Your aging parents just appointed you as their attorney-in-fact– now what? It is important to keep in mind a few simple rules to stay within the bounds of the law.
Rule #1: Act in the principal’s best interests.
The principal is the person that appoints the attorney-in-fact and specifies the financial authority they possess. Acting in the principal’s best interest is the golden rule of being an attorney-in-fact. For every situation in which you may exercise your rights in that capacity, ask yourself these three (3) questions:
- Is taking this action in the best interest of the principal?
- Would I execute the same transaction for myself under the same circumstances?
- If someone challenges my decision, can I defend it?
If answering any of these questions gives you pause, you should reconsider whether to follow through with the transaction. It may also be wise to consult a financial advisor or attorney to help you with such decisions.
Rule #2: You are held to the standards of a fiduciary.
An attorney-in-fact is a fiduciary, meaning the person or entity has a legal and ethical relationship of trust with the principal. It is very important to take this responsibility seriously, as not doing so could result in your removal as attorney-in-fact, costly litigation, and/or other monetary damages.
There are many types of fiduciary duties that we will cover in a future series of blog posts, but the bottom line is: exercise good faith and good judgment, and always hold the principal’s needs and interests paramount.
Rule #3: Maintain updated financial records.
One of the duties of an attorney-in-fact is to maintain proper records. In practical terms, this requires one to be organized and keep all documentation related to the principal’s finances. One simple way to stay organized is to use a filing system. Each year, create new folders and title them: “bills,” “receipts,” “statements,” and “other.” Alternatively, you can organize these files according to the entity with which you are dealing and include subfolders. For example, you might include separate files for bank accounts, retirement instruments, health insurance, life insurance, and estate planning documents.
However you choose to organize, be diligent about maintaining records. If questioned about your financial management, it will be necessary to explain your organizational system.
Rule #4: Don’t keep secrets.
As an attorney-in-fact, there may be family members or siblings of the principal that need information regarding the principal’s finances. Secret sales and gifts may arouse suspicion and invite litigation. It is a good idea to keep others informed and be able to explain your financial management decisions.
There are, of course, situations where total transparency may be impossible or adverse to the principal’s best interests, such as an uncle who lives off the grid in New Mexico or a sister who has been known to get perpetrate fraudulent real estate schemes. In those instances, it would be wise to consult an attorney to ensure you are not putting yourself at risk.
Rule #5: Behave like a prudent investor.
The Prudent Investor Rule provides a standard of care for portfolio strategy and investment risk and return objectives. It also requires a fiduciary to look at all of the facts and circumstances surrounding an investment, and exercise reasonable care, skill, and caution. Essentially, an attorney-in-fact is required to invest money wisely by looking at the age of the principal, their assets, and the reasonable level of risk for that person to assume. They are also to look at the general economic conditions, expected tax consequences, and other resources in the principal’s portfolio.
In circumstances where an attorney-in-fact has little to no financial experience, it would be wise to consult a trusted financial advisor that can help assess risks and recommend investments that are most likely to meet the principal’s needs..
Rule #6: Be very careful when giving gifts.
Look very closely at the power-of-attorney document to ascertain what powers are granted by the principal. If gift giving is permitted, determine the parameters. If allowed, it is a good rule of thumb to duplicate gift giving in the same manner as the principal did prior to the attorney-in-fact became effective. For example, if the principal made yearly Christmas donations to a food bank or a monthly allowance to your cousin, continuing to do so would be a relatively safe exercise of the gift giving authority.
However, as attorney-in-fact, if you authorize gifts to your agents, a favorite sibling, or yourself, the gift giving authority may be subject to scrutiny. You should not spend the principal’s money in a way that is contrary to his or her best interests, nor should you spend any money towards your own personal expenses, absent some explicit directive to do so.
Rule #7: Respect your elders.
Elder abuse is a felony and is not limited to physical abuse. If you, as an attorney-in-fact, take money from an elderly or disabled person, you are subject to criminal penalties as well as civil liability. It is not necessary to have forcibly taken the money. If you deceived, intimidated, or conspired with others to steal an elderly person’s funds, assets, or property, you could be criminally culpable and civilly liable.
If you are involved in a situation where an attorney-in-fact may be abusing or neglecting his or her duties, or you are unsure of whether you, as an attorney-in-fact, are satisfying the statutory requirements, it is advisable to contact an attorney experienced in fiduciary litigation. Please visit us as www.lindleylawoffice.com for more information.
For more information on the powers conferred by North Carolina law, click here.
For North Carolina’s Short Form Power of Attorney, click here.