Don't let debt collectors take all you've got.
Summary: Did a family member give you power of attorney before they died? Worried that you'll be stuck with their debt. Find out if you're liable and how to protect what's yours and theirs.
As you probably know, the primary purpose of a power of attorney is to act as another person's legal agent during their lifetime should they need you. But what happens when they pass away? You may be wondering if you will be responsible for any debts after the principal's death. Let's take a closer look.
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Understand How a Power of Attorney Works
A power of attorney is a legal document giving authority to an agent to act on behalf of the principal in the event of incapacitation. Generally, this is the person who is responsible for making decisions for you when you can't.
A principal is a person who designates power of attorney, and the agent is the individual who is given legal power of attorney.
A power of attorney (POA) gives a person or agent authority to manage the principal's affairs, including finances, property, or medical-related decisions. There are three different types of power of attorney.
- General Power of Attorney. The agent is given overall authority over the principal's finances and manages the principal’s estate and property as per the POA contract. In some cases, the agent can also access the principal's bank accounts and pay for bills and other expenses on the principal's behalf. They can also collect debts and even make investment decisions on behalf of the principal.
- Specific Power of Attorney. The agent has authority over certain aspects of the principal's affairs concerning their estate and property while alive.
- Healthcare Power of Attorney. The agent is given the power to decide what kind of medical care the principal receives, including surgeries, hospital/home care, or psychiatric treatment. They also decide on the doctors or care providers and other health-related issues such as the principal's diet and even who bathes the principal.
Note: A power of attorney becomes null and void once the principal dies. The POA will not serve any meaningful purpose because the principal's death relinquishes you from any ownership of assets or property. Dead persons can't legally hold money or own property. However, if stated in the POA, the agent can be authorized to make financial transactions, but the property will now be under the deceased principal's estate and the care of the executor of the estate.
Learn the Difference Between Power of Attorney and the Executor of the Estate
After the expiration of a power of attorney, the executor of the estate becomes responsible for legal and financial matters on behalf of the deceased principal. The executor of the estate is usually named by the will and is bound by its provisions. Essentially, while a power of attorney represents a principal while they are alive, the executor represents the principal after death. Once appointed, the executor can only follow the instructions laid out by the will. If the deceased principal did not leave a will, intestate laws apply to decide how the deceased's estate is managed.
The underlying rule governing an agent's power of attorney is that they must act in their principal's best interest. In this regard, they cannot perform the following tasks:
- Alter, modify, or amend a principal's will.
- Go against their fiduciary duty to act in the best interest of the principal.
- Unless named the executor of the principal's will, make estate decisions after the principal's death.
- Transfer power of attorney to someone else, but it is within their rights to decline their appointment at any time.
Know When You May Be Held Responsible for Debt
When it comes to debt, an agent acting under power of attorney is not liable for any debts the principal accrued before being given authority or/and any obligations outside their scope of authority. However, it is critical to note that as an agent, you can find yourself liable for the principal’s debt in several ways:
- Co-signers. A person who intentionally guarantees or co-signs a debt together with their principal will remain liable after the principal's death. It does not matter who among the two parties benefited from the debt. For example, if the agent signs any contract resulting in debts in their own capacity as a relative and does not follow the guidelines set up in the POA. So, you want to be mindful about creating a situation where you co-sign a debt with power of attorney.
- Joint Accounts. If the agent and the principal hold a joint bank account, any debt remaining from the account is left under the agent's care when the principal dies. The survivor must settle any debts accrued from the account in full, regardless of who benefited from the loan.
- Communal Property. In certain states, when you pass power of attorney to your living spouse, the state deems them to have equal responsibility for debts. Under these state guidelines, spousal property (both assets and liabilities) is considered communal. Liability on debt, therefore, falls on the surviving spouse. The nine states with community property laws include California, Arizona, Louisiana, Nevada, Idaho, New Mexico, Washington, Texas, and Wisconsin.
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Use the Principal’s Assets to Settle Debts
In the event of death, all the outstanding debts liable to the principal should be settled using the property in their estate left after death. The family members of the principal are not responsible for any debts owed by their deceased relative. However, if a family member or members were co-signatories, guarantors, or joint account holders, the debt will automatically fall to them.
The principal's assets will be distributed among the named beneficiaries of the will only after the debts are paid. You should note that any relative who inherits assets like a car or house with a loan/mortgage, the debt is carried forward to them. Suppose the principal's assets are insufficient and cannot pay all creditors. The estate is usually split up among the creditors. In these cases, the secured creditors get priority.
Having power of attorney is a great responsibility, We hope this information helps you know whether you will be held responsible for any debts held by the principal after their death.
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