A Key Planning Tool for a Homeowner’s Future

With a power of attorney (POA), you can appoint a trusted, competent person to act for you later, if you can’t carry out real estate transactions on your own behalf. In POA lingo, you are the principal, and your trusted person becomes the agent or attorney-in-fact (not to be confused with a real estate agent or an actual attorney!).

A valid POA has to be created and signed when you’re still mentally able. Therefore, it’s really never too early to plan for the transfer of your home when it could be necessary.

There are financial POAs, which name the agent to handle any or all of your financial affairs. And there are limited POAs, which specifically authorize your agent to manage your real estate.

Each state has its own regulations governing the power of attorney. And each state has certain rules that apply to real estate transactions specifically. Some may require specific language in the POA showing your agent has accepted the POA, some may say the notary public cannot be one of the witnesses when the POA is executed, and so forth.

Wherever you are, state law controls.

How Powers of Attorney Come Into Effect

Check both state law and your county’s rules on durable, springing, and limited POAs to know what is permitted and what will work best in your situation. Here, we provide a basic orientation to the POAs usually picked for incapacity — durable, and springing.

The durable power of attorney is often chosen for assigning another person the ability to sign for the homeowner in a real estate transaction, with specific property described in the document. Unlike the non-durable power of attorney, a durable POA remains in force if you become unable to carry out transactions. Before then, you may revoke or modify your durable POA — and it’s best to tell those involved if you do, so they don’t rely on your prior version. Indeed, your state might mandate a written revocation notice to inform your appointed agent.

Some homeowners write termination dates into their POA documents, forcing themselves to review and update their instructions from time to time, so the power doesn’t linger with ex-spouses or ex-friends, or someone who has passed. This brings up the importance of naming at least one successor agent — just in case your preferred agent can’t serve when the time comes. If you appoint more than one agent, everyone you name will need to sign agreements, disclosure documents, and so forth. 

Using the POA, your agent can ultimately pass the home title on — whether by selling your home, or conveying it to a family member, friend, or charity. Your agent can do so without any changes to your will. The durable power ends when you pass away. Then, the county probate court opens a probate case for your estate. If you wrote a will (and you should!), the court will approve the executor you named in the will to manage your estate from there.

Can you have your POA take effect only if and when you actually become unable to handle your transactions? Yes. This is a springing power of attorney. This document clearly describes a situation that gives your agent the power to sign papers on your behalf. When your agent presents a springing POA to the title company, the examiner may require certification from your doctor that you are incapacitated, and the history and background of your condition.

Important note: A conventional POA form will not work to transfer real estate when you intend to create a durable or springing POA.

Tips for Creating an Effective Power of Attorney

If you ever become unable to carry out your own transactions, but you haven’t prepared for this situation, a court could be called upon to intervene. The court might appoint a conservator to handle your business. But if you create an effective POA, you can avert the crisis. To create an effective POA instrument:

• Choose a trustworthy person. Remember, your agent can change the title to your home. According to the American Bar Association: “Integrity, not financial acumen, is often the most important trait of a potential agent.”

• Avoid ambiguities. State clearly that your agent may carry out any legal business involving the real estate, including a transfer, gift, etc. If you intend to restrict what your agent can do, state the limits. This might need to be done through a statutory form. If, for example, you’re in Texas, you execute and notarize a statutory durable power of attorney. You must initial the form at the line of any authority you are granting to your agent.

• Are there co-agents? Be clear on whether the majority are empowered to act if there is not full consensus or everyone is not available.

• Follow the formalities. Have the final document signed, witnessed and notarized according to state requirements. Record the POA with the recording office in the home’s county, and make copies. Regardless of whether the state law requires it, recording is the best practice.

The original, executed document will be used in the conveyance, so be sure you agent knows where it is and has access to it. Assuming it’s drafted and executed as state law directs, a smooth transaction should happen. To be confident that it will, consult with an estate planning attorney for advice that fits your own financial situation and personal circumstances, and comports with all state standards, including for any out-of-state holdings.

State laws on powers of attorney do change. Review your POA with your attorney regularly.

When Powers of Attorney Are Questionable

To reduce claims of improper use of POA documents, states have stringent rules for POAs, and provide access to the courts for relatives and others close to the homeowner when questions arise about a POA. Lenders, additionally, might require a minimum sale price in a POA conveyance, to be sure no one is getting a deal too good to be fair.

Your agent should let the real estate professionals know up front that a POA is being used. The title company will ask why. Professionals rightly want to be sure that you weren’t pressed into signing away your control by a caregiver or someone who is taking advantage of a weakness for their own profit. Title companies have to protect themselves from other people who might sue.

The state may forbid agents from making gifts to themselves if the POA document doesn’t say they can. So, for example, if you expect your adult child to hold power of attorney and use it to conveys the family home without a sale, then state, right in the POA, that the gift of the real estate is permitted, so it’s obvious that your agent is following your wishes.

In any case, transferring a home to your adult child while you’re alive might be a tax fumble. There are usually better options. For example, transferring through a will provides a stepped-up tax basis (with a reduction in capital gains taxes) for the heir.  

☛ Read more about a very common question in estate planning: Should You Transfer Your Home to Your Children Now, or Leave It in Your Will?

The Rubber Hits the Road: How a POA Works in a Real Estate Transaction

A successful transaction through your POA starts well before the transfer. Give the title company a call and ask if it will cover a future conveyance by your agent, under a POA. Your state law might require the title company to review the POA before a transaction can occur. If so, the company likely offers state-compliant POA forms, and instructions and support for POA agents. The title company’s attorneys will review the completed document, and might require further steps before the transaction is completed.

Why would a title company question the POA? This can happen if:

• The title company needs proof that you haven’t revoked the POA.

• The title company needs medical proof that you actually are incapacitated.

As for the deed and related documents, your agent will sign as “X acting as agent for [your name]” or “[your name] by X under POA for [your name].” The deed language will convey the home from you (by your agent) to a grantee. Generally, the agent attaches the POA to the deed for recording. Check the recording deadlines and follow them with care.

☛ For more on the nuts and bolts of the power of attorney, see Conveying Real Estate Through a Power of Attorney.

We hope this overview is a helpful orientation to a forward-thinking practice: creating a POA to direct your real estate decisions if and when you can’t do so. Of course, this article cannot anticipate the facts and possibilities arising from own circumstances. Many people have case-specific questions and need personal guidance on using a power of attorney. We recommend consulting with an attorney familiar with estate planning and real estate in your local area.

Photo credit: Andrea Piacquadio, via Pexels.