consider granting power of attorney for financial matters to an arms-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 unused to it or is struggling financially themselves. They really just don’t think of consequences to the principal or his / her estate and heirs, until it is too late to be undone.

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.

Contact Lisa Majeau Gordon, Business Advisor, Forensics and Litigation Support Services, at 780.451.4406 or [email protected].