Estate planning often involves creating a living trust and granting someone a power of attorney. A living trust is an arrangement a person enters into while they are alive to use her property to benefit others, called beneficiaries. The trust property is managed and distributed to the beneficiaries according to terms established in a trust agreement by a third party trustee. Many times the terms of the living trust can be changed by its creator during her lifetime. A power of attorney is a document that allows a person, or principal, to give another the ability to act on his behalf as his agent. Whether an agent with power of attorney can change a living trust depends on how the power of attorney is drafted.
Limited vs. General
There are different types of powers of attorney. A limited power of attorney only permits an agent to act for the principal in areas it specifically defines. For example, a limited power of attorney may only grant an agent the right to sell the principal’s house or change the terms of a living trust the principal created. The agent cannot act for the principal in any other area other than what the power of attorney permits. A general power of attorney allows an agent to do anything that the principal would be able to do. With a general power of attorney, an agent usually could sell a principal’s house, change the terms of his living trust, and many other things without restriction.
Durable vs. Non-Durable
Traditionally, a power of attorney terminated when the principal died or began to lose his mental faculties. This is known as a non-durable power of attorney. However, principals may want to appoint trusted people as their agents to act in their stead because they may lack the ability to act for themselves due to mental incapacity. As a result, these people will create a durable power of attorney which continues even if the principal loses his mental faculties. Therefore, if a non-durable power of attorney grants an agent the ability to change the terms of a living trust but the principal has lost his mental faculties, the agent cannot change the trust. However an agent with a durable power still could change the trust.
Read More: Definitions of Durable and Non-Durable Power of Attorney
Powers of attorney are regulated by state law, and some states have additional rules about how an agent can obtain authority to change a trust. Authority to do certain things on the behalf of the principal are called “hot powers.” One of these hot powers is the ability to change the terms of a trust created by the principal. Regardless of whether the power of attorney is general or limited, a principal must specifically state in the power of attorney that the agent can change the terms of a trust created by the principal.
If an agent changes the terms of a trust, it is not just the principal that is affected. The beneficiaries of the trust may suffer because they may get less or lose out on the entire benefit. An agent with power of attorney has a fiduciary duty to the principal. This means that when acting on the principal’s behalf, the agent must always put the needs of the principal first and not use his powers to enrich himself. If an agent does abuse his powers and changes the terms of the trust inappropriately, the principal can sue the agent to recover what the agent took. If the principal is unable to sue the agent, the beneficiaries of the trust can sue the agent and try to recover what they lost from him.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.