A power of attorney allows you to designate someone else to handle your financial affairs and to make and/or sign agreements on your behalf. The person who executes the power of attorney is called the “principal,” and the person to whom the power of attorney is given is called the “agent” or “attorney-in-fact.”
The agent or attorney-in-fact has a legal, fiduciary and ethical duty to act in the best interests of the principal and to keep the principal's assets and finances separate from his or her own. In other words, the agent cannot “take the money and run.”
Types of Powers of Attorney
In New Jersey, there are several types of power of attorney documents: general, limited, durable and springing.
A power of attorney (“POA”) can be general if it authorizes the agent to take care of all the principal's personal assets and financial matters – or it can be limited, giving the agent the authority to do just one transaction on behalf of the principal.
For a POA to be durable – it means that it takes effect immediately and remains in effect even if the principal becomes incompetent at a later date.
In contrast, a springing POA only becomes effective when the principal becomes incapacitated which usually requires certificates from two (2) physicians stating the same. Several states, like Florida, are no longer acknowledging such POAs as valid. The burden of proof for legally establishing that the “springing event” i.e., the principal's incapacity, has occurred can be difficult to obtain and financial institutions often require that the doctors' certifications be updated every couple of months to ensure that the POA is still valid.
Ideally, a POA relating to a real estate transaction should be limited and specific to the transaction in question, and it should also be durable. This means that it takes effect or remains in effect if the principal should become incompetent.
Requirements for Powers of Attorney
In order for all POAs to be valid under New Jersey law, the principal (the person executing the document) must be competent and of sound mind at the time the document is executed. A principal who is already incompetent cannot authorize a power of attorney.
Moreover, the POA must be signed in the presence of two (2) witnesses and in the presence of a licensed Notary Public.
A POA is no longer valid if the principal has died.
Utilizing Powers of Attorney in Real Estate Transactions
In the context of a real estate transaction, a POA may be used to allow another person, i.e., the agent, to sign a contract, a deed, handle financial transactions (including signing a promissory note and a mortgage), or sign other closing documents for the principal. When executing documents under a POA, the agent will always include after his or her signature that the document is being signed “as agent for” or “attorney-in-fact for” the principal. If the agent signs only his or her own name, the agent may be held personally liable for whatever was signed. Though somewhat tedious, it is always recommended to sign as follows: “John Doe, as agent and attorney-in-fact for Jane Doe.”
- Durable, Limited POA and Specific Language to Include:
As stated above, it is recommended that a POA used in a real estate transaction be a durable, limited POA. The POA should be specific to the real property involved and include the address and legal description of the property. It should, also, set forth the names of all parties involved in the transaction.
If the POA is to be used by the buyer, there should be specific language in the POA that authorizes the agent to sign all buyer specific documents provided to him or her by the closing agent. This would include notes, deeds, settlement statements, contract addendum, recording forms, and all lender provided documents.
If the POA is to be used by a seller, the POA must allow the agent to sign a deed and all other seller specific settlement documents presented by the closing agent. The document should, clearly, define the specific powers given to the agent. The language used can become an issue at the closing, especially if a general POA is used that gives the principal very broad powers.
- Newer POA is Better:
When relying on a POA in a real estate transaction, the document should not be too old. Although New Jersey, currently, does not have a law that requires a POA to have been entered into and signed no more than a certain number of years (i.e., 3 years) before use, attorneys, title agencies and others involved with the real estate transaction are wary if the POA is more than several years old. In fact, many title insurance companies do not want to insure an older POA. The reasoning is that since there is no specific action required for a principal to rescind or invalidate a POA, there is no guarantee that that the POA was revoked or amended prior to its exercise.
- Possession of Original POA:
It is also important that the agent using the POA on behalf of the principal have possession of the original document and not just a copy. Financial institutions (such as banks) are, now, requiring that the original document be provided to them. The original POA is, also, required if the agent is signing a deed on behalf of the principal. Prior to recording the new deed, the original POA will need to be sent to the clerk's office to be recorded. Note that the original POA will be returned to the agent after it is recorded.
- Risks of Using POAs in Real Estate Transactions:
Although using POAs in real estate transactions is common, questions can arise as to why the POA is being used when the principal may, otherwise, be available. Such issues may be that the document was forged, that the principal was under a legal disability at the time of execution, that the POA has been revoked or amended prior to its exercise, that the principal has died, that the principal had been declared a disabled person and is under guardianship, and that the act being performed by the agent is outside the scope of the authority granted in the document. The use of POAs can be easily abused, and such abuse is not always easy to detect.
For this reason, POAs are not always accepted for use, notwithstanding that the document was lawfully executed and has not been revoked, suspended or terminated. Financial institutions (i.e., banks and mortgage lenders) are setting their own requirements and policies for accepting a POA and will require that the POA be reviewed by their legal department before it is accepted. Moreover, many institutions are now requiring the use of their own POA forms.
Accordingly, if a POA is being utilized in a real estate transaction you are handling, it is imperative that the POA be provided to the lender and title underwriter in order to obtain their consent. It is, also, recommended that the principal be contacted directly to confirm that he or she is aware of the agent acting on his or her behalf in the transaction. In the event that the principal is incapacitated and is unable to communicate, you may wish to contact his or her family members to confirm that the POA is valid and the agent has the authority to buy or sell the real property.
Moreover, it is important to remember that once a principal has died, the POA is no longer valid. At such time, only the principal's estate (i.e., the Executor or the Administrator) can buy or sell real estate on behalf of the principal's estate.
If you have any questions or need assistance with a POA or other estate planning documents, such as Wills, Trusts, and Health Care Directives, please do not hesitate to contact Katherine E. Ingrassia, Esq. at 908-852-2600.