Powers of Attorney

Using one

Capacity

Concept of capacity

· 20 min read

Capacity refers to ability to manage one's own affairs

The Six (6) Greater States have defined incapacity in legislation

Alternative definitions of incapacity might be considered

Capacity may arise in different contexts

Capacity arises in the context of creation a Power of Attorney

Capacity arises for consideration after the creation of a Power of Attorney

Managing the issue of capacity is not an easy task

There are many potential causes of incapacity

Capacity is of no relevance to commercial entities

REFERENCES

Capacity Refers To Ability To Manage One's Own Affairs

In California, a lengthy definition is found in §811

Mention s.4235, note 1994 report says re 4235

“Section 4235 is drawn from the Missouri Durable Power of Attorney Law. See Mo. Ann. Stat. § 404.714(4) (Vernon 1990). This section does not provide anything inconsistent with permissible practice under former law, but is intended to recognize the desirability of consultation in appropriate circumstances and provide assurance to third persons that consultation with the attorney-in-fact is proper and does not contravene privacy rights. As to the right to obtain medical records under the durable power of attorney for health care, see Section 4721. See also Section 4455(f) (receipt of bank statements, etc., under statutory form powers of attorney). The right to obtain information may be enforced pursuant to Section 4941(f).”

Principal's Loss Of Capacity

Often a durable Power of Attorney is said to be a Power of Attorney that triggers entitlement of an agent to perform tasks if the principal loses capacity, or survive incapacity of the principal.

However, these are merely different designs of a durable Power of Attorney.

The notion of "durability" should align with the intention of the principal as to whether its operation is to survive their loss of capacity.

What is important is to give effect to the proposition that the principal may choose to provide that the Power of Attorney continues to operate if the principal loses capacity.[3]

What needs to be avoided is any approach that involves mysterious notions, such as a Power of Attorney always terminating upon the principal losing capacity.

The difference between these two approaches is that the first approach tends to fundamentally protect and preserve freedom of a principal's to structure their affairs however they see fit, whereas the second approach tends to limit this freedom.

Example

Imagine a principal wants to say in a Power of Attorney that "at any time between my overseas departure and return dates if I have capacity this agent may perform certain tasks they can do so" ("the First Power of Attorney") and say in another Power of Attorney that "at any time between my overseas departure and return dates if I lack capacity this (possibly other) agent may perform certain tasks" ("the Second Power of Attorney").

What The Example Illustrates

Legislation that inhibits the making of arrangements of the kind seen in the Example above, it is problematic.

For example:-

  • legislation in California provides that "the authority of an attorney-in-fact under a nondurable power of attorney is terminated by the incapacity of the principal to contract" (§4155) resulting in termination of the First Power of Attorney if the principal loses capacity, even where the principal prefers otherwise
  • legislation in New York states "a Power of Attorney terminates when the principal becomes incapacitated, if the Power of Attorney is not durable" (§5-1511) and "a Power of Attorney is durable unless it expressly provides that it is terminated by the incapacity of the principal" (§5-1501A) also (like in California) resulting in termination of the First Power of Attorney if the principal loses capacity, even where the principal prefers otherwise

There is no reason why legislation should work to prohibit the making of arrangements of the kind seen in the Example.

There are excellents reasons for legislation to protect the right of a principal who is a person to make arrangements of the kind seen in the Example.

Conclusion

The best approach is to accept that:-

  1. But for the passing of legislation in the Six (6) Greater States over the last seventy (70) or so years, it would not be possible to create a Power of Attorney that survives incapacity[3:1]
  2. Each state has chosen to do things in fundamentally different ways[4], notwithstanding initiatives for national reform
  3. It would be preferable if the issues at stake were approached universally with primary consideration given to freedom of the principal to structure their Power of Attorney affairs however they see fit
  4. This is of particular importance given the fundamental, core functions and purposes of a Power of Attorney[5]
  5. Instead, governments have passed legislation that tends to erode the freedom of a principal to structure their affairs as they see fit[6]
  6. Problems arise in particular, from legislation that refers to termination in the context of Powers of Attorney surviving incapacity of the principal[7]
  7. If reference to termination was removed and focus replaced upon the intention of the principal, much of the confusion would be solved[8]
  8. Until this occurs, confusion will prevail because anyone seeking to understand the implications of a principal losing capacity will need to consider a lot of complicated matters[9]
  9. All of this confusion is capable of being removed by returning the focus back to the intention of the principal and the importance of a principal being able to structure their affairs however they see fit

Often a durable Power of Attorney is said to be a Power of Attorney that triggers entitlement of an agent to perform tasks if the principal loses capacity, or survive incapacity of the principal.

