Powers of Attorney (POAs) are very important tools in your toolkit when planning for your future and helping family members prepare for theirs. They are also important for business owners to use as part of their succession planning. Understanding how they work, though, is critical to take advantage of what they can do. As with most legal documents, there may be things about POAs that, upon first glance, may not be what they seem. In this post we discuss some of the advantages of POAs, and point out some things that you should understand better as you plan for the future.
Before we get into the types of POAs, we first need to define a few terms. The people who sign POAs are called the “Principals,” and they give authority to their “Agents” to act on the Principals’ behalf. Agents owe their Principals “fiduciary duties”—a requirement that Agents act in the Principals’ best interests, or in other words, that Agents must not take advantage of their positions to do anything that would benefit themselves to the detriment of their Principals. (You can learn more about fiduciary duties here.) Because of this, it is very important that Principals give serious thought about whom they trust to carry out their wishes. It is also critical for Principals to talk with their Agents ahead of time so that the Agents know what the Principals’ wishes are.
Some people like to split responsibilities between two individuals. For instance, our clients will often make one child their Agent under the Health Care POA and another child Agent under the Property POA. (Each type is described more below.) This can be a good idea when your potential Agents have different skill sets, interests, or abilities. Dividing authority also creates checks and balances, which can be a good thing.
But what you don’t want to have happen is for your checks and balances to become sand in the gearbox. To avoid that, you need to appoint Agents who can work well together, who trust each other, and who can deal with the reality that, just because one person makes a decision that is different than another, that doesn’t make the decision “wrong” or “illegal.”
This concept of giving deference to the decisions the Agent made is sometimes called the “business judgment rule,” although it applies equally for decisions made under the Health Care POA as the Property POA. Basically what it means is that, if there is a fight over the decisions the Agent has made (for instance, the child who is not the Agent accuses the child who is the Agent of breaching the Agent’s fiduciary duties to their parent, the Principal), a judge will simply ask, “Is what the Agent did reasonable? Did it harm the Principal?” What the judge will not ask is “Was this the best possible decision that could have been reached on the Principal’s behalf?”
For instance, the Property Agent is not required to make the cheapest decision (and will not necessarily be prohibited from making the most expensive decision). Nor is the Health Care Agent required to make decisions that will keep the Principal alive the longest (and even will not necessarily be prohibited from making a decision that could result in the Principal’s death).
In other words, a court does not ask whether the Agent’s decisions are the “best.” Instead, courts ask if those decisions are “reasonable”—an inquiry that itself depends heavily on the circumstances surrounding the decision. As a result, something reasonable in one situation may not be reasonable in another.
While the Illinois Power of Attorney Act allows a Principal to appoint co-Agents (that is, two or more people who act as Agent at the same time), the short-form, fill-in-the-blank powers of attorney found in the act do not allow for that, which are discussed more below. If you want to have co-Agents, you will need to draft your own powers of attorney. The short-form POAs do, however, allow the Principal to appoint Successor Agents to serve if the primary Agent is unwilling or unable to do so. The Principal can also nominate the Agents under the Property and Health Care POAs serve as the Principal’s Guardians for the Estate and Person, respectively. A Guardian is very similar to an Agent, but is court-appointed and reports to a judge to make sure the Principal is properly cared for.
Next, although the Property and Health Care POAs described below give various powers to the Agents to exercise on behalf of the Principal, the Principal can elect in the POA to limit some or all of those powers. And finally, the POAs allow the Principal to decide whether the Agent should have these powers immediately upon signing the document, or at some other time (such as only after the Principal becomes incapacitated, only while the Principal is out of the country, etc.). And while both short-form versions are revocable at any time, the Property POA has a line that allows the Principal to choose a termination date—a specific time or event that will terminate the agency.
With this background, let’s discuss the types of Powers of Attorney in Illinois. The Illinois Legislature recognizes that powers of attorney are important to have. The Legislators also know, though, that drafting a legal document can be expensive and cumbersome for a lay person. Because of this, the Legislature created two fill-in-the-blank POAs that anyone can complete and execute on their own—the Illinois Short Form Power of Attorney for Health Care, and the Illinois Short Form Power of Attorney for Property.
