Financical Management Using a Durable Power of Attorney
Jan L. Warner
FINANCIAL MANAGEMENT USING THE DURABLE POWER OF ATTORNEY
When used properly, the Durable Financial Power of Attorney can be an effective tool with which to manage the affairs of a mentally or physically incapacitated person.
Through proper drafting, the person who signs this document (the "principal") can (i) choose a person whom he or she trusts to be the proxy or agent, (ii) expand or limit the scope of agent’s authority and responsibility depending on the circumstances, (iii) have the agent’s authority "kick in" when a particular event occurs (called a "springing durable power of attorney"), and (iv) avoid the expense and burdens of court-supervised administration of guardianship proceedings (which deal with the incapacitated person him or herself) and conservatorship proceedings (which deal with the property of the incapacitated person).
The use of durable powers of attorney does not require the present transfer of assets and does not require the filing of fiduciary income tax returns.
Even though persons of all ages should consider creating and signing durable powers of attorney, the need is more urgent for elderly people because they have an increased statistical likelihood that they will suffer an incapacitating disability.
While traditional powers of attorney gave an agent the legal power to enter into a business transaction on behalf of the principal, durable powers of attorney add the protection of durability or survivability to such an arrangement should the principal become incapacitated. In all states, without the word "durable," a general power of attorney terminates upon the incapacity of the principal -- the time when the document is needed most.
When used in the area of planning for the disability or incapacity of an elderly person, the agent can be given the authority to act in the capacity of a virtual trustee if given the authority to invest and manage income-producing assets, pay expenses, etc. Although the principal's assets are not generally transferred into the name of the agent, in some situations, this may be appropriate and gifting provisions can be included.
Agents under durable powers of attorney can also be given the options of either personally managing the assets and financial affairs of the principal, turning the assets over to a professional manager, or even establishing a revocable or irrevocable trust on behalf of the principal and transferring assets into the same, or some combination of these options.
Agents can even be authorized to prepare and sign tax returns and pursue personal claims for damages or other causes of action. All this can be accomplished without the need for fiduciary income tax returns to be filed by the agent.
In drafting a durable power of attorney for property and financial management, the document should be detailed and comprehensive: Detailed to help the agent when dealing with third persons; Comprehensive since if the agent's authority is limited by the document, the principal can not amend the power of attorney after incapacity.
When drafting a durable power of attorney for property and financial management, the following powers should be considered:
1. Buying, selling, and placing liens upon the principal's assets.
2. Depositing or withdrawing funds in the principal's bank accounts.
3. Entering safe deposit box of the principal.
4. Signing tax returns and acting as agent for tax matters.
5. Dealing with all aspects of retirement plans.
6. Creating revocable and irrevocable trusts for the benefit of the principal.
7. Funding trusts created by the principal or the agent.
8. Borrowing money for the principal's benefit.
9. Creating or changing agreements concerning business.
10. Collecting or forgiving debts owned to principal.
11. Pledging to charities and funding charitable pledges made by the principal or agent.
12. Hiring professionals and paying salaries to employees of principal.
13. Canceling or continuing to use the principal's credit cards.
14. Securing important documents.
15. Suing, defending, or settling disputes at all levels.
16. Changing estate planning documents (except wills) if defective.
17. Resigning public and private offices and positions.
18. Exercising rights in securities.
19. Beginning or continuing a gifting program.
20. Supporting dependents.
21. Collecting income and various entitlements.
22. Renouncing or disclaiming gifts and inheritances.
23. Making certain gifts and entering into certain transactions for Medicaid purposes.
A note about signing tax returns: By authorizing the agent to sign tax returns, the agent must make sure that her or she complies with the requirements of the IRS and other tax authorities. For example, under certain conditions, an agent named under other than an IRS power of attorney can sign a Form 2848 on behalf of a principal which will be accepted by the IRS as if it had been signed by such taxpayer.
If the agent does not know about the principal's estate plan and liquidates assets to support the principal, there may be a serious disruption of the estate plan. This can also occur if investments are changed when the will specifically provides that those investments will go to a certain beneficiary. In these types of situations, there could be an unintended ademption or loss to the intended beneficiary under the principal's will may occur.
In this event, The Uniform Probate Code, which is not the law in all states, provides that If specifically devised property is sold by a conservator or an agent acting within the authority of a durable power of attorney for a principal who is under a disability, or if a condemnation award or insurance proceeds are paid to a conservator or an agent acting within the authority of a durable power of attorney for a principal who is under a disability as a result of a condemnation, fire, or casualty, the person who was to receive the specific property has the right to a devise of money equal to the net sale price. UPC §2-608(b):
While the law of certain states may make exceptions to the general ademption rules in certain cases, the following wording in the power of attorney may be advisable:
Should it become necessary for my Agent to sell or otherwise dispose of my assets in order to provide support and care for me, or if such sale of assets becomes necessary for any other reason which my Agent finds to be appropriate or convenient, my Agent, to the extent reasonably possible, should avoid disrupting the provisions of any estate plan which are known to my Agent, whether or not such estate plan is embodied in a will, a trust, non-probate property, or otherwise. And if it is necessary to disrupt the plan, then my Agent shall use his/her best efforts to restore the provisions of such plan as and when the opportunity to do so is available to my Agent. My Agent shall make reasonable efforts to obtain and review my estate plan and any person having knowledge thereof or possession of any documents implementing such estate plan is authorized to make disclosure thereof to my Agent, and to furnish my Agent with copies of such documents.
II. Estate Planning
Using a durable power of attorney to plan the estate of an incapacitated person raises two significant caveats.
The first caveat relates to the question of delegability. While there are few limitations on the nature of the authority that can be delegated to an agent by a principal, there are definitely some limitations. Traditionally, the making of a will cannot be delegated to an agent, and some commentators have gone even further and at least raised the question of whether will substitutes are included in such a prohibition.
The second caveat arises out of the nature of the principal/agent relationship under which an agent is