However, these are merely different designs of a durable Power of Attorney and what is important, is that in each example the intention of the principal is that operation of the the Power of Attorney survives their loss of capacity.

What is important is to give effect to the proposition that whatever terms the principal sees fit to include in their Power of Attorney.

For example if the principal wants to say "at any time between my overseas departure and return dates if I have capacity this agent may perform certain tasks" they can do so and equally for example, say in another Power of Attorney "at any time between my overseas departure and return dates if I lack capacity this agent may perform certain tasks". It is as simple as to say if legislation inhibits this sort of arrangement, the legislation is problematic.

There is simply no excuse why legislation should work to prevent these kind of arrangements and excellent reasons for legislation to protect the right of a principal who is a person, given that for example, this is only an ordinary kind of arrangement that many people may prefer to adopt, if they were travelling, or going into hospital or similar.

The justification for ensuring these kind of arrangements are feasible is basic human freedom, accepting that at stake is a transaction with over 2500 of history,

Any policy kind of argument that arrangements of this kind are complicated in some manner because the capacity of the principal is determinative of an agent's authority are easily dismissed given that, for example:

  • the principal is at liberty to structure their affairs a different way if they prefer
  • some states permit agents to certify that the principal has or lacks capacity as applicable
  • it offends public policy to suggest that complexity should justify limiting the options available to a principal in any manner

of that other circumstances prevail (such as the principal lacking capacity)

the principal

What is importance in these

large number of considerations

To understand why the confusion is so substantial, it is necessary to understand the historical contexts of Power of Attorney.

Until recently, it was generally assumed that

It is helpful to approach these matters on the following basis:-

a Power of Attorney may terminate or become questionable in terms of being reliable in any particular circumstances, unless:-

  • the principal expresses an intention in their Power of Attorney that the Power of Attorney continue to operate irrelevant to whether the principal has or lacks capacity and for example, complies with any related statutory obligations; or
  • legislation relieves the principal of any need to include express an intention that the Power of Attorney continue to operate irrelevant to whether the principal has or lacks capacity; and
  • the principal has not expressed any contrary intention in their Power of Attorney

It is fundamentally helpful to work backwards from a series of simple propositions

  • the notion of a durable Power of Attorney is a concept that takes into account the intention of the principal and terms of relevant legislation:-
    • a durable Power of Attorney is not simply a Power of Attorney that triggers entitlement of an agent to perform tasks if the principal loses capacity to manage relevant affairs
    • a durable Power of Attorney is not simply a Power of Attorney with an operation that survives incapacity of the principal
    • a durable Power of Attorney is a kind of Power of Attorney that with an operation that survives incapacity of the principal

may terminate or become questionable in terms of being reliable in any particular circumstances, unless:-

A person who is unable to demonstrate capacity is unable to create a valid and enforceable Power of Attorney.

If a Power of Attorney was created by a person who lacked capacity to create a Power of Attorney, a Court may declare the Power of Attorney is invalid (i.e. void ab initio, which means ‘as it if never existed’).  That said, it would require someone to put the case before the Court and so, there are risks.

Terms like ‘has capacity’, “had capacity” or “with capacity” are often used to describe a principal being a person with ability to manage their own affairs relevant to a Power of Attorney.

Conversely, terms like ‘without capacity’, ‘lacking capacity’ or ‘incapacitated’ are often used to describe a principal without ability to manage their affairs relevant to a Power of Attorney.

This approach is oversimplified:-  

  • incapacity may be intellectual or physical, including where a principal may be domestically mobile but unable to manage the rigour of attendances associated with managing commercial interests, such as attending on banks, professionals, broader financial institutions, attending to the day-to-day minutiae of managing payments. managing monies in accounts and similar 
  • capacity might focus upon a broad inability to perform any task of a commercial nature or the precise tasks authorized to be performed by agents under the Power of Attorney
  • capacity may be fluid, changing over time, or constant and unlikely to change, as in the event of permanent incapacity

The Six (6) Greater States Have Defined Incapacity In Legislation

All of the Six (6) Greater States have a definition of “incapacity” in their legislation.

