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What is a power of attorney?

You’ve been asked by a relative or close friend to be their power of attorney (POA), and you feel honored because it means that person considers you to be trustworthy and capable. But what is a POA in the first place? A power of attorney is a legal document where one person (called the donor) gives authority to another person (called the attorney) to manage some or all of the donor’s financial affairs while they are alive.

There’s no doubt that when one person (the ‘donor’) gives another person (the ‘attorney’) POA over his or her assets, the donor is placing a significant amount of trust in the attorney and this could make the donor vulnerable to abuse.

In an “enduring POA,” an attorney has the power to act on behalf of the donor if the donor becomes mentally incompetent, making the donor even more vulnerable to abuse if the attorney is not honest and trustworthy. In Québec, once a person’s mental incapacity is established, the attorney is legally recognized by a court of law to act as the representative of the donor.

When you are acting under a POA, you are that donor’s attorney and have an obligation to act only in the donor’s best interests, not yours. If, as attorney, you instigate an action that is in your best interests rather than the donor’s, that is a conflict of interest.

Here are a few examples of actions that would breach the duty of an attorney.

  • Adding the attorney or a family member as a joint owner of the donor’s property so the assets pass outside the estate and go directly to the surviving joint owner
  • Adding the attorney or a family member as a direct beneficiary of a registered asset or life insurance policy so the funds will be paid directly to that beneficiary and not to the donor’s estate
  • Distributing the donor’s assets to the attorney or family members prior to the death of the donor (although some jurisdictions do allow attorneys to make small gifts from time to time).

 In some cases, the justification for carrying out actions like those described above has been to save probate fees; however, probate fees are extremely low throughout Canada and should not be used as an excuse to drive these actions. In fact, adding joint owners and direct beneficiaries may be bad financial planning in many cases. Instead, it is often more advisable to have the assets distributed through the estate, which may provide a more equitable distribution and more tax-planning opportunities.

As an attorney you are accountable for actions done on behalf of the donor and could be asked by the court to account for all transactions made as an attorney. Seek advice from a lawyer and your professional advisor to help ensure that you stay on side.

Reviewed: October 27, 2014

Written and published by Investors Group as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an Investors Group Consultant.