So InKleined
by Linda B. Klein, M.Tax., J.D., R.F.P
(Send your questions on any aspect of financial planning c/o this
publication. Please include your name, address, and phone number.)
POWERS-OF-ATTORNEY:
WHY EVERYONE SHOULD HAVE AT LEAST ONE
Remember when you were in school and you needed a
permission slip to go on a class field trip? When viewed from the
vantage point of agency law, your parent or legal guardian thereby
authorized your teacher to take you off school property and to
exercise supervisory control over you while away -- i.e., to act "in loco
parentis" (in place of the parent).
Any legally-competent individual can authorize another person
to carry out a given task. Essentially, a "principal" appoints an
"agent" (also referred to as an attorney-in-fact) to represent the
principal as if the principal were performing the task directly. The
agency agreement defines the scope of the authorization in terms of
both the powers granted and any time limitations imposed.
A general grant of authority invests the agent with the power to
perform anything and everything on behalf of the principal that the
principal could legally do personally. (However, an agent cannot make
a last will for the principal.) Commonly included "general" powers are
authorizations to exercise stock options and to vote shares of stock
(proxies), to buy and sell property, to execute any agreements or
documents, to loan or borrow money, to fund a trust, to engage the
services of legal counsel or financial advisers, to file actions or defend
claims in court, to file tax returns and make any tax elections, etc.. A
special or limited grant of authority restricts the agent to only the
specified power(s); e.g., authorizing a stock broker to trade your
account.
Whether these grants of authority are very broad in scope or
very specific, for a limited time or not, the law imposes a "fiduciary
duty" upon the agent, tying her conduct to an objective standard of
care: always in the best interests of the principal. Because an agent
bears an accountability for her conduct, she can be held liable to the
principal for a breach of fiduciary duty from any abuse of discretion,
whether the abuse is one of commission or omission..
A curious aspect of agency law is that an ordinary grant of
authority automatically lapses if and when the principal becomes
legally-incompetent . . . which is exactly when, you would suppose,
the principal most needs an agent's assistance. But it is also then that
the principal must be the most circumspect to protect against or to
remedy breaches of the agent's fiduciary duty. Therefore, a "durable"
power-of-attorney must contain socalled "magic words" stating that
the agency relationship is intended to survive and not be affected by
the principal's subsequent disability or incompetency, or by the lapse
of time. Similarly, unless the agreement states otherwise, an agency
relationship automatically terminates by the subsequent appointment
of another agent with the same powers.
As a practical matter, durable general powers-of-attorney are
the most useful. But they are also the most vulnerable to abuse.
Therefore, even if your docuoment provides for "springing powers"
(which take effect only under specified, triggering circumstances), do
not appoint as a general agent anyone whose judgment, honesty, or
competence in business matters is the least bit questionable.
Moreover, make certain that your agreement provides for easy
revocation of the agency relationship, and that both you and your
agent understand those provisions. Lastly, the principal should
decide whether or not photocopies of the documented power-of-
attorney shall have the same force and effect as the original, and
expression of
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