Financial Powers of Attorney
Financial Powers of Attorney 1
By Donald D. Vanarelli, Esq.
A financial power of attorney is a legal instrument by which an individual (the “principal”) authorizes another person(s) (the “attorney(s)-in-fact” or “agent(s)”) to act on behalf of the principal with respect to the financial matters enumerated in the instrument. See 2A C.J.S. Agency § 44; Regan, J., Tax, Estate & Financial Planning For The Elderly, § 13.03 at 13-5 (Matthew Bender 1999).
In order to execute a power of attorney, the principal must possess the capacity to contract, or to understand the nature and the effect of the act of appointing an agent. See G. Mazart, New Jersey Elder Law Practice, § 2 at 2-3 (New Jersey Institute for Continuing Legal Education 1999).
New Jersey statute specifically authorizes the use of powers of attorney by an agent to conduct banking transactions on behalf of a principal. N.J.S.A. 46:2B-11.
Because an ordinary power of attorney is only effective during the time that the principal is competent, it is void when the principal becomes incapacitated, rendering it ineffective as a tool for addressing disability.
Consequently, New Jersey statutory law authorizes the use of a “durable” power of attorney, in which the instrument is not affected by the disability of the principal. N.J.S.A. 46:2B-8. A power of attorney is “durable” if it states: “This power of attorney shall not be affected by disability of the principal,” or “This power of attorney shall become effective upon the disability of the principal,” or similar words. Id. When a power of attorney is durable, all action taken by the agent pursuant to that power during the principal’s disability or incompetence has the same effect, and binds the principal as if the principal were competent. Id. Thus, the durable power of attorney provides the principal with the opportunity to select his or her own agent to act in the event of incapacity, which is a favorable alternative to and may avoid resort to the courts for such appointment in a guardianship or conservatorship proceeding. SeeJ. Regan, R. Morgan and D. English, Tax, Estate & Financial Planning For The Elderly, § 13.03 at 13-6 (Matthew Bender 1999).
Under the statute, if a guardian is subsequently appointed for the principal, the attorney-in-fact must account to the guardian, and the guardian has the authority to revoke the power of attorney. Id.
An alternative to a durable power of attorney, which becomes effective immediately upon execution of the document, is the “springing power of attorney” which becomes effective only upon the principal’s incapacity. N.J.S.A. 46:2B-8; J. Regan, R. Morgan and D. English, Tax, Estate & Financial Planning For The Elderly, § 13.03 at 13-6 (Matthew Bender 1999). A springing power of attorney should contain a mechanism for determining incapacity, by such means as providing a definition of the term and giving the principal’s physician responsibility for making and documenting the incapacity determination, in order to avoid the necessity of resorting to court intervention for a capacity determination. Id. at 13-8.
A power of attorney terminates upon the death of the principal, the revocation by the principal, or when termination is provided for by the terms of the document itself. Id. at 13-14.
1 Note: There legislation currently pending in the New Jersey Assembly and Senate governing the execution of powers of attorney.
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