Under the Health Care POA, an Agent has basically four powers:
This fourth power is one example of something that it is very important to understand. Many people believe that a person’s Executor (the individual appointed under a Will to administer their estate after the person dies) has authority to dispose of the deceased person’s body. That may be true, but only if there is no valid Health Care POA. In that case, the Illinois Disposition of Remains Act (755 ILCS 65/1 et seq.) gives primary authority to the Agent under the short-form Health Care POA because the POA meets the requirements of that act. The executor ranks next, followed by the deceased person’s spouse, and then the majority of their children.
Additionally, the Principal gives the Health Care Agent specific authority regarding whether and when to withhold life-sustaining treatment. Specifically, there are two options. The first is in the case of the Principal being unconscious, unable to wake up, or unable to recover the ability to think, communicate, and experience their surroundings. In that case, the Principal can instruct the Agent to withhold life-sustaining treatment because the Principal’s quality of life is more important to her than the length of her life.
Under the second scenario, staying alive is more important to the Principal than any suffering she might experience, the cost of the procedures, or how unlikely the chances of recovery are. Here, the Principal instructs the Agent to prolong the Principal’s life to the greatest extent possible.
The Health Care POA is not effective until it is signed by the Principal and a witness. Although it is probably good practice to have the witness there when the Principal signs, the Health Care POA does allow the witness to state whether he actually saw the Principal sign, or whether the Principal merely told the witness that the Principal signed the document.
If you want to see a sample of the Illinois Short Form Power of Attorney for Health Care, you can find it here.
LIke the Health Care POA, the Property POA gives the Agent certain powers, but many, many more. There are fifteen categories of powers, ranging from real estate transactions, to retirement plans, to tax matters, to business operations, and everything in between. The specific powers associated with those categories can be found in the Illinois Power of Attorney Act, here.
Unlike the Health Care POA, the Property POA allows the Property Agent to delegate certain powers, such as to an accountant or attorney. The Property Agent is also entitled to reasonable compensation for the services provided for the Principal. What is “reasonable” will be determined by a court if someone (for instance, a family member of the Principal who is not also an Agent) challenges the compensation paid.
To ensure that only the Agent or Successor Agent uses the Property POA, the Principal may also ask the Agent and Successor Agents to sign the POA. The Principal then signs next to those Agents’ signatures, acknowledging them. This serves as a type of “signature card” so that anyone relying on the POA can verify that the Agent’s signatures are the same. Although it may be good practice to fill out this section of the short-form Property POA, failure to do so will not invalidate the agency.
POAs from Illinois may also be used in other states so long as they meet the other state’s requirements. In Illinois, only one witness is necessary to be effective. However, other states may require more witnesses. Thus, the Illinois short-form Property POA contains signature lines for two witnesses so that it may be used in states that require two (assuming it also meets that state’s other requirements).
If you want to see a sample of the Illinois Short Form Power of Attorney for Property, you can find it here.
The Illinois Power of Attorney Act requires that anyone presented with a properly executed POA must accept the authority of the Agent. That is, a bank or doctor may not refuse to honor the POA and instead insist that the Principal verify that the Agent indeed have the authority they claim. However, the person being asked to rely on a POA may require that an Agent execute document called “Agent’s Certification and Acceptance of Authority.” By signing that document, the Agent swears, under penalty of perjury, that: (1) the Principal is still alive; (2) the POA has not been revoked; (3) the Agent’s powers have not been modified or terminated; and (4) the POA remains in full force and effect. If the Agent gives this certification, and then if it turns out that any of these statements was false, then the Agent (but not the bank, doctor, or other person relying on the POA and the certification) will be liable to the Principal for any damages. If, however, the Agent presents the certification and the person still refuses to honor it, that person will be liable to the Principal for any damages incurred that could have been avoided if the agency were honored.
Powers of attorney are very useful and can make business- and life-transitions go more smoothly. To use them properly, however, you must understand how they were intended to be used and why they contain the language they do. Call or email us today if you want to discuss how we can help you plan for your business succession or your estate plan.