How to Prevent Power of Attorney Abuse
Power of attorney is an essential legal document that all adults should have. It allows you to name someone you trust to manage your finances for you if you’re ever unable to yourself.
However, if the person you name as your power of attorney turns out to be untrustworthy, that person can take advantage of you. That’s why power of attorney is sometimes called a “license to steal.”
Because the potential for misuse of power of attorney is a real problem, it’s important to take steps to protect yourself and your finances when drafting this document. Here’s what you need to know about avoiding power of attorney abuse.
What is power of attorney?
This legal document allows you to appoint someone to act on your behalf in certain legal and financial matters. You (the person appointing a power of attorney) are called the principal. The person appointed to act on your behalf is called the agent.
Usually, power of attorney is a tool used to plan for future incapacity, which could happen if an accident, illness or cognitive impairment such as dementia leaves you unable to handle your finances on your own. However, it can be used to give someone temporary power to handle specific financial transactions for you, such as signing business documents while you’re traveling.
The scope of your agent’s power is determined by the type of power of attorney that is drafted:
- General power of attorney gives your agent broad powers to handle any sort of financial transaction for you if you’re unable to yourself.
- Limited power of attorney limits the scope of your agent’s power to a specific transaction, types of transactions or a period of time.
- Springing power of attorney takes effect only in certain circumstances that you designate, such as being designated by doctors that you are no longer competent to handle your affairs.
- Durable power of attorney remains in effect after the principal becomes incapacitated.
When using this document to plan for the future, it’s best to have a general durable power of attorney so your agent has broad powers and doesn’t face any roadblocks when stepping in to help with your finances. However, this also can open the door to power of attorney abuse.
[ See: General, Limited, Springing, Durable—Which Financial Power of Attorney Do You Need? ]
What is power of attorney abuse?
Abuse of power of attorney can happen in many ways. However, it typically happens when the person you name as your power of attorney doesn’t act in your best interest.
Your agent is required to be a fiduciary, meaning that he or she must act solely in your best interest. Your agent must manage your money in a way that benefits you and is expected to keep detailed records.
However, there often isn’t anyone looking over the shoulder of a power of attorney to ensure that fiduciary duty is upheld. As a result, there are a variety of ways power of attorney can be abused according to the U.S. Department of Justice:
- Self-dealing: An agent uses the principal’s money for himself rather than for the principal’s needs.
- Exceeding the scope of authority: An agent does things that the power of attorney document doesn’t allow, such as gifting the principal’s money to himself.
- Deviating from principal’s expectations: The agent handles money in a way that undermines the way the principal wants his money managed.
- POA document forgery: This can happen when a signature is forged on a power of attorney document or the principal is coerced into signing a document by someone who wants to take advantage of the principal.
If not caught quickly, power of attorney abuse can result in serious financial loss. Victims can have their bank accounts raided, their savings drained and their property sold out from under them. It also can lead to emotional, psychological and physical abuse.
How to prevent abuse of power of attorney
Don’t let the possibility for abuse of power of attorney scare you away from granting this power to someone. If you don’t name someone you trust as your power of attorney while you are healthy and mentally competent, you risk having someone you wouldn’t normally trust talk you into naming him or her your power of attorney. Or a judge might have to appoint someone to be your conservator to manage your finances if you can’t.
You can reduce the risk of power of attorney abuse by taking the following steps:
Choose someone you trust
When choosing a power of attorney, “trust is more important than anything else—more than financial experience, than accounting experience,” says estate planning attorney Harry Margolis, who is author of “The Baby Boomers Guide to Trusts” and creator of AskHarry.info.
Avoid naming anyone who has financial problems, addictive behavior, relationship problems, legal problems, a history of lying or avoiding responsibility. Margolis also cautions against naming someone who has an authoritarian or controlling personality because that person will be less likely to be transparent with other family members when it comes to managing your money.
You can name co-agents to avoid giving too much power to just one person. If you do this, though, make sure the power of attorney document states that the agents can act independently of each other. Otherwise, it can be very cumbersome getting them both together to sign documents or on the phone to provide consent for transactions, Margolis says.
