The Power to Act


After years of training and planning, you’re doing it, climbing Everest.  Your oxygen deprived lungs are permeated by -280C temperatures while an unrelenting 30 mph wind whips down the South Col.  As you begin to ascend the Khumbu Ice Falls your sherpa hands you the sat phone. It’s your realtor. She finally has a solid offer on your Park Avenue multi-unit apartment complex, but the buyer must close by Friday.  She asks if there is any way you can sign the purchase agreement and close on Friday?

“No but call Joe,” you tell her. “Who is Joe?” she asks.  “Why, Joe is my agent under a general power of attorney,” you reply.

While it’s unlikely any of us will be in this exact situation, it is likely that at some point in our lives we will have need for someone to step in for us to perform certain duties that we cannot. That’s why everyone needs a power of attorney.

A power of attorney is a legal document that authorizes another person, known as your attorney in fact or agent, to perform specific duties on your behalf under certain circumstances. There are a few different types of powers of attorney, used in difference scenarios. Even if you have a power of attorney, it’s important to know which type you have and consider who is named as your agent. Because at critical moments, you must make certain your agent has the power to act.

Financial vs. Medical

Simply put, a financial power of attorney gives your agent authority only over financial decisions, while a medical power of attorney allows your agent to make medical decisions.  Examples of duties granted under a financial power of attorney include making deposits and withdrawals from your accounts, collecting debts, filing lawsuits, selling property, and filing taxes. Whereas under a medical power of attorney your agent can make decisions regarding your medical treatment, life support, and organ donation.

General vs. Durable

A general power of attorney grants authority to your agent to act on your behalf for a period of time. You decide what actions the agent may take in your name, what decisions he or she can make, and when he or she may do so. It is important to note that a general POA ends the moment you become incapacitated.

On the other hand, a durable power of attorney allows your agent to act on your behalf even if you become incapacitated.

If, for example, on Wednesday afternoon half a mile from base camp you suddenly lose consciousness, Joe cannot close on the real estate deal. Your general power of attorney ends the moment you become incapacitated. To sell your property, Joe would need to be named as your agent under a durable power of attorney.

Springing vs. Durable

A springing power of attorney is a special type of power of attorney that only becomes active in certain circumstances.  Usually that event is when the principal is found incompetent.  In our example, Joe would not be able to execute the sale on your behalf if named under a springing power of attorney, because you are still mentally and physically capable. However, the second you lose consciousness, Joe can spring into action and close the deal.

Springing power of attorneys are tricky because it requires financial institutions to determine your capacity.  Many refuse to accept the agent’s authority until a legal opinion can be rendered, which causes delays and adds otherwise unnecessary legal fees.  A durable power of attorney does not need to be subjected to such scrutiny because it takes effect immediately and continues through a principal’s incapacitation.

Death vs. Power of Attorney

Let’s suppose on Thursday your ascent of Everest takes a turn for the worse when an avalanche buries you under 15 feet of harden snow and ice. Could Joe act on your behalf at Friday’s closing?  No, because powers of attorney are ineffective after death.  All authority granted under any type of power of attorney terminates immediately upon death.  At death, all financial affairs are controlled by your personal representative or trustee.

The Uniform Power of Attorney Act

As alluded to earlier, financial institutes sometimes struggle with accepting an agent’s authority.  Either the power of attorney is dated, the provisions are ambiguous, or the principal’s capacity is difficult to ascertain.  This often results in the financial institution requiring a legal opinion which can be costly and delay an agent’s ability to act quickly.

To rectify this issue, Michigan is considering adopting the Uniform Power of Attorney Act which aims to strike a balance between two important objectives: 1) the need for flexibility and acceptance of an agent’s authority and 2) the need to prevent and remedy financial exploitation. Already adopted by 28 states, the Act makes all powers of attorney automatically durable; in other words, an agent’s authority is not terminated at the principal incapacity. This default is the reverse approach currently taken in Michigan.

If an agent’s powers are durable, financial institutions no longer need to concern themselves with ascertaining a principal’s capacity, or lack thereof. However, durability also continues to be one of the most potentially hazardous features in a power of attorney because incapacitated principals are more easily exploited by bad agents.  So, choose your agent carefully.

Who’s Your Agent?

If the Uniform Act passes, even more scrutiny should be given when selecting your agent. While competent, you can ascertain if your agent is acting in good faith.  However, when incapacitated, you have no way of knowing if your agent is acting in your best interest.  Things to consider when choosing an agent:  Does your agent make good financial decisions?  Do they live nearby and have the time to administer your financial affairs?  Are there any conflicts of interest? Think about it, if Joe is scaling Everest with you, he would not be your best choice.

While having a power of attorney is extremely important, reviewing the terms and your appointments is just as important, especially in light of pending legislation. If you have any questions or would like help reviewing your current estate planning documents, please reach out to your Legacy Trust Advisor.