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Perhaps it is not the same in every state, but in Minnesota both ALFs and NHs can have secure units for memory care or dementia care.
A person who has been declared by a court to be incompetent to act on his or her own behalf cannot sign legal documents.
Most persons with dementia are never declared incompetent. The issue never goes to court.
So then the question comes down to, can the person with dementia fully understand what she is signing, and understand the consequences. She may think aliens are living in her attic and Elvis Presley sings out of her toothbrush, but if she understands what appointing someone to act on her behalf means, she can do that.
Usually persons are placed in the locked section of an ALF if they are at risk for wandering, or if their behavior is disturbing to other residents. It does not necessarily mean their cognitive skills are worse. (Often they are, but not necessarily.) Being in the locked unit would not necessarily disqualify them from signing a new POA.
So, your mother wanted a new medical POA document, her lawyer drew one up, it was signed and witnessed. (The witnesses were merely verifying that the signature was made by your mother, nothing else.) And it changes the delegated medical decision-maker from you alone to you and your estranged sister. Why on earth would Mother do that? Doesn't matter -- the only reason that would impact its validity would be undue influence. Do you believe that someone pressured her or coerced her to make that change? The lawyer? Your sister? Who? Do you have evidence?
If you have evidence of undue influence, you might want to pursue that, but I imagine that would be difficult to prove.
Does the new document name the two of you jointly as the decision-maker, or is one primary and the other secondary? If you are still primary and sister was added as secondary that should be no problem. She could only act if you could not.
Assume the document your mother signed is perfectly valid -- no trickery or undue influence and she understood what she was doing. That doesn't mean you have to share medical POA responsibility with your sister. You can simply decline to accept that role. Put that in writing and send it to the lawyer and to your mother.
You ask whether the lawyer has a "right" to have mother sign a doc when she has dementia and is in a locked ALF unit. The answer is, yes, that action can be perfectly acceptable and legal. Your mother does not lose her civil rights just because she is in a secure dementia unit. She has the right to change POA documents if she understands what that means.
In order to override the changes and get back to being her sole medical proxy you would need to prove that she did not have capacity to understand what she signed and/or that someone exerted undue influence to make her sign it. Can you do either of those things?
I think Babalou's right - why don't you just tell us what's really going on here?
I'm not certain about the concurrence of witnesses as to the sound mind issue. Witnesses typically only witness the execution of documents but don't attest to anything, unless one is a notary and the attestation would only be as to who the person executing the document is.
When I witnessed any documents, I was NEVER asked to address the issue of someone's competency, nor would I have done so because I, and other staffers, had no way of knowing or making that determination.
Something doesn't sound right here. What is the "paperwork" that your mother is being asked to sign, or has she already signed it? How did you learn about this situation? Were you present when the attorney arrived with office staff?
I assume this is a fait accompli already?