Acting as an agent under POA provides you with legal authority to make decisions for the principal. However, it does not give you unlimited power. Misusing your authority or failing to fulfill your duties could expose you to legal liability. So, what are the duties and responsibilities of a power of attorney, and when can they be held liable?
We’ll explain the circ*mstances when a power of attorney can be held liable and provide tips on protecting yourself.
Key Takeaways
A power of attorney can be held liable for breaching their fiduciary duty, acting outside the scope of authority granted in the POA document, or committing fraud or other illegal acts.
POAs are held to a high standard as fiduciaries and must always act in the principal's best interest.
Carefully read the POA document to understand the scope of your authority. Overstepping these bounds can result in legal issues.
What Can a Power of Attorney Be Held Liable For?
A power of attorney document dictates the specific powers an agent has. You must carefully review the POA to understand the scope of your authority.
Overstepping the bounds of the powers granted to you could make you liable for any damages that result. Common examples of unauthorized actions include:
Breaching Fiduciary Duty
A power of attorney is a fiduciary role, meaning the agent (the person granted authority to act on behalf of another) has a legal duty to act in the principal's (the person granting the authority) best interest at all times.
Claudia Cobreiro, attorney and founder of Cobreiro Law and Top Notch Title in Coral Gables, Florida, explains: "In the same way that being appointed someone's attorney has privileges, it also comes with several responsibilities. The extent of the responsibilities will ultimately depend on the type of power of attorney being granted to the attorney.”
She continues: "Some powers of attorney, for example, are for a minimal purpose, while others are extensive. However, one responsibility that accompanies being appointed someone's attorney, in fact, in almost every situation, is a fiduciary duty to the principal (the person giving power of attorney).
"A breach of this fiduciary duty to the principal can put the attorney in a situation where they may be liable for damages caused to the principal who gave them the responsibility."
Some common fiduciary duties include:
Acting loyally in the principal's best interest.
Avoiding conflicts of interest.
Keeping the principal's affairs confidential.
Keeping detailed records.
Using assets only for the principal's benefit.
If a court finds that a POA breached its fiduciary duty, the agent may be ordered to pay restitution to the principal for any improper actions. Criminal charges could also apply in cases of theft or fraud.
Making Financial Gifts on the Principal's Behalf Without Express Gifting Powers
As a POA, you may be tempted to make financial gifts on behalf of the principal to family members, friends, or charitable organizations. However, unless the POA document specifically grants you the authority to make gifts, doing so could be considered a breach of your fiduciary duty.
Even if you believe the principal would have wanted to make a particular gift, it's not within your authority to do so unless expressly permitted. Gifting assets without authorization could be seen as misappropriating funds and lead to legal consequences.
Changing Beneficiaries on the Principal's Accounts or Policies Without Authorization
Changing beneficiary designations without the principal's express consent is considered a serious breach of your fiduciary duty. Even if you believe you are making changes in the principal's best interest, you could face liability if you don't have clear authorization.
Before making any changes to beneficiaries, carefully review the POA document to confirm you have the authority to do so. If you're unsure, err on the side of caution and consult with an attorney or the principal directly.
Signing Contracts or Making Business Deals Not Permitted by the POA
If the POA is limited in scope and doesn't expressly grant you the power to sign a particular type of contract or make a certain kind of deal, doing so could expose you to liability. The other party to the contract may seek to hold you personally responsible if they relied on your apparent authority as POA.
Before signing any contracts or making business agreements, thoroughly review the POA document to confirm you have the necessary authority. If there's any ambiguity, seek legal counsel to clarify your powers. And if a particular deal seems outside the scope of the POA, it's best to avoid it altogether.
Using the Principal's Assets to Benefit Someone Other Than the Principal
You breach your fiduciary duty if you use the principal's money or property to enrich yourself, family members, friends, or any other third party. This could be considered self-dealing or misappropriation of funds, which can lead to civil liability and even criminal charges in severe cases.
Examples might include using the principal's money to:
Buy gifts or pay personal expenses for yourself or others.
Make investments that benefit you or your associates rather than the principal.
Pay off debts owed by family members or friends.
Make loans to others that put the principal's assets at risk.
As a POA, you must keep the principal's assets separate from your own and use them only in ways that directly benefit the principal.
Fraud, Abuse, and Illegal Acts
A power of attorney doesn't give you permission to break the law. If you use the POA to commit fraud, theft, or other illegal acts, you can face both civil and criminal liability.
Examples could include:
Forging the principal's signature on checks or documents.
"Borrowing" money from the principal without their knowledge or permission.
Coercing or deceiving the principal into granting you expanded authority.
Using the POA to engage in tax fraud or evasion.
If your illegal actions are discovered, you could be sued, forced to pay restitution, and even face jail time. A POA does not put you above the law.
Negligence
In some cases, failing to take proper action as a POA can be just as problematic as taking incorrect actions. If your failure to act responsibly causes harm to the principal, you could be liable for negligence. Some examples of negligence include:
Failing to Pay the Principal's Bills or Taxes
If bills are paid late, the principal may incur late fees, interest charges, or other penalties. Their credit score could also suffer, making it harder for them to secure loans or lines of credit in the future.
