DIFFERENT TYPES OF AGENCY:
ATTORNEY-IN-FACT VS. TRUSTEE
Ethan R. Okura
Clients often come to me confused about the different ways their loved ones can act for them if they become incapacitated (or how they can act on behalf of their family members). Today I’ll explain the different types of agency and fiduciary relationships that are common in estate planning and how they apply to your important life decisions and estate planning documents.
First, let’s start off with some important definitions. When we talk about an “Agent” in the Law of Agency, we’re not talking about James Bond, Jason Bourne, the FBI, or CIA. An “Agent” is someone who acts on behalf of another and whose actions are subject to the other’s control or restrictions. A “Principal” is someone who appoints an agent to act on his behalf, subject to the control of the principal. So a principal and an agent are always a pair. You can’t have one without the other, and the principal can’t appoint an agent without the agent’s knowledge. The agent has to agree to accept the role of agent in order to be accountable to the principal. An agent is a “Fiduciary”, meaning he has a legal and moral responsibility to manage the assets of the principal for the benefit in the principal and according to the instructions given by the principal, not for the agent’s personal benefit.
An “Attorney-in-Fact” is an agent appointed under a “Power of Attorney” (sometimes called a Durable Power of Attorney, a General Power of Attorney, or a Limited Power of Attorney). The Attorney-in-Fact has authority to make business decisions and investments, sign legal documents, enter contracts, and otherwise manage the finances of the principal. A Power of Attorney can be effective immediately when the principal signs it (so the Attorney-in-Fact can act for him right away), or it can be a “Springing” Power of Attorney which doesn’t take effect until the principal becomes incapacitated. However, an Attorney-in-Fact can only act on behalf of the principal using the power of attorney while the principal is still alive. From the moment the principal passes away, the Attorney-in-Fact cannot legally use the power of attorney anymore. After the principal dies, we must have the Court appoint a “Personal Representative” (in some States called the Executor) to represent the estate of the deceased principal and manage the assets of the estate.
Another type of agency is under a Health Care Power of Attorney. In Hawaii, this document has been legislatively combined with a Living Will to become a document known as the “Advance Health Care Directives.” In the Advance Health Care Directives you name a person (or several people) who can act as your agent to make medical or health care decisions for you. This person will be known as a Health Care Agent, Agent under Health Care Power of Attorney, or Agent under Advance Health Care Directives. The type of agency allowed is limited by the document so the health care agent has no right to manage your finances or access your bank accounts just because he’s your health care agent (unless he is also your Attorney-in-Fact).
Now the biggest confusion that I see among clients and their agents is a misunderstanding in the difference between the roles of an Attorney-in-Fact and a trustee. With every trust, there are three parties: The Settlor (sometimes called Grantor or Trustor), Trustee, and Beneficiary. The Settlor is the person creating the trust and putting his or her assets in the trust. The Trustee is the person who receives the assets, manages and invests the assets, and distributes the assets in accordance with the terms of the Trust. The Beneficiary is the person who benefits from the Trust—the one whom the Trustee gives the trust assets to or spends the trust assets on. If you create a revocable living trust, you are usually the Settlor, Trustee, and Beneficiary during your life while you’re still mentally competent. However, a Successor Trustee can step in as the Trustee to manage the Trust whenever you become incompetent or pass away. The common misunderstanding comes in when people think they can use the power of attorney to manage the assets in their family member’s trust. A power of attorney only lets the Attorney-in-Fact manage the assets in the principal’s individual name. Any assets owned by the principal in her revocable or irrevocable trust can’t be accessed using a power of attorney. Only the Successor Trustee has authority to deal with and manage the Trust assets. Although both the Attorney-in-Fact and the Successor Trustee are both fiduciary agents of a sort, their roles are NOT interchangeable. Another difference between Attorney-in-Fact and Trustee is that while the Attorney-in-Fact may not manage the principal’s assets or conduct business and sign documents for the principal after the principal’s death, the Successor Trustee can continue (or start) to manage the Trust even after the death of the Settlor (principal).
Another way that some people choose to allow family members to manage their assets is by create a Joint Account at a bank or other financial institution. I usually do not recommend using a Joint Account as a means of allowing someone to help manage funds. The main reason is that the Joint Account owner is not a fiduciary and owes no legal obligation or duty of loyalty to the other joint owner. It does not create a principal-agent relationship. Even if all the assets belonged to one person initially, once the account is put into joint names, either joint owner has full access to use all of the joint account assets for himself or herself. Also, if either joint owner gets sued or divorced, it doesn’t matter who contributed the assets initially—all of the joint account assets could be lost to a creditor. Finally, if the joint owner dies before the original owner, the assets may have to go through probate when the original owner passes away. For these and other reasons, I don’t recommend using a joint account when an agency relationship might better serve the needs of the client. Having the account owned by a revocable living trust or an irrevocable trust is usually the best solution.
Finally, you may heard of a POD or TOD account (they’re two different names for the same thing). POD means “Payable on Death,” and TOD means “Transfer on Death.” A POD or TOD Beneficiary will receive the account assets upon the death of the account owner. However, it does not allow a named beneficiary to access the account at any time prior to the death of the owner. If those funds need to be accessed to pay bills for the owner, his agent will need to have a valid financial power of attorney (not one for health care only) that is accepted by the financial institution in order for the Attorney-in-Fact to access those funds and pay his bills. Also if the POD or TOD beneficiary dies before the owner, the funds in that account might have to go through probate. Hopefully this clears up some of the misconceptions that are out there about powers of attorney, the differing roles of the Attorney-in-Fact and Trustee, and Agency Law in general.
© OKURA & ASSOCIATES, 2013