My father became POA over our grandfather. He sold our grandfather's house in the state of Michigan and placed the money in his personal account because my grandfather was going to be placed in a nursing home and could only retain a limited amount of $$ in a bank account. My father (only child) died BEFORE his dad. SOMEHOW, my stepmother who has no children by my father gained possession of this account and has claimed this money as HER OWN. A statement was made by her saying "she placed herself on his account". My grandfather died. My understanding is that having POA to handle someone's affairs does not entitle you the right to retain or gift the person's money to yourself and anyone else. Should this not be handled in Probate Court? Any advice on what we should do?

First please understand what your father did was illegal, he was trying to hide the assests of your grandfather from the nursing home , so they would get medicaid and medicare and not have to pay additional money.
So first and foremost they are intitiled to being paid first from this money and if notified of the illegal hiding of the money will sue for their money.

Now aside from that, a POA allows them to sign for another person, it does not give them any authority over.
So legally they can sign and withdraw a persons money. After that, the estate of the grandfather and sue the step mother claiming the father committed fraud and stole the money from the grandfather.

It will be up to the probate judge to decide what happens.

But once it was in the fathers account, if he dies, without a will, the step mother would legally get the money, The fact that the father was trying to hide the money and commit a criminal act is the only reason that the probate may order the return of the money.

A power of attorney can be given to another for varioius reasons/purposes/uses, i.e. I can give my 28 yr old daughter a limited Power of Atty to cash my paychecks and only that or I can give her power to handle my insurance issues or I can give her more authority and name several acts she can perform on my behalf. Then there are the issues of dying either with a will or wihout a will (intestate). Then there is the issue of attempting to have Medicare/Medicaid pay for nursing home expenses rather than exhausing one's assets to pay for those assets... hiding assets to avoid using personal assets rather than having Medicare/Medicad pay is either illegal or on the verge of being illegal, however, it's now a moot or irrelevant now issue since you father has now passed away. The issue of who is entitled to the money from the proceeds of the sale of the home is much too complicated for the lay person not trained in the law to digest and then take whatever action/actions are appropriate. I am not an attorney, however, I would consult one if you feel you are entitled to a portion of the proceeds.