  • in California, a lengthy definition is found in §811
  • in Texas, legislation refers to a principal being ‘incapable of managing their financial affairs’ (§751.00201)
  • in New York, capacity is defined as: "ability to comprehend the nature and consequences of the act of executing and granting, revoking, amending or modifying a power of attorney, any provision in a power of attorney, or the authority of any person to act as agent under a power of attorney"  and incapacity is defined as “be without capacity” (§1501) 
  • in Florida §709.2102(7) refers to “inability of an individual to take those actions necessary to obtain, administer, and dispose of real and personal property, intangible property, business property, benefits, and income”
  • in Illinois:-
    • §2-3 states: “the principal is under a legal disability as defined in Section 11a-2 of the Probate Act of 1975.  A principal shall also be considered incapacitated if:  (i) a physician licensed to practice medicine in all of its branches has examined the principal and has determined that the principal lacks decision making capacity;  (ii) that physician has made a written record of this determination and has signed the written record within 90 days after the examination;  and (iii) the written record has been delivered to the agent.  The agent may rely conclusively on the written record”
    • §11a-2 provides: "Person with a disability" defined.) "Person with a disability" means a person 18 years or older who (a) because of mental deterioration or physical incapacity is not fully able to manage his person or estate, or (b) is a person with mental illness or a person with a developmental disability and who because of his mental illness or developmental disability is not fully able to manage his person or estate, or (c) because of gambling, idleness, debauchery or excessive use of intoxicants or drugs, so spends or wastes his estate as to expose himself or his family to want or suffering, or (d) is diagnosed with fetal alcohol syndrome or fetal alcohol effects."
  • in Pennsylvania, §102 states “incapacitated person” means a person determined to be an incapacitated person under the provisions of Chapter 55 (relating to incapacitated persons).

Alternative Definitions of Incapacity Might Be Considered

A person might consider including an alternative definition of “incapacity” in a Power of Attorney, such as:

“..incapable of managing the affairs that my agent(s) are authorized to perform under this Power of Attorney by virtue of an injury, condition, disease or any other cause (whether known or unknown).”

This definition focuses upon whether tasks relevant to the Power of Attorney are able to be performed and does not specify physical or mental disability as a specific cause (although this definition might be expanded to include these concepts) and recognizes a cause may not be identifiable.

There may be circumstances where it is suitable to tie the test of capacity to the ability of the principal to perform the precise tasks specified in the Power of Attorney and other instances where a broader test is more appropriate. 

Capacity May Arise In Different Contexts

Whether a principal has or had capacity might arise, for example:-

  • in respect of the point in time when a Power of Attorney was created, or
  • in respect of a point in time or multiple points in time, after a Power of Attorney was created

Capacity Arises In The Context of Creation a Power of Attorney

Where  capacity at the time when the Power of Attorney was created is in dispute, issues include whether at the time that the Power of Attorney was created, the principal:-

  • had sufficient capacity to appreciate their commercial affairs
  • had sufficient capacity to appreciate their options with respect to the Power of Attorney
  • was capable of properly exercising discretion in designing the Power of Attorney
  • was capable of understanding the implications and effect of signing the Power of Attorney

Capacity Arises For Consideration After The Creation of A Power of Attorney

Where capacity is disputed in respect of a point in time after a Power of Attorney was created, there may be questions as to whether at various points in time the principal had capacity.

This seems more likely to occur where for example, a Power of Attorney is said to only authorize an agent to act when the principal lacks capacity or in California in respect of a non-durable Power of Attorney that terminates upon the the principal losing capacity under §4155 (§4155 provides “the authority of an attorney-in-fact under a nondurable power of attorney is terminated by the incapacity of the principal to contract”).

Where a Power of Attorney under which the principal is a person is expected to be on foot for some time, there may be considerable purpose in maintaining adequate evidence of capacity over time, to best ensure that any dispute as to the capacity of the principal is easy to resolve.   

Managing The Issue of Capacity Is Not An Easy Task

Involving a lawyer in the preparation and execution of a Power of Attorney and ensuring that the lawyer is suitably authorised and instructed to disclose an account of the principal's presentation at the time it was made is often the most effective means to manage risks associated with a dispute as to whether a principal had capacity at the time a Power of Attorney was made.

