I often encounter clients (or their families) who have some confusion about their rights and responsibilities as a legal representative of a family member or friend. Usually, the person is named as an agent under a financial power of attorney or a trustee of a trust. What does that mean? And how far do those powers extend?
A general power of attorney (POA) lets the agent act on behalf of the principal (the person who created the power of attorney and appointed the agent), to legally sign for her, buy and sell property for her, enter into contracts, access her financial accounts, and generally manage her finances. However, it only allows the agent to deal with assets that are owned directly in the principal’s name. If the principal created a trust and transferred assets to that trust, the agent under the POA has no authority to deal with, invest, manage, or access the trust assets unless he is also named as a trustee of the trust.
This is a common point of confusion. Most people who have done some estate planning have created a revocable (or an irrevocable) trust. The trustee of the trust might be the same person as the agent under the POA, but that is not necessarily so. The trustee is the only one who can access, manage, and invest the assets owned in the name of the trust. The POA agent is the only one who can access, manage, and invest the assets owned in the name of the principal. If they’re not the same person, they can’t deal with assets outside of the scope of their authority. Generally, we recommend that our clients name the same person or people whom they can trust to be both trustee and POA agent.
Another point of confusion is that a power of attorney always becomes invalid upon the death of the principal. An agent may not use the power of attorney to act on behalf of the principal after the principal’s death. If it is a durable power of attorney, then the agent may continue to act for the principal even after the principal becomes incapacitated. In fact, if it’s a springing durable power of attorney, the agent can’t act for the principal until she becomes incapacitated (at which time the POA springs into effect). So if some assets are not in trust, but only in the principal’s individual name, how do we manage these assets after the principal’s death if we can’t use a power of attorney?
This is where the executor or personal representative comes in to play. Upon the death of the principal, any assets in her individual name fall under the authority of the probate court. The court looks at the last will and testament of the principal to see who should be named as the personal representative (this person used to be called the executor). If there is no will, the court will appoint the personal representative using its best judgment—usually the surviving spouse, child, or other family member.
Probate court can be time-consuming, expensive, and cumbersome. Because of this, many people set up a revocable living trust and appoint themselves as initial trustee so that they can continue to manage their own assets during their own lifetime, but do not have to get the probate court involved after their death. The trust document appoints a successor trustee who can manage the trust assets for the principal when she becomes incapacitated or passes away. As long as there are no other assets outside of the trust this allows us to avoid probate.
Regardless of the type of authority—whether agent under POA, trustee, or personal representative—there are fiduciary duties and responsibilities that all share in common. First and foremost, the agent, trustee, and personal representative must act in the best interests of the principal, trust/beneficiaries, and estate/beneficiaries, respectively; and not for the agent’s own personal benefit or interests. They must also 1) keep good records of the assets being managed, invested, and spent; 2) protect and preserve the assets, including managing the investments prudently, and insuring assets adequately; 3) use or distribute the assets for the benefit of the principal or the beneficiaries, as appropriate; 4) follow the principal’s instructions/wishes as made known in the appointing document (i.e., power of attorney, trust, or will); and 5) meet and work with the principal’s lawyer and accountant on her behalf when she can’t do so.
If you ever violate these responsibilities while serving under such a role, you could be held liable to the principal or other beneficiaries by the court for any wrongdoing or negligence. It’s a good idea to seek legal advice whenever you’re authorized or required to act for someone as an agent, trustee, or personal representative—just to make sure that you’re doing things correctly and in accordance with the law and your responsibilities.
© OKURA & ASSOCIATES, 2015