Failing to pay taxes can be even more serious, potentially leading to audits, fines, or even legal action against the principal. If the IRS or state tax authorities believe taxes were deliberately avoided, they may seek to hold the principal criminally liable.
As a POA, you could be liable for any financial or legal damages incurred by the principal as a result of your failure to manage their obligations properly. Stay organized, keep detailed records, and ensure that all bills and taxes are paid in full and on time.
Ignoring Signs of Physical or Financial Abuse Against the Principal
If you notice suspicious bruises or injuries, sudden changes in the principal's behavior or demeanor, or unusual financial transactions or missing assets, it's important to investigate further. Ignoring these red flags and failing to take action to protect the principal could be considered a breach of your fiduciary duty.
If you suspect abuse, you may need to report it to the appropriate authorities, such as Adult Protective Services or law enforcement. You may also need to take steps to remove the principal from harmful situations or prevent further abuse, such as revoking the abusive party's access to the principal's home or accounts.
Failing to act in the face of known or suspected abuse could expose you to liability if the principal suffers harm as a result. As a POA, you have a legal and ethical obligation to prioritize the principal's safety and security.
Neglecting to Properly Monitor Third Parties Like Caregivers or Financial Advisors
As a POA, you may be responsible for hiring and overseeing third parties who provide services to the principal, such as:
Caregivers.
Housekeepers.
Financial advisors.
It's important to exercise due diligence in selecting and monitoring these individuals to protect the principal's well-being and assets.
If you fail to properly vet or supervise third parties and the principal suffers harm as a result, you could be held liable for negligence. For example, if a caregiver you hired without a background check later abuses the principal, or if a financial advisor you failed to monitor mismanages the principal's investments, you could face legal consequences.
As a POA, you are responsible for surrounding the principal with trustworthy, qualified professionals and monitoring their activities.
Allowing Insurance Policies to Lapse
If you fail to make premium payments and a policy lapses, the principal could be left without coverage when they need it most. For example:
If a health insurance policy lapses, the principal may be unable to access necessary medical care or face significant out-of-pocket expenses.
If a life insurance policy lapses, the principal's beneficiaries may not receive the death benefit they were counting on for financial security.
If a homeowners or auto insurance policy lapses and a loss occurs, the principal may have to pay for damages out of pocket.
Allowing policies to lapse could also be considered a breach of your fiduciary duty as a POA. If the principal suffers financial or other harm as a result, you could face liability.
Staying on top of premium payments is a key part of fulfilling this duty.
How Can a POA Protect Against Liability?
While the potential for liability may seem concerning, there are steps POAs can take to protect themselves while carrying out their role.
Understand Your Authority
Read through the entire POA document to make sure you understand the scope of powers granted to you. If anything is unclear, ask the principal or an attorney for clarification. Never assume you have the authority to do something if it's not explicit in the POA.
Related: Who Can Override a Power of Attorney?
Keep Detailed Records
Keep clear, thorough records of every action taken on behalf of the principal. This should include a detailed accounting of all financial transactions. Good record-keeping makes it much easier to demonstrate that you have acted properly if your actions are questioned.
This is where a service like Trustworthy can help. Trustworthy provides a secure platform to help POAs stay organized and compliant.
If legal issues ever arise, having all your affairs neatly organized with Trustworthy will make it much easier to demonstrate your compliance and commitment to the principal's best interests.
Communicate With the Principal
When possible, keep open lines of communication with the principal to ensure your actions align with their wishes. If the principal is incapacitated, do your best to make the decisions they would have made themselves.
The power of attorney is no longer valid if the principal is deceased. In the event of the principal's death, the executor or personal representative named in the principal's will takes over the responsibility of managing the deceased's estate. If there is no will, the court will appoint an administrator to handle the estate according to the state's intestacy laws.
A power of attorney does not grant any authority to the agent after the principal's death. If you have been acting as an agent under a POA and the principal passes away, you should immediately cease making decisions or transactions on their behalf.
Instead, the executor or administrator will be responsible for tasks such as:
Identifying and protecting the deceased's assets
Paying debts and taxes owed by the estate
Distributing the remaining assets to beneficiaries according to the will or state law
Address Family Disputes
If family members raise concerns about your actions as POA, address their concerns head-on. Share records demonstrating why your choices were in the principal's best interests. Transparency often stops disputes from escalating into legal battles.
Consider Fiduciary Liability Insurance
For extra protection, some POAs choose to purchase fiduciary liability insurance. This can provide coverage for legal costs arising from alleged breaches of duty, offering greater peace of mind.
Frequently Asked Questions
Can a power of attorney be held liable for investment losses?
Generally, a POA is not personally liable for investment losses if they made prudent decisions based on professional advice and acted in the principal's best interest. However, if investments were excessively risky or benefited the POA rather than the principal, liability could arise.
Can a power of attorney be compensated for their services?
Yes, in many states, a POA is entitled to "reasonable compensation" for their legitimate services rendered on behalf of the principal. The POA document should specify any compensation arrangements. Excessive or improper fees could be considered a breach of fiduciary duty.
How can a principal protect against power of attorney abuse?
Principals can build in safeguards such as requiring regular accounting to a trusted third party, appointing multiple agents who must act jointly, or creating a limited rather than general POA. The principal should choose their agent very carefully and clearly express their wishes. They can also revoke and appoint a new agent if needed.