If a dispute arises, a Court would be able to hear and potentially rely upon the lawyer’s evidence about the principal's presentation at the time that the Power of Attorney was signed by the principal.

Equally, a lawyer is capable of advising about what steps should be taken to minimize risk of dispute involving questions as to the capacity of the principal, such as obtaining suitable medical evidence. 

One difficult issue that can arise in respect of a durable Power of Attorney is deciding whether agents may either:-

  • exercise all authority prescribed in their favour under the durable Power of Attorney upon the principal either: (a) losing capacity to perform any single relevant function; or (b) losing capacity to perform more than one relevant function, or perhaps all relevant functions; or
  • only exercise authority prescribed in their favour under the durable Power of Attorney at any given time to the extent that the principal lacks capacity

This issue is difficult because if the agent or agents may only exercise authority prescribed in their favour under the durable Power of Attorney at any given time to the extent that the principal lacks capacity it means that:-

  • as and when every function relevant to the principal's affairs comes to need to be performed, someone has to decide what capacity the principal has and does not have and of course, that capacity may change from day-to-day; and
  • beyond that, there is a further question as to who is authorised to decide what tasks the principal can and cannot perform, being a decision that might for example, be made by the agent or agents themselves or a physician, or perhaps a person chosen by the principal etc.

The difficulties identified above in relation to an agent or agents only being able to exercise authority to the extent that the principal lacks capacity tend to justify the principal either:-

  • adopting the alternative approach referred to above, whereby upon the principal losing capacity the agent or agents appointed under the durable Power of Attorney may exercise any and all authority prescribed in their favour, particularly given an agent may only exercise authority under a durable Power of Attorney for the benefit of the principal; or
  • authorising the agent or agents appointed under the durable Power of Attorney to exercise authority whether or not the principal lacks capacity, which removes these issues completely

Considerations of this kind may have led to Florida prohibiting a principal from authorizing agents to commence to exercise authority after a future point in time (ie. a prohibiting springing Powers of Attorney - see §709.2108(3)).

An individual may want to specify tasks that may be performed by an agent and when an agent may perform those tasks, include tasks to be performed only if the principal has capacity and tasks to be performed only if the principal lacks capacity and whether or not the principal lacks capacity.

There Are Many Potential Causes of Incapacity

A person may lose cognitive ability as a consequence of a traumatic event, a condition or disease (ie. dementia, Huntington’s disease etc) or mental illness (ie. schizophrenia, personality disorder etc).

Incapacity may also result from a physical condition that renders a person unable to communicate sufficiently to demonstrate that they have cognitive ability (ie quadriplegia, multiple sclerosis, motor neurone disease etc) in which event, even if they have cognitive ability they are incapacitated in the relevant sense.

Traumatic events that might give rise to cognitive and physical incapacity (as opposed to diseases and illnesses) include:-

  • a stroke
  • work, motor vehicle, household, recreational or other accident
  • exposure to toxins, poison or chemicals, electrocution or oxygen deprivation
  • criminal or animal inflicted injury
  • effects of the ageing process

At least in principle, some occupations may involve greater risk of being exposed to a traumatic event than others (oil rig workers, law enforcement and prison workers etc.)

Arguably the most difficult issues pertaining to Powers of Attorney relate to capacity, partly because it is a fallacy to suggest incapacity works in absolutes, such that a person is either incapable or capable.  For example, a person may lack capacity, but be far from incapacitated.

When considering a durable Power of Attorney, it is worthwhile to consider empowering agents to exercise authority whether or not you have capacity as opposed to only if you lack capacity, to reduce risks associated with argument about capacity.

Capacity Is A Concept Of No Relevance To Commercial Entities

Capacity in the cognitive sense it often applies in the context of Powers of Attorney has no relevance to a commercial entity, because they are not natural persons.

Where a commercial entity seeks to execute a Power of Attorney, the concept of ‘capacity’ might for example, refer to execution of a Power of Attorney being consistent with any relevant Articles of Association, partnership agreement, other document or legislation governing the existence of the legal entity.

Articles of Association, partnership agreement, other documents or legislation may for example, inform as to the entitlement or otherwise of a particular legal entity to create a Power of Attorney.

REFERENCES

California

In California, multiple references are made in legislation to incapacity, see for example, §4120, §4124 and §4125).  A lengthy definition is found in §811.

Notably, in California unlike some other US States, part of the verification process available to an agent to satisfy a third party of their bona fides includes authority for an agent to swear an Affidavit deposing to the lack of capacity on the part of the principal, which in turn, may be relied upon by the third party in the context of certain assurances and similar that in effect, protect the third party from any dispute as to whether in fact, the principal did or did not lack capacity at any relevant time. This is potentially significant, although more significant in US States like Texas where such authority is not afforded to an agent, leaving open the question as between any agent and third party as to whether the the principal may or may not lack capacity.

Legislation also acknowledges a key concept relevant to incapacity stating that “a temporary incapacity suspends the attorney-in-fact's authority only during the period of the incapacity”, cognizant of the reality that often, incapacity is transient. (§4152) 

Incapacity is expressly provided to terminate a non-durable Power of Attorney,§4155.

Texas

The concept of capacity with respect to a Power of Attorney created by an individual operates differently in various contexts.

  • In respect of a durable Power of Attorney, the term “incapacity” is defined in legislation as being ‘incapable of managing their financial affairs’ and unless the principal defines incapacity otherwise, the legislative definition applies (§751.00201).
  • In respect of a non-durable Power of Attorney, the absence of express legislation in Texas dealing with non-durable Powers of Attorney means that in practical terms, it is preferable to define what is meant by capacity or incapacity , if the concept is mentioned in the non-durable Power of Attorney

It is significant that this definition:-

  • does not expressly recognise that for example, a durable Power of Attorney might be created to authorise an agent or agents to manage only property or legal affairs, as opposed to financial affairs in which event, at least on its face, the definition could not be satisfied for purposes related to the durable Power of Attorney; and
  • appears to speaks in absolute terms, as if a person may either be capable of incapable of managing their financial affairs without recognising in particular, that in many cases a person will have a degree of capacity; and
  • only refers to incapacity to manage financial affairs, whereas the purpose of a Power of Attorney may include property or financial affairs in addition to financial affairs or potentially, to the exclusion of any financial affairs

Notably, unlike California where the verification process available to an agent to satisfy a third party of their bona fides includes authority for an agent to swear an Affidavit deposing to the lack of capacity on the part of the principal, which in turn, may be relied upon by the third party in the context of certain assurances and similar that in effect, protect the third party from any dispute as to whether in fact, the principal did or did not lack capacity at any relevant time, in Texas an agent cannot depose an Affidavit confirming the lack of capacity of the principal so as to remove this issue from the scope of any dispute.

Cases involving any genuine dispute as to capacity on the part of a principal are difficult disputes, often requiring family members and medical experts to give evidence, invariably involving considerable time and expense.

New York

In New York, capacity is defined as (§1501):

“ability to comprehend the nature and consequences of the act of executing and granting, revoking, amending or modifying a power of attorney, any provision in a power of attorney, or the authority of any person to act as agent under a power of attorney."

The term “incapacity” is defined as “be without capacity” {§1501).

It may be of help to reflect upon §81.02 which defines incapacity for guardianship purposes.

Florida

The default statutory definition is (§709.2102(7)):-

“inability of an individual to take those actions necessary to obtain, administer, and dispose of real and personal property, intangible property, business property, benefits, and income”.

Given that a durable Power of Attorney in Florida must contain certain words or similar words to a set of words that include the word incapacity and this term is defined in §709.2102(7), it might be said that where the requisite words are included, the word ‘incapacity’ attracts the definition and another possibility may be that no alternative definition may be preferred.

Illinois

The default statutory definition is (§2-3):-

“the principal is under a legal disability as defined in Section 11a-2 of the Probate Act of 1975.  A principal shall also be considered incapacitated if:  (i) a physician licensed to practice medicine in all of its branches has examined the principal and has determined that the principal lacks decision making capacity;  (ii) that physician has made a written record of this determination and has signed the written record within 90 days after the examination;  and (iii) the written record has been delivered to the agent.  The agent may rely conclusively on the written record”

The term ‘person with a disability’ is also relied upon legislation (see for example, §2-6) and defined (§2-3).

Pennsylvania

In Pennsylvania, §102 states:-

“Incapacitated person” means a person determined to be an incapacitated person under the provisions of Chapter 55 (relating to incapacitated persons).