An article in Saturday’s Wall Street Journal, “Power Grab,” reminds us that one of the most useful estate planning tools is the durable power of attorney. However, without some guidance – and some controls – a durable power of attorney can be abused and cause potentially devastating results. Fortunately, a durable power of attorney can be tailor-made to your specifications to help protect you from such abuse.
As reported by the Wall Street Journal’s article, a power of attorney is a legal document that is designed someone, typically elderly, to turn over control of the management of finances, or other business matters, to family members or friends. Increasingly, we are seeing those friends and family members misuse and abuse those powers of attorney, causing the loss of assets and control, in unanticipated ways.
The article also correctly identifies one of the most difficult impediments to the effective use of a power of attorney, i.e., that banks, and other third parties – especially financial institutions – can legally refuse to honor the power of attorney. The rejection of a power of attorney by a bank, or other financial institution, can lead to costly problems surrounding the management of the elderly person’s affairs, such as the inability to transfer assets during life, forcing the probate of those assets; or potentially defeating the effort to engage in planning that is designed to qualify the elderly person for Medicaid eligibility – costing the family tens of thousands, or maybe even hundreds of thousands of dollars.
A remedy that works both for helping avoid potential abuse of the power of attorney, and for helping to avoid the rejection of a power of attorney by a bank or other financial institution, is to carefully draft the power of attorney with appropriate controls. A power of attorney can be drafted to be very broad and cover virtually any financial or business transaction, or it can be drafted very narrowly so as to cover only a single transaction, or it can contain provisions anywhere between those two extremes. The point to consider, and remember, is that the power of attorney should not be a “boiler-plate” legal document that is the same for everyone. Your individual power of attorney should deal with your individual circumstances.
The Wall Street Journal article offers several suggestions for actions to take to minimize the opportunity for someone to refuse to honor the power of attorney, and to provide some protection over the misuse or abuse of the power of attorney. Among the suggestions contained in the article:
• Set it up early – before you have reached a point of mental incapacity. Just be sure that it has the proper coverage, and that you truly trust not only the integrity of the person you are designating as your power of attorney, but you also respect their capacity for rational decision making and their sense of responsibility for taking necessary actions.
• Consider making it a “springing power of attorney” rather than an “immediate power of attorney.” An immediate power of attorney is one that takes effect immediately upon signing the document, and can be used by the person you’ve designated as your “attorney in fact” immediately upon delivery of the document to him or her. A “springing power of attorney” is one that does not take effect until you have become incapacitated. The potential problem with a springing power of attorney is that when you become incapacitated, the attorney in fact that you have designated must comply with the requirements of the document for establishing the incapacity. You have the ability, and right, to define “incapacity” in the document in the manner you desire. By defining what constitutes incapacity, you can provide some level of protection for the potential misuse of the power of attorney before you actually become incapacitated. The problem arises when you become incapacitated. The incapacity may be sudden and unexpected (such as a heart attack, stroke or accident), and the time it takes to comply with the requirements to establish incapacity may result in the lack of control over assets when that control is most needed. A typical definition of incapacity is obtaining two written opinions from physicians who have examined you and determined you to be unable to manage your own affairs. Finding two doctors and allowing for them to examine you may cause some meaningful delay in the effectiveness of the power of attorney.
• Keep it current – Some financial institutions won’t honor a power of attorney that is more than six months old. Periodically renewing the power of attorney is the most effective means of avoiding the rejection of a power of attorney by a third party for it being “stale.”
• Keep it under lock and key – your attorney can hold possession of your power of attorney pursuant to your written instructions, or you can keep the power of attorney in a safe or safe deposit box at a bank. Areas of concern include whether your attorney in fact knows where the original document may be, and if so the time it takes to obtain possession of the original, including whether the attorney in fact has access to the safe deposit box at the bank or the safe at home. Proper safekeeping prevents the attorney in fact from gaining access to the document before its needed.
• Restrict the power – as suggested above, you can design a power of attorney to be very broad or very narrow. By limiting the coverage of the document, you can provide some protections. Another option is to allow broad discretion for the attorney in fact for some matters, but require others to agree to broader matters. For instance, the designated attorney in fact could make payments up to a specified level. Anything needed beyond that level requires he consent and agreement of other family members. That limits the amount of potential damage that can be accomplished through the abuse of the power of attorney.
• Cover your IRA or pension plan – Probably the most frequent reason for a power of attorney to be rejected by a financial institution is that the power of attorney does not provide authority for specific actions that are needed, such as allowing withdrawals from retirement plan accounts. Consider also whether you want to allow, or not allow, the attorney in fact to change the beneficiaries of your retirment plans (or life insurance policies), and if you want to allow such changes, can the attorney in fact change the beneficiary to himself or her self.
• Prepare separate documents – powers of attorney typically are state specific, and the use and validity of such documents are governed by state law. If you have business or financial activities in different states, take the time, and incur the expense, to have separate powers of attorney implemented in each state. This action is particularly appropriate for health care powers of attorney and advance directives.
• Consider authorizing gifts – you can provide in your powe of attorney that your attorney in fact has the authority to make gifts on your behalf should you become incapacitated. If you have a taxable estate, that can be very important for purposes of minimizing your ultimate estate tax liability. If you are making gifts purusant to your estate tax plan, then you should ensure such language is included in your power of attorney for those gifts to continue during periods of incapacity. You can also provide limitations on the gifting that can be made by your power of attorney. The important thing is that you thoroughly explain, in the power of attorney document, the limitations on such gifting, whether amounts, gift recipients, or gifts by the attorney in fact to himself or herself.
• Consider a fallback trust – a revocable trust that can be established ahead of time can be useful if the person(s) you’ve named as your power of attorney are unable or unwilling to serve in that capacity. Your assets can then be transferred into the trust, and the disability trustees that you have named can take control of the assets and manage them according to your instructions and guidelines.
One area of particular importance that was not addressed by the Wall Street Journal article is the “durability.” of the power of attorney. Under the laws of most states, a plain “power of attorney” becomes ineffective if you become incapacitated. To ensure that the power of attorney can be used during periods of incapacity, the document should include “durable” provisions. “Durable” provisions are typically provided by state statute and set for the requirements for the power of attorney to be a “durable power of attorney.” A durable power of attorney continues to be effective during the period of any actual disability. The Florida Statute on durability, can be found at Section 709.08, Florida Statutes.
The proper use of a durable power of attorney can be very effective to preserve assets for the individual and the family. Improper use of it can cause devastating results. You have the ability, and the right, to determine the degree of control that is placed on your attorney in fact to limit the potential for wrongdoing.
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