If you don’t have a family member or friend you can trust to manage your finances for you, you might be able to name an attorney as your power of attorney. “Some lawyers fill that role as a last resort,” Margolis says. However, a better option can be to create a trust and to appoint an independent trust management service as trustee (more on that below).
Include safeguards in the document
In a power of attorney document, you can limit what actions your agent can perform. For example, you might want to include language that prevents your agent from gifting your money to himself or herself or changing beneficiary designations on your will, trust, life insurance policy and investment accounts. However, Margolis cautions against placing too many limitations on your agent’s power. It can make it more difficult for your agent to get your bank and other financial institutions to accept the power of attorney document.
You could require in the document that your agent provide a regular accounting of financial transactions to family members or a third party. By working with an estate planning or elder law attorney rather than using DIY power of attorney documents, you can customize your document to include safeguards such as this.
Get a second set of eyes on the agent
One of the best ways to prevent power of attorney abuse is to ensure that there is transparency. “Give other people you trust the ability to review investment accounts and bank accounts to see if anything is going on and to stop it,” Margolis says.
You can do this by using a service such as Carefull. By linking your financial accounts to Carefull’s digital platform, you’ll get 24/7 monitoring and alerts when Carefull spots anything unusual. You can name trusted contacts who can get view-only access to your accounts and activity alerts. This will allow family members or financial professionals you trust to keep tabs on how your power of attorney is managing your finances if you become unable to manage them yourself.
Consider creating a trust
If you don’t have someone you trust to act as your power of attorney, using a trust is a much better alternative, Margolis says. It’s even a good option of you do have a trustworthy power of attorney.
A trust is essentially its own financial entity. You must transfer your assets to the trust and appoint a trustee to manage those assets. The trustee can be you so that you can manage your assets while you’re alive and capable. However, you can name a co-trustee or successor trustee who can step in and manage your assets if you become unable to yourself.
The co-trustee or successor trustee can be an independent trust management service that you hire to fill that role. It’s a good idea to use this sort of third party even if you have trustworthy family members to prevent arguing among family over management of the trust.
There are several benefits to using a trust. They require accounting of how assets are managed. A trust protector can be appointed to review accounts in the trust. Financial institutions are less likely to put up hurdles for honoring trusts than for power of attorney documents. And if the bulk of your investments and savings are in a trust managed by trustee, you can still have a POA to sign documents or handle some transactions when necessary, Margolis says.
What to do if power of attorney is abused?
You can revoke a power of attorney document at any point as long as you aren’t incapacitated. So if you change your mind about the person you chose to fill the role, you can appoint someone else.
However, power of attorney abuse is more likely to occur if you are incapacitated—at which point you can’t revoke the document. That’s why it’s important to develop a strong social safety net of family and friends while you’re healthy and to give those you trust insight into your finances so they can spot changes and detect exploitation if your health declines.
Signs of power of attorney abuse
There are a variety of signs that indicate that power of attorney is being misused. Here are several of the key signs:
- There are unexplained withdrawals or transfers from the principal’s bank or investment accounts.
- The agent is unwilling to share details about the principal’s financial situation.
- Property is transferred to the agent or is sold without the principal’s permission.
- The agent is buying big-ticket items for himself or herself.
- The agent isolates the principal from family and friends.
- The principal appears uncared for even though care has been arranged.
- Bills aren’t being paid even though the principal has the financial means to pay.
- The principal is moved to a facility that’s of much lower quality than the principal can afford.
How to report power of attorney abuse
If family and friends suspect that your power of attorney is exploiting you, they can report it to Adult Protective Services, a victim services agency for the elderly. APS can investigate and stop the abuse. Law enforcement also can be contacted to intervene.
Financial institutions and certain financial professionals are required by law in more than half of the states to report suspected elder financial exploitation to authorities, which can help prevent POA abuse if family and friends don’t spot it or intervene. Many financial institutions in states where reporting isn’t mandatory will do so voluntarily to help prevent elder financial exploitation.
If abuse is discovered, legal action can be taken to stop abuse of power of attorney. The sooner abuse is discovered and reported, the more likely it is that the damage can be limited.
[ Keep Reading: How Financial Care Is Part of Aging in Place ]
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