We often advise clients who are serving as durable power of attorney for a parent or another family member. We’ve also dealt with many litigation situations challenging work performed by a power of attorney. Every situation is different, every document is different, and specific transactions require specific advice.
However, some general principles apply in most situations. This post includes the generally applicable rules that every agent serving as a power of attorney should know.
Rule #1: Keep Things Separate
When serving as power of attorney, the first rule is to keep the principal’s funds separate from those of the agent. (A quick note on terms—if a child is serving as power of attorney for a parent, the parent is the principal and the child is the agent.) This means:
All of the principal’s expenses should be paid directly from the principal’s accounts with check or card.
All of the principal’s income should be paid into the principal’s accounts.
The agent should not deposit any of the agent’s money into the principal’s accounts.
The agent should not transfer any of the principal’s money directly to the agent.
The goal here is that anyone looking at the principal’s accounts should easily be able to review the accounts and easily see how the principal’s finances have been managed.
Poor managers often do the opposite. They do things like:
Paying the principal’s bills themselves, then reimbursing themselves.
Withdrawing cash from the decedent’s accounts to be used for bills and expenses.
Transferring funds to themselves without a record of what they are for.
This can be innocent, of course. It will happen that the agent is picking up an item for the principal at the pharmacy and forgot the principal’s checkbook, or that cash needed to be paid to someone helping out at the house. But this should very much be the exception, not the rule.
Rule #2: Don’t Self-Deal
It should go without saying that the agent should not be benefiting themselves at the principal’s expense. However, the legal rule prohibiting self-dealing is actually broader than many people think.
Self-dealing does not just mean taking money from the principal’s checkbook. It also means engaging in any transaction that creates a personal benefit to the agent. This includes:
Hiring the agent or the agent’s family members to put a roof on a house.
Paying for the agent to travel with the principal.
Gifts from the principal to the agent.
Selling real estate, vehicles, or other property to the agent or the agent’s family members.
Transactions between the agent and principal are not always against the law. This depends on the document and the specific transaction. But they are the sort of thing that can raise questions, especially in potentially contentious situations, and should generally be avoided. Most litigation involving powers of attorney involves transactions in which the agent benefits somehow from a transaction involving a principal.
Rule #3: Be Careful
The third rule is what the law calls the “prudent person” rule. This is essentially the agent’s legal duty to manage the principal’s affairs in a way that a careful person would manage their own affairs. This means:
Making reasoned decisions about important financial transactions (such as selling real estate).
Managing investments following advice from a professional advisor (or, if no professional is involved, following generally accepted investment approaches).
Diligently managing bill paying and other day to day transactions.
The prudent person rule does not mean there is only one right way to do things. However, it does mean that actions well away from the norm (investing a large chunk of mom’s money in cryptocurrency, for example) are problematic and should be avoided.
Have Questions?
We are happy to advise our clients on specific transactions or on what a particular power of attorney document allows.