A power of attorney is an agreement between two people, the principal and the attorney in fact or agent. The agreement authorizes the agent to act as the principal's legal representative. It's a power the agent can easily abuse, but he may face civil and criminal penalties for doing so.
Power and Duty
The agent can do almost anything the power of attorney authorizes him to do. That can include selling the principal's real estate, buying stocks with the principal's money, managing the principal's bank accounts or signing contracts. State and federal law may limit the agent's authority. For example, a regular power of attorney doesn't empower the agent to represent someone before the Internal Revenue Service. That requires an IRS-specific power-of-attorney form.
Another restriction on the agent's actions is that she has a fiduciary duty to her principal. When acting under the power of attorney, the agent must put the principal first:
• She must make decisions with competence and good judgment.
• The agent must make decisions based on the principal's interests, not her own. She must avoid conflicts that would pit her interests against the principal's.
• The agent cannot act against the principal's wishes.
• She must keep her assets and the principal's separate and keep detailed records of how she manages the principal's money and assets.
Betraying the Principal
An attorney in fact may fall far short of his fiduciary duty. An agent can use the power-of-attorney to sell the principal's house or transfer the title into his own name. A greedy agent can siphon money out of the principal's bank accounts. An agent who has heavy debts he can't pay off may do the same thing out of desperation. The motives don't matter, however. Abusing fiduciary power for any reason is unacceptable.
A principal can revoke the power of attorney at any time, but that won't undo any damage the agent has already done.
Read More: Can a Power of Attorney Be Revoked by a Mentally Incompetent Principal?
Crime and Penalties
The penalties for an agent who abuses her trust depend on state law and on how her case is handled, either by authorities or the principal. If the principal suspects a problem, he can take action against the agent. So can his children or spouse, and possibly others, such as the principal's caregiver.
The first step is to request a court order that the agent provide an accounting of her duties and her management of the principal's affairs. If the accounting shows the attorney has breached her duty to the principal, she can be sued. A successful lawsuit may be able to overturn and undo the agent's actions. An agent who has taken title to the principal's house, for instance, could be forced to return it. The principal or another interested party can also sue for damages.
Some agents have been convicted in criminal court for unfiduciary behavior, including embezzlement, fraud and theft. In those cases, the penalty is based on state criminal law.
One step to reduce the risk of abuse is for the principal to write the power narrowly. If, say, the principal only needs the agent to sell her vacation home, she shouldn't sign a power of attorney that gives him wider authority.