As the title of the post states, Power of Attorney liability is much greater than you think. And what’s more important is that your liability as Power of Attorney emanates from sources you least expect as you’ll see. That’s right. Problems of liability can blindside you and put you in a world of hurt.
Before we get to that, let’s define a few terms. The person who creates and provides you with the Power of Attorney is called the “grantor”, “principal” or “donor”. If you are given (and except) a Power of Attorney, you become the “agent” of the “grantor”.
What can an Agent do?
As “agent” you can enter into business transactions as defined by the general or limited power of attorney. Usually that means you can buy and sell real estate, take on mortgages, sign contracts and obligate the “grantor” in many other ways. If the “grantor” doesn’t complete her side of the bargain, she will be held responsible, not you. This is very similar to how a trustee in a trust works and is the reason some people turn to professional trustees in certain circumstances .
Sure there are some cases where creditors can come after you. But that can only happen if you:
- Agree to be personally liable by signing an additional agreement.
- Are liable because of the relationship you have with the person (and this has nothing to do with you being the “agent”).
- Act negligently, fraudulently or illegally.
- Do something that you are not authorized to do by the Power of Attorney document.
Are you seeing the thread here? The common theme is that a Power of Attorney isn’t personally liable for the debts of the grantor unless she does something wrong or silly or both.
Neal’s Notes: It’s also important to keep in mind that there are certain problems with Powers of Attorney that go beyond the scope of what we are talking about here.
I recently came across a case where a POA was asked to incur liability she didn’t have to. Here’s what happened. Once the woman was appointed Power of Attorney for her father, she contacted her dad’s bank. The bank wouldn’t give her information on her father’s loan until she co-signed her father’s mortgage. Outrageous.
The bank acted illegally of course. They had to provide information to Pam because she was the legal agent for her father. She didn’t need to take on any additional liability. Once this was brought to the attention of the bank, they started to behave.
Be careful of tricks like this. If you present POA documents to any financial institution they usually must honor them if they are valid. You won’t need to take on other people’s liability to act as POA.
At the same time, please understand that not every financial institution will consider your Power of Attorney valid. Most of these companies have their own Power of Attorney documents drawn up by their own attorneys. Sadly, your best bet is to have a valid document on file from each financial firm you deal with. I know this is a pain in the arse but it is worth it. People often overlook this step and if they do so it can be a tremendous headache and fatal flaw in estate planning.
Let’s get back to the bottom line and here it is. You probably won’t have to worry about personal liability from creditors in most cases as POA. But that doesn’t mean you can forget about the problem of liability. You still have plenty of it. And it comes from the place you least expect it – the grantor.
Because the “agent” has a “fiduciary responsibility” to act on behalf of the grantor. That means you have to work in the best interests of the grantor and not your own. And that means if the grantor thinks (and can prove) that you acted outside your duty, she (or her heirs) can and will sue you.
How can you minimize your risk as Power of Attorney?
First, never do anything silly like use the grantor’s assets for your own use or benefit. That goes without saying. At the same time, never commingle your personal assets with assets which are entrusted to you. This gives the appearance of impropriety and it can be a huge problem even if you do nothing wrong. Finally, you should never co-sign a loan for the grantor. This is even more dangerous than commingling funds. Don’t do it.
Maybe the best way to avoid Power of Attorney liability is refuse to accept the offer when someone gives it to you. That would put all your fears to rest. Sometimes this approach isn’t practical.
Have you acted as a Power of Attorney? Did you run into any problems? What steps did you take to minimize your risks?