New Law Changes Financial Powers of Attorney

What Is a Power of Attorney? New Law in New Jersey Re-Writes the Rules Governing Powers of Attorney

One of the most important, and frequently neglected, areas of personal andestate planning is protecting oneself legally and financially in the event ofdisability or incapacity. Many older persons and their families fear thepossible onset of physical or mental disability as the elderly person advancesinto old age. A properly drafted durable power of attorney is a critical toolthrough which an older person may make and implement decisions concerning themanagement of his or her property in advance of incapacity.

A new law in New Jersey, the Revised DurablePower of Attorney Act, N.J.S.A. 46:2B-8.1, et seq, has substantiallychanged the rules governing these important and powerful estate planning tools.New Jersey''s new power of attorney law provides new rights for principals andimposes new obligations on agents and will make powers of attorney more usefulto State residents.

What Is a Power of Attorney?

Powers of attorney have long existed under New Jersey law. A power ofattorney is used to designate an agent to act on behalf of an individual duringincapacity. A power of attorney is a written document by which one person, asprincipal, appoints another person as his or her agent, or attorney-in-fact, andconfers upon that agent the authority to act in place of the principal for thepurposes stated in the instrument.

The agent is empowered to "stand in the shoes" of the principal orto act in the place and stead of the principal with respect to financialmatters. A power of attorney therefore authorizes the agent to act as if theagent were the principal. A power of attorney may be limited to one specificaction, a "special" power of attorney, or it may authorize the agentto perform virtually any kind of financial transaction, a "general"power of attorney.

In addition, a power of attorney may be classified as "springing"or "durable". A "springing" power of attorney empowers theagent to act only upon the disability of the principal, while a"durable" power of attorney becomes effective immediately uponexecuting the instrument and remains in force despite the principal''sincapacity. The person executing a power of attorney must have the requisitecapacity to understand the nature and significance of his act at the time he orshe signs the document.

Creating a power of attorney is relatively simple.There are only two requirements: (1) The power of attorney must be in writing,and (2) the power of attorney must state that the powers conveyed are notaffected by (or will become effective upon) the subsequent disability,incapacity or incompetence of the principal.

New Law in New Jersey Re-Writes the Rules Governing Powers of Attorney

On December 8, 2000, the Revised Durable Power of Attorney Act becameeffective. Except with regard to banking transactions, this new law completelyrevises the law in New Jersey governing powers of attorney. For example, for thefirst time, the law defines when the principal and agent are legally consideredto be under a disability ("if the principal is unable to manage hisproperty and affairs effectively", and when "the [agent] is unable toexercise the authority conferred by the power of attorney effectively"). N.J.S.A.46:2B-8.2(c).

The new law, also for the first time, specifically states that a power ofattorney remains effective until it is revoked by the principal or terminatesunder its own terms. N.J.S.A. 46:2B-8.3. Further, the new law states thatthird parties may properly presume that a power of attorney is effective unlessthey have received actual notice of revocation or death of the principal. N.J.S.A.46:2B-8.5 and 8.6.

Surprisingly, under the new law, the execution of a subsequent power ofattorney does not automatically revoke a prior power of attorney. Rather,revocation occurs only when the principal signs a written revocation orphysically destroys all originals of the power of attorney. N.J.S.A.46:2B-8.10.

The new law defines the relationship between a principal and agent, andimposes new obligations on the agent. Under the new law, an agent under a powerof attorney owes a fiduciary duty to the principal, or to his guardian if theprincipal has been found to be incompetent, and must act for the sole benefit ofthe principal at all times. N.J.S.A. 46:2B-8.13(a).

Further, the agent has a duty to maintain accurate books and records of allfinancial transactions, and must render an accounting if required by theprincipal, the principal''s guardian, conservator or executor, or the SuperiorCourt. N.J.S.A. 46:2B-8.13(b).

The new law also empowers a principal to compensate an agent in a power ofattorney, and permits a principal to provide for the method by whichcompensation will be calculated and a timetable by which the payments will bemade. N.J.S.A. 46:2B-8.12.

The Superior Court may also award reasonable compensation to the agent whenthe power of attorney does not provide for the agent to be compensated. N.J.S.A.46:2B-8.12.