Power of Attorney, a word that conjures up images of countless movies and TV serials where it has been used. Everyone is familiar with scenarios where one person gets a Power of Attorney signed by another person and just like that; he becomes the all-powerful owner of all the money and property that the other person owns, and he wastes no time in throwing the other person out of his huge, mansion-like house.
Because of this notion popularized by cinema and TV, most people think of a POA as a high-risk document that is capable of taking away from them everything they own.
However, that is a reel-life scenario, and it is not always true for real-life situations.
Read on to know how real-life POAs work and what precautions one needs to take when preparing and executing one.
What is Power of Attorney and How it Works?
A Power of Attorney (POA) is a document that allows an individual to appoint a person or an organization to manage his/her affairs if he becomes unable to do so.
Different types of Power of Attorneys serve a different purpose and delegate different types of authority.
The person delegating authority under the POA is called the principal and the person to whom authority is being delegated is called the agent. This arrangement establishes a Principal-Agent relationship between the two persons which is primarily governed by trust.
To know more about the principal-agent relationship visit here.
The ‘Principal’ should be mentally sound when signing the document assigning an agent for taking care of his/her affairs. The term ‘mentally sound’ means that the person is free from any mental illness and is perfectly capable of making reasonable and rational decisions.
Like most legal matters, setting up and enforcing a Power of Attorney can be a challenging task. Sample formats are available online, but it is advisable to always seek help from a qualified professional to make sure it is prepared correctly.
A Power of Attorney that has not been executed correctly holds no value.
In order to be valid, a POA needs to be authenticated by a notary public certifying the mental soundness of the principal at the time of signing.
It is not compulsory to register a POA in India. However, it is advisable as getting a POA registered adds to its legal value.
Also, recent amendments in registration laws have made it compulsory to get a POA registered if it relates to transfer of immovable property.
For example, if a person wants to delegate authority to his relative to sell an immovable property on his behalf; it is compulsory to get the POA registered.
Please also note that a notarized POA is different from a registered POA, mainly in terms of legal value each type holds. So do not let anyone convince you otherwise and follow the proper procedure for registration.
Fundamental Types of Power of Attorney
1. General Power of Attorney (GPA)
Under a GPA, vast powers are allowed to the agent to act on behalf of the principal. This type of POA can be useful to an individual when he is not in the country, or he is mentally incapable of taking care of himself and his affairs.
Managing financial transactions, buying life insurance and making gifts are some of the many activities that an agent can undertake in the capacity of the principal.
It is advisable to be extremely cautious while delegating authority under a GPA because if the agent is not an honest person, executing a GPA in his favor is more or less equivalent to holding out a signed blank cheque to a robber.
2. Healthcare Power of Attorney
This POA enables the principal to nominate an individual who can make healthcare decisions concerning him when the principal himself is unable to do so.
The agent should ideally be a dependable and principled individual, who can act rationally in the most difficult of situations. The decisions to be taken range from medical care and place of living to the food that the principal eats.
3. Financial Power of Attorney
This kind of Power of Attorney gives an agent the right to make financial decisions for the principal when he/she is either not present, or is unable to do so due to physical or mental incapability. Paying bills, making investment decisions, paying for healthcare and housing are some activities that require decision making under the Financial Power of Attorney.
Special/Conditional Power of Attorney
A Power of Attorney does not come without limits. If the principal wants to limit the powers of the agent or to extend the durability of a Power of Attorney, he can do so by executing the following type(s) of POA.
1. Special Power of Attorney
Specific powers are allowed to the agent by signing on this type of POA. If the principal does not wish to allow the agent to enjoy a wide spectrum of powers and requires to delegate authority only in respect of a particular task, he can do so by executing a Special Power of Attorney (SPA).
For example, Mr. R is an old person who needs to raise a loan by mortgaging his house. However, he is not very familiar with the entire mortgaging process and the banking system.
He can appoint any person of his choice to act as his agent only for the purpose of mortgaging the house and raising a loan from a bank.
This is done by specifically mentioning the powers allotted to the agent in the POA.
The validity of an SPA comes to an end as soon as the task(s) specified in it are completed.
2. Durable Power of Attorney
If the principal happens to become mentally unsound due to some reason while there is a POA in effect, he/she can sign a Durable Power of Attorney to ensure its validity or to avoid any kind of trouble later.
Any kind of Power of Attorney that has a durability provision to keep the current POA in effect will work just fine.
This kind of Power of Attorney can also be used to prepare for a future possibility of the principal becoming mentally incompetent.
If the POA specifically mentions that it cannot go into effect until a doctor specified by the principal states that the principal is mentally incompetent; or two licensed physicians agree on his mental condition being delicate, it cannot be enforced.
While preparing a POA, some important points to be kept in mind are:
- No POA can survive the principal’s death. I.e. the authority of an agent comes to an end as soon as the principal dies.
- A POA can also be canceled, in which case the agent and all such institutions where the agent acted on behalf of the principal should be notified in writing. Alternatively, putting down an expiration date on the POA can lead to automatic cancellation.
- An individual of high integrity who can always be trusted to act in the principal’s best interest should be chosen as an agent.
- Any suspicion of wrongdoing on the part of the agent should be reported to a law enforcement agency, or professional legal advice should be taken.
A Power of Attorney is a powerful tool available to one and all to make dealing with unforeseen situations easier by not allowing them to hamper day to day activities and it should be prepared with utmost precaution so as to avoid any legal or financial troubles later.