Is Your POA Just a PIA Or Simply DOA? – Loretta Part II (Sorry, This One’s Long)

By Jeff Shiller, Esq.

I recently wrote about a new power of attorney law, dubbed “Loretta’s Law.”  I explained about the new form of the POA and the duties imposed on agents.  If you missed it, check it out here

I’ve seen sooooo many deals go bad right before closing because of issues tied to POA’s, guardianships and estates.  So I wrote this to help investors protect their contracts and keep from wasting a lot of time.


First, let’s clarify what each of these things are and when each is required:

Power of Attorney (POA) – A POA is a written instrument whereby a person or entity grants revocable authority for an agent to act on his/her/its behalf.  The person granting the authority is known as the principal, and the person receiving the power is the agent.  POA’s can be extremely flexible and can grant limited powers or more sweeping powers, covering every type of financial situation imaginable.  POA’s are very common in real estate transactions when one party cannot attend settlement.  There is no direct Court supervision of a POA, although the agent does have a duty to act in the principal’s best interest.  POA’s are only valid when: 1) the POA is in proper form; 2) the principal is still alive; and 3) the POA hasn’t been revoked.  Most modern POA’s are “durable,” meaning they survive any disability (mental or physical) of the principal.

Guardianship (or sometimes called “conservatorship”) – This is a POA on steroids.  Many times, whether or not the principal has a POA, a guardianship is required if the principal becomes legally disabled (“disabled” is commonly confused with “incompetent.”  Although they may be synonymous, most State statutes do not use the term “incompetent”).  Once a person is deemed by the medical community to be disabled and unable to manage his/her affairs, the Court will appoint a guardian.  A guardianship will “trump” a POA because it is a Court order.  There a 2 types of guardians – Guardian of the Person and Guardian of the Property – the former deals with medical issues, the latter financial ones.  Both guardians can be the same person or two different people.  And unlike a POA, there is direct Court supervision of a guardianship.  This means the guardian is responsible to report to the Court on a regular basis (for property guardians, this means an annual accounting which is reviewed by a Court Auditor).  The agent is known as the guardian and the principal is known as the ward.  As I’m sure you can tell by reading this, a guardian has the highest duty to look out for his/her ward.  The law states that the guardian literally “steps into the shoes of the ward” and has to make decisions as if the ward was making the decisions himself/herself.

Estate – When a person dies, the only legal mechanism to handle a person’s property is by opening an estate through the probate division of the Court.  Both POA’s and guardianships terminate with death and are rendered invalid.  The probate Court will appoint an “executor” or “personal representative” whose responsibility it is to marshal, or gather, all of the dead person’s assets, pay any just claims, and distribute the remaining estate to the heirs or legatees (trusts can be used to short-cut this process, but that’s a different post for a different day).  The executor is usually a family member.  As with a guardianship, there is direct Court supervision – and for good reason – the State wants to make certain it collects all appropriate estate taxes and that people can be hauled before the Court if they try to make off with the deceased’s assets before paying creditors.

So why is this important to you, the investor?

Let me illustrate by example:

You find a great deal on a piece of property.  Seller tells you he’s the owner, so you enter into a contract.  Days or weeks later, after a title search is performed and you’ve spent countless hours lining up contractors and financing, you learn it was actually the legal titleholder’s son that signed the contract.  Here are the three most common things I would expect to hear from the son:

–          “Oh yeah, I have a power-of-attorney for my dad.  I’ll send it to you.”

–          “Oh yeah, my dad is in a nursing home and I’m living here, but told me it was OK to sell it.  He’ll sign the contract.  You want me to take it to him?”

–          “Well, my dad died a few months ago but he left the house to me.”

Do you see the problem?  Every title company conducting a settlement must be certain that every person signing the contract and closing documents has the proper legal authority to do so.  If the title company goes to closing without doing this, they risk a serious title claim. In short, if you can’t prove proper authority, your deal is DOA.

– What if there is a POA but it’s not in proper form?  Or worse, a forgery? Or was executed after dad became legally disabled?  Maybe you really need a guardianship.

– What if dad is in a nursing home due to dementia?  How is he going to sign a contract?  Do we need to file a guardianship proceeding and, if so, will the Court allow the property to be sold for so cheap?  Remember, the guardian has the highest level of fiduciary duty to the seller and must answer for his/her actions to the Court.

– What if dad’s dead and no estate has yet been opened with the Court? Or the neighborhood lawyer is the Executor of the Estate and not the son?  What if there are other heirs that will not agree to the sale of the house for so cheap?

And these are just some of the problems I’ve seen.  To avoid these headaches, I would advise the following on every deal you do:

  1. When you speak to the seller, ALWAYS ask the seller if, in fact, he or she the actual title holder.  And ask if there’s anyone else on title.
  2. Include additional questions in your seller questionnaires like:  “has any owner of the property recently died?” or “how did you come into possession of the property?” or, “do any owners of the property have health problems?” Try to structure some series of questions that would uncover “capacity” issues.
  3. Look up the property title holder’s name on the State records before entering into a contract.  If there is a discrepancy, find out why before proceeding.
  4. Ask the seller to see a copy of the title deed.
  5. If the title holder has given a POA to another person, ask why the owner can’t just come to closing (what if the principal is dead? Then the POA is no good).
  6. If there is a POA, demand to see it and get it reviewed by the title company before committing any time/resources to the deal.
  7. If the title holder is under some type of nursing care, make certain there has been no diagnosis of dementia.  You may need to get the treating physician to certify the owner’s legal competence.  You should consult with your attorney to see what steps need to be taken.
  8. If the title holder is dead, find out 1) if an estate has been opened; 2) where it was opened; 3) who the Executor is; and 4) the name of any attorney assisting with the estate.  Give this info to your attorney or title company.

Doing these things will not guarantee a problem-free deal, but they will greatly enhance your chances for success and keep you from wasting time.  And remember, just because you find a capacity issue, your deal is not necessarily dead.  It may just be delayed.  But you must get to the right professionals to help or you could end up worse off.

Do you have any capacity horror stories?  If you do, I’d love to hear them.

And if you need a Loretta Law compliant Power of Attorney, Click Here.

‘Til next time,

Jeff

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