Power of attorney, debt and death: What you need to know

Imagine a close relative calling you, explaining they’re working on an estate plan with an attorney. Because the relative trusts you, they ask if you can take on the power of attorney (POA) tasks. You want to help your relative but aren’t sure what involvement with a POA entails. Will it be a lot of work? Will you be expected to pay your relative’s debt and other expenses? And what happens if that individual dies?

Here’s the good news: The answers to the above questions about the POA are straightforward. Your responsibilities depend on the type of POA assigned to you. Accepting a POA doesn’t make you liable for your relative’s debts. Finally, when that relative dies, the POA terminates.

What is a power of attorney?

A power of attorney — POA, for short — isn’t a person or entity. Instead, it’s a legal document that passes decision-making power from one individual or entity to another. You can’t “be” a power of attorney. But you can attain it if an individual (the principal) authorizes you as an agent or attorney-in-fact (though you don’t have to be an attorney or legal professional to act in this role).

“POAs are created and used while someone is alive so that others can make decisions for them,” said Travis Christiansen, owner of Boyack Christiansen Legal Solutions.

The types of power of attorney

The POA allows you, as an agent, to make decisions on behalf of the principal or the relative who has assigned you that role. The extent of that authority (and the time during which it exists) depends on the arrangements. In most states, there are four types of power of attorney that apply to financial matters:

Another common type of power of attorney, medical POA, allows someone to make medical decisions for the principal but doesn’t give any authority over financial matters.

Does power of attorney mean you are responsible for debts?

If that close relative convinces you to become their POA agent, you might be concerned that you might be responsible for paying their credit card debts or loans. As an agent, you might be in charge of tasks like investments, legal decisions, asset management and account administration.

You don’t need to worry about paying your relative’s debt with your funds. You’re not personally responsible (though you might sign checks from that relative’s account to pay balances, depending on the POA requirements). Nothing should come out of your pocket.

As mentioned in the chart above, a POA terminates when certain conditions are met — like when a specific transaction closes, a military member returns from overseas deployment or a pre-determined deadline passes. Another event that terminates any POA is the principal’s death. At that point, the former principal’s (now the decedent’s) executor handles things from there. In this situation, “any debt settlement is handled by the estate,” Christiansen said.

Granting a POA to the right individual

You might need to find a trustworthy person to handle a power of attorney for you or someone else. You should look for someone you know and trust.

Other considerations for an effective POA should include the following:

• Be concise. The POA document must clearly outline the powers granted to the agent. When drafting a POA document, ensure specific, to-the-point language and avoid vague or flowery mandates.
• Don’t keep it a secret. Once the POA is assigned, tell others about it. Depending on the type of POA involved, provide health care providers, relatives and close friends with the necessary information.
• Ensure proper execution. In most states, a POA must be signed in the presence of a notary public. Other entities might be involved as well. For instance, if the agent is hired to assist with a real estate transaction, the POA document must be filed with the county where the property is located.
• Look out for fraud. POA fraud does occur. It’s unfortunately easy enough for an attorney-in-fact to forge certain documents or enhance their duties without permission from the principal. Even if the agent selected for the POA is trustworthy, monitor accounts frequently and ensure safeguards against fraud in the agreement.
• Update when necessary. A power of attorney is flexible. If you (or your relative) find the agent lacking, nothing says you can’t cancel that POA and find someone else. The POA should be revoked immediately if the agent isn’t working in your relative’s best interests.

What happens to debts when someone dies?

Once the principal you’re helping passes away, your role as a POA agent automatically ceases. You don’t have to pay for any debts the principal owed.

However, you could find yourself in the role of beneficiary or heir. Things may be a little different if you end up in this position. In most cases, heirs aren’t responsible for the debt.

“The executor, or personal representative, of the decedent is responsible for managing both the debts and assets of an estate,” said Matthew Erskine, managing partner at Erskine & Erskine. “Typically, neither the personal representative nor the beneficiaries are liable for the deceased’s debts unless they guaranteed the debt or jointly owned it with the deceased.”

Assuming your deceased relative prepared a will and assigned an executor, that executor will take care of the paperwork and pay bills — including any remaining debts—on behalf of the estate. That individual or entity is also responsible for paying off claims that creditors might make against the estate. All of this is done from the estate’s accounts, not yours.

In some cases, there isn’t an estate, or the decedent has racked up a lot of debt with very little income to pay it off. That debt often goes unpaid.

There are a few situations when you could be responsible for paying off debts generated by your relative. However, none of these have to do with whether you have power of attorney.

These situations include:

• If you’re a co-signatory on a loan: If you put your signature on a loan document with a relative and were still paying off the loan before death, you’re now responsible for the remaining balance.
• If you’re a joint credit card holder: If you shared a joint credit card, you inherit the remaining balance when your relative dies. However, if you were an authorized credit card user, you could use the card, but your relative paid the charges. If the relative dies in this instance, you don’t have to pay down the balance.
• If you’re a surviving spouse in a community property state: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states. If you’re a surviving spouse to a decedent living in one of these states, you’re responsible for paying the debt balance on jointly owned property or other assets.
• If you were joint owners of a property. “If the debt is in the name of more than one person, say a mortgage on a property that is owned in joint name, then the surviving owner is fully responsible for the debt,” said Erskine.

If you think you might struggle to pay that debt, contact the company that holds your loan and discuss the situation.

The bottom line

Understanding the purpose of a POA can help you be a trusted agent for a relative who needs your help or find a reliable individual to take on the job. At the same time, understanding the role of debt in the POA relationship (and upon the borrower’s death) can help alleviate concerns or give you an idea of where you stand.

Because issues like POA, estates and potential inherited debt are driven by state legislation, working with legal professionals who understand your state’s laws is important to ensure you know your responsibilities.