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 and estate planning is protecting oneself legally and financially in the event of disability or incapacity. Many older persons and their families fear the possible onset of physical or mental disability as the elderly person advances into old age. A properly drafted durable power of attorney is a critical tool through which an older person may make and implement decisions concerning the management of his or her property in advance of incapacity.

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

What Is a Power of Attorney?

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

The agent is empowered to "stand in the shoes" of the principal or to act in the place and stead of the principal with respect to financial matters. A power of attorney therefore authorizes the agent to act as if the agent were the principal. A power of attorney may be limited to one specific action, a "special" power of attorney, or it may authorize the agent to 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 the agent to act only upon the disability of the principal, while a "durable" power of attorney becomes effective immediately upon executing the instrument and remains in force despite the principal''s incapacity. The person executing a power of attorney must have the requisite capacity to understand the nature and significance of his act at the time he or she 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 not affected 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 became effective. Except with regard to banking transactions, this new law completely revises the law in New Jersey governing powers of attorney. For example, for the first time, the law defines when the principal and agent are legally considered to be under a disability ("if the principal is unable to manage his property and affairs effectively", and when "the [agent] is unable to exercise 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 of attorney remains effective until it is revoked by the principal or terminates under its own terms. N.J.S.A. 46:2B-8.3. Further, the new law states that third parties may properly presume that a power of attorney is effective unless they 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 of attorney does not automatically revoke a prior power of attorney. Rather, revocation occurs only when the principal signs a written revocation or physically 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, and imposes new obligations on the agent. Under the new law, an agent under a power of attorney owes a fiduciary duty to the principal, or to his guardian if the principal has been found to be incompetent, and must act for the sole benefit of the 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 all financial transactions, and must render an accounting if required by the principal, the principal''s guardian, conservator or executor, or the Superior Court. N.J.S.A. 46:2B-8.13(b).

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

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