As the population ages, a power of attorney is becoming a more critical element to any client's financial plan. But this document can be riddled with pitfalls.

One growing issue is abuse. For example, allegations of abuse have ensnarled the estate of the late philanthropist Brooke Astor. Her son was recently indicted in New York for allegedly abusing his power of attorney. His attorney has denied the charges.

Fraud and forgery of durable power-of-attorney documents have also become significantly easier as blank forms become widely available online. But numerous other issues pose a threat for your clients as well.

Among these:
People are outliving the person they designated as power of attorney.
State laws concerning powers of attorney are getting families embroiled in legal disputes.
Financial institutions are setting their own requirements for invoking a power of attorney.
Fiduciaries are getting sued if they incorrectly release funds on the basis of power-of-attorney documents.

Financial advisors are not immune from the last item, warns West Palm Beach, Fla., probate lawyer John Pankauski. "The law doesn't discriminate. Fiduciaries are held to reasonable or higher standards of reviewing a durable power of attorney, analyzing the act which is being requested, and determining whether the power holder-the agent-has authority to do what he or she is requesting."

Often, Pankauski notes, financial advisors have language in account-opening documents that provides limited power of attorney for certain things, such as trading securities. However, in Florida, as well as in many states, Pankauski warns, you need witnesses on these documents. "If you don't follow the statute precisely, it's invalid."

Another problem occurs in Florida and other states with accounts that are slated to pass automatically to beneficiaries when the account holder dies. These include joint accounts, deposit accounts "in trust for" certain beneficiaries and "payable on death" accounts. Those holding a power of attorney may wrongly assume the document gives them power to change these automatic beneficiary designations. Not so-unless the power-of-attorney document contains specific language that allows for it.

The result: Not only are those holding a power of attorney getting sued for exceeding their authority, Pankauski says, but so are financial institutions, which incorrectly release account-holder funds.

Similar power-of-attorney restrictions on automatic beneficiary designations are believed to exist in California, Kansas, Missouri, Washington and New Mexico and perhaps other states, according to The National Conference of Commissioners on Uniform State Laws in Chicago. In Florida, Pankauski says, those who successfully sue may be entitled to damages, costs and attorney fees. However, rules for the reimbursement of expenses may vary in other states.

Say you are provided with a power-of-attorney document and asked to transfer funds for a client. Easy enough, until you learn that your product provider-the investment company or brokerage-declines because it has its own forms and procedures. The power-of-attorney designee is bound to get mad-particularly if the principal is already incapacitated. Yet you certainly don't want to sue your product provider!

Best to avoid this tricky situation by learning in advance exactly what documents your product provider needs to act on a power of attorney, Pankauski says. Linda Whitton, professor at Valparaiso University School of Law in Indiana, says the greatest problems with power-of-attorney documents typically come once a principal is incapacitated. The agent presents the document to conduct a transaction, only to be told that the power of attorney must be on the institution's own form. The problem is, it's too late to get the principal to sign the form. Families often find the time and expense involved in getting the power of attorney accepted more costly than just getting a guardianship.

Whitton was involved in the 2006 Uniform Power of Attorney Act, which several state legislatures are expected to introduce this year to help avoid these situations. Already adopted in New Mexico, the new rule is expected to make power-of-attorney documents more portable nationwide. Under the rule, only a power-of-attorney document plus a picture ID is necessary to prove who the person holding the power is, according to John P. Burton, chair of the NCCUSL committee that drafted the act.

The agent may be required to sign a document certifying that he or she is the agent. A statement saying that the principal who gave the power of attorney is still alive may also be required. That's because a power-of-attorney document becomes invalid once the principal dies. But if the rules are correctly followed, fiduciaries may gain some protection from lawsuits.

In the meantime, what should you do if your client needs to draw up a power of attorney?
Attorneys unanimously agree that it is most important for your client to choose someone 100% trustworthy. The person should live nearby, and have the time and experience to handle the duties. The agent, or power-of-attorney appointee, is generally considered a fiduciary and can be sued if something goes wrong.

Clients might also consider giving power to remove the trustee to someone who has no authority over the assets-say, a trusted certified public accountant or lawyer. Also, the client should name successors.