The ‘Power’ in a Power of Attorney
By Paul T. Czepiga, Esq., CELA
An ElderCare Matters Partner
Lawyers are continually asked by clients whether the client should give their children or others their Power of Attorney. There is no standard answer because everyone’s financial situation and relationship to their children is different. A meaningful response requires that the client understand what a POA is and what it can and cannot do for them. My view is “Yes, you should give a POA” but only if you come to that conclusion after first discussing all of the following considerations with your advisor. One can best summarize the utility of a Power of Attorney by borrowing from a well known phrase and saying that “never has so little done so much for so many.” The benefits of a POA will be explored later in this article, but let’s begin with a basic understanding of what a POA is.
A POA creates an agency relationship between the parent who signs the POA, known as the principal, and the child (or other trusted advisor), known as the agent. Only the parent is required to sign the POA. Because it is an agency relationship, the ability of the child to act on the parent’s behalf ends when the parent either dies or revokes the POA. A POA can be granted to enable the child to perform an unlimited number and range of functions on behalf of the parent or to perform only certain functions. The Power of Attorney that will be discussed in this article are durable powers of attorney, meaning that are intended to continue in the event of the principal’s incapacity. A POA is durable if it contains language that expressly states that the POA will remain in effect regardless of the principal’s subsequent incapacity. Without such a statement, the POA lapses if the parent later becomes incapacitated??something almost always not intended when drafting POAs for estate planning purposes.
Health Care Decisions
It was not until May 1990 when the Connecticut legislature added “health care decisions” to the enumerated list of powers that could be granted under a POA. Therefore, anyone with a pre?1990 POA should execute a new POA that includes health care provisions if they want their agent to have that authority. The definition of health care decisions stops short of (does not include) termination of treatment matters??these are governed by Connecticut’s living will statute enacted in 1985 and subsequently amended and expanded in scope in 1991.
Springing Power of Attorney
A second significant change in POAs occurred in 1993 when Connecticut created a Springing Power of Attorney. There had always been a desire on the part of people to be able to grant someone authority as their agent provided that authority did not become effective until some future triggering event. The concern was that the agent would use the POA at times and for purposes not intended by the principal. For example, spinster aunt would like to name nephew as her agent under a POA, but is afraid that nephew might abuse his authority (more on this later). Right now she is perfectly able to manage her affairs and does not want nephew to act for her in any manner until she can no longer do so herself. Before 1993, Connecticut did not give spinster aunt any choice with a POA?it was effective when signed and if nephew wanted to exercise his authority as agent, he could. With a Springing POA, it is now possible to name someone your agent, but the agency is not effective until the future. For example, aunt could name her nephew as agent and provide that his authority does not come into existence until aunt is “no longer capable of managing her affairs” (a mental incapacity) or “attending to her physical needs and care” (a physical infirmity) or both.
Has Aunt succeeded in protecting herself? The answer is yes, but marginally so. Under the new statute the nephew, before he can act under the Springing POA, must sign an affidavit in front of two witnesses and a notary attesting to the facts that 1) aunt named him as agent in a POA, 2) his authority does not take effect until aunt becomes incapable of managing her affairs or attending to her personal needs and care, and 3) one of those prerequisites has occurred. There is no need for independent medical evidence that aunt is really in such a condition unless aunt required it as a condition to nephew’s authority.
Choosing An Agent
This scenario takes me to what I consider to be an inviolate litmus test when it comes to counseling someone on whether to grant a POA. If there is no one in whom the principal has full, total, and complete trust, then a POA, regardless of whether it is springing, should not be given. If the principal spends more than a split second pondering if there is such a person, than they have already flunked the test. For example, spinster aunt could have required that nephew’s affidavit have attached to it a certification by a Connecticut licensed physician attesting to her incapacity, but if aunt wants or needs such a precaution she has already failed the litmus test. I find that in my practice, about sixty percent (60%) of my clients use the springing POA and the rest use a non-springing POA. There is also a direct correlation, with married couples, between length of marriage and type of POA used?the longer the marriage the more likely it is that a non-springing POA will be used.
Limitations and other Express Powers
As mentioned earlier, in a financial planning and Medicaid context, it is best to give a POA that conveys the broadest possible authority, limited only by the principal’s concerns. Connecticut’s statutory form POA and Springing POA convey thirteen separate powers, including “all other matters.” Although this sounds fairly inclusive, it is not.
The most harmful limitation is that the Connecticut form does not expressly give an child the ability to makes gifts of the parent’s assets. One’s incapacity does not lessen the need to reduce the gross taxable estate for estate tax reduction purposes or to remove assets out of one’s name for Medicaid eligibility purposes. Without an express gift making provision, it will be very difficult to transfers the parent’s assets to their beneficiaries even though this is what the parent would have wanted. Even so, gift giving provisions should not be automatically included in all POAs without first pondering the need and ramifications of such a power. If gift giving is to be included, then the parent should also address to whom may gifts be made and to what extent. To the spouse only and unlimited? To children? If to children, must gifts be equal to the children each year? What if there is a change in a child’s circumstances (for better or worse)??should or must gifts still be made to that child? If gifts are limited to the annual exclusion, what if there is a need to rapidly deplete the estate for Medicaid purposes?
Other powers that I expressly add to my POA after discussion with the parent include dealing with the State of Connecticut and the IRS on all tax matters?income and gift (including gift splitting) and the DRS for income, gift and sales and use tax, accessing safe deposit boxes, changing domicile, creating, funding and requesting distributions from revocable and irrevocable trusts, changing beneficiary designations on life insurance, annuities, and retirement plans, and further elaborating on health care decisions. Although some of these are arguably included in the statutory form already, it does not hurt to single them out for enforceability purpose.
Acceptability of a Power of Attorney by Third Parties
Enforceability of a gift giving provision can be a daunting task when a bank teller states that bank policy requires a POA not more than two years old and the POA is three years old and the parent is incapacitated . Or the stock broker says that regardless of the POA’s age, you must produce a statement from the parent stating that the POA has not been revoked, but the parent is no longer competent. What to do? Add a paragraph to the POA stating that unless the third party has actual notice of revocation they may rely on the agent’s authority and include a hold harmless or indemnification of the third party. This may help. The point being that your advisor should add to the POA whatever they can to make it ”acceptable” to the outside world.
One curative would be to have on standby (or in lieu of the POA) a living trust. The child can convey the parent’s assets to the living trust. This would not be a gift. Once the assets are in the living trust, the trustee can, within the scope of authority conveyed by the trust, do with the assets whatever is needed because the trustee has legal title to the assets. This differs from the agent who does not have legal title to the principal’s assets and it is this difference that causes third parties to be wary when dealing with an agent using a POA to give away the principal’s assets.
In summary, a POA is a powerful and useful tool for a variety of estate planning needs, both foreseen and unforeseen. Once you sufficiently identify your Medicaid or Estate Planning needs, you should sign a POA as soon as possible (assuming the litmus test is met) so that if there is a need to implement or continue your estate plan after your possible incapacity, your child can effectuate under your POA, as much as possible, your wishes.
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