Power of Attorney: Your Most Significant Document

Power of Attorney: Your Most Significant Document

By: Martin M. Shenkman, CPA, MBA, JD

Power of Attorney is a basic standard document in which you name a person (agent) to handle legal and tax matters if you cannot do so for yourself (reasons why include incapacitation, if you are out of the country, or if you are simply unreachable for any reason). Call a general practice attorney and they will likely quote you a price of $100-$350 for such a document. But what are you really getting? In some cases, a typed version of a standard pre-printed form with a few modified paragraphs. Usually this is not the planning you want or need. A poorly drafted Power of Attorney can be a financial disaster for you and your heirs. Consider the issues outlined below. If you already have a power, take a look and see how, and if, these matters are dealt with. Even as a layperson, you will be able to quickly discern significant issues.

Note that in some instances it is advisable to have a standard form. In New York for instance, the standard form is called a Blumberg Power of Attorney. In New Jersey, it is called an Allstate Power of Attorney. The advantage to having a standard form is that banks and other financial institutions may more readily accept these documents as they are familiar and frequently used. When you go to a financial institution with a comprehensive Power of Attorney, often the institution will have their own legal department review the document and determine if it is acceptable to them. In an emergency situation, you may be delayed access to funds and accounts by having to go through this process. Beyond this though, a more comprehensive, tailored Power of Attorney is advisable.

Springing Power: Can your agent sign your checks today, or does the power require that you first be disabled before your agent's rights become effective (spring)? Including a springing power prevents your agent from having any authority until you are actually disabled and require assistance. Many people prefer this approach, in order to maintain sole power over their own funds and assets. What does your power say about this? If the mechanism that springs your power into effect is not clearly delineated in the document, your agent might need significant legal involvement to convince a bank that he or she has the authority to act on your behalf. Not exactly the quick intervention you intended when you signed the power.

Some powers might provide that a letter signed by your attending physician stating you are unable to handle your affairs will suffice. An improvement, but you are not home yet. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), 42 USC 130d and 45 CFR 160-164, includes significant restrictions on any physician disclosing your private health information without your explicit approval. So, your power should include an express waiver of these restrictions. If it doesn't, get it revised! You might also indemnify the physician for issuing any such letter in good faith. Fear of a lawsuit can make a letter difficult to obtain.

Spousal Power: Commonly, when one spouse names the other spouse as their primary agent, the power will go into effect immediately and the power for alternate agents will be a springing power. Do not assume that because you are married your spouse will have automatic access to funds and assets that are titled in your sole name. This is not the case. If you are stuck in traffic and need your spouse to go to the bank for you, you may be surprised to find out how little your spouse can do on your behalf, beyond a standard joint checking account, without a Power of Attorney. Be sure your wife has the authority to withdraw from your accounts.

To Gift or Not To Gift: That would have been Shakespeare's question if he had been a tax attorney. A key clause in your Power of Attorney is the right to make gifts. If your power does not expressly authorize your agent to give away your assets, they probably can not. Do you always want a gift provision? No. So on one end of the planning spectrum your power could expressly state that your agent does not have the authority to make gifts in order to minimize the risks of abuse. Many standard powers permit gifts without limit! The right to unlimited gifts makes your power more significant then your will-yet you probably treat your will with great deliberation, and your power as a mere formality.

In other cases the right to make gifts could be crucial to your planning. On the opposite end of the planning spectrum your power could authorize your agent to give away all of your assets. Why no limit? To facilitate elder law planning, tax minimization and probate avoidance. There is a lot of ground in between no gifts and unlimited gifts. What point on the spectrum is right for you? Does the provision in your power get it right? Make sure this is an issue that is addressed in your Power of Attorney to the degree that it is important to you.

Gifting also raises issues of trust. How much do you trust your agent? If you are hesitant that your agent might abuse his or her power as your agent you might want to reconsider naming that person as your agent.

How Much to Gift: If your power authorizes your agent to make gifts, but you do not want the risk of unlimited gift giving, the document could limit gifts to the maximum gifts that your agent can give away for you without any gift tax consequences, $12,000 per year (the current cap), plus direct payments of tuition and medical expenses without limit. The tax laws increase the $12,000 maximum for inflation. Does your power provide for that? Many powers permit annual gifts but not payments for tuition or medical costs. You could authorize unlimited gifts to your spouse to facilitate planning. Code Section 2503(b) and 2503.

The power should authorize your agent to split gifts with your spouse. That permits your spouse to gift $24,000 to one person and treat it as if half were from you to avoid gift tax implications. Does your power permit this? Many forms do not include the right to make gifts to Section 529 college savings plans. To assure that these plans can be funded an express clause should be included in your Power of Attorney. Again, be sure to clearly explain who has the power to make gifts and where the gifts can be made to in order to ensure smooth processing.

Gift Equalization: So you have three kids. One is single. One is married with no children. And the other has rabbit genes: a spouse, 6 kids (all married), and 21 grandchildren. $12,000 per person annual gifts will create a huge imbalance. Do you limit the gifts? To what amount? Do you give the agent the right to make $12,000 annual gifts since it costs more to raise and care for all those children-how will he know if that's what you wanted? Do you include a make up bequest in your will to equalize your two children who don't have descendants- wont they think that it's unfair that the third child is getting more? Do you simply leave it up to the children to make it right on their own-obviously each one is going to say that they deserve the most? The bottom line is that you have to evaluate what is appropriate for you and your family and be sure your power provides accordingly.

The odds that a standard form will include exactly what is appropriate for your family are pretty slim. Read the gift provision in your existing power and see what it says. In a comprehensive Power of Attorney you may want to specifically detail your gift requests so that an agent is not left with these questions. You may also choose to include additional gift provisions in a will. Also, the uncertainties may cause strife to come up between your children. You do not want your assets, which you thought would be helping them, to cause huge family arguments.

Divorce: Some say the divorce rate for first marriages is 50-60%+, and for second marriages 75%+, but few people address this issue in their powers. It is possible that your soon-to-be ex-spouse can use your Power of Attorney without your knowledge to transfer all of your accounts out of your name. If your marriage gets rocky, destroy all of your original powers and consult your attorney about formally cancelling them. When your life becomes stable again, be sure to re-draft your powers, fitting them to your new lifestyle.

Business Document Coordination: Be sure that your power has detailed provisions giving your agent the authority to deal with a wide array of business and investment issues. When using a power to plan for potential disability, do not overlook coordination of appropriate business documents. If you have a professional practice or business corporation, you must draft the necessary minutes to assure at least a second signatory on business bank accounts. Shareholder, partnership and operating agreements should address disability planning to assure that successor officers, directors and managers can serve. Even a one member LLC can create a succession plan through a one-member operating agreement designating you as current manager, and naming a replacement if you are disabled. Owning your own business includes a host of other issues that must be addressed in your estate planning, to ensure that both your clients, and your heirs will not be harmed.

Cooperation with Professionals: A major reason for your signing a power is to assure someone can handle matters in case of your disability. Often the first call an agent makes is to your attorney to ask for guidance and financial information. Attorney ethics and in particular, the duty of confidentiality your attorney has to you, the Grantor, may inhibit your attorney from fully cooperating with your agent. To address this, your power could include an express provision authorizing your attorney and other financial advisors to discuss any matters with your agent. If he is the one you chose to look after your matters, then you have to trust him and give him all the appropriate advice. If your power does not, an update might be in order. You must take care when appointing your agent and drafting this clause in your power how much you are going to allow your attorney to share, and what, if anything, will fall under confidentiality.

Make it Practical: Your agent will need your Social Security number and key financial, tax and other data. Be sure this information is available to him. Have you spoken to your agent about the appointment and responsibilities? In the event of your disability, you do not want to shock someone who is probably filled with grief, by letting her know that she is your agent. Even the best document is of limited use if the agent is uncertain as to what to do. It may be possible to include in your Power of Attorney, and certainly to instruct your attorney to release this key information that will allow your agent to fulfill the basic needs for which you drafted the power.

Powers of attorney are almost always treated as a footnote to most estate and financial plans. However a Power of Attorney can be your most important planning tool. Great care must be taken to appropriately address vital provisions in a manner that accomplishes your goals. Relying on standard documents might be cheap and quick, but you wouldn't go to the Golden Arches for your child's wedding, so don't use a form power for what might be your most important document.

Our Consumer Webcasts and Blogs

Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.

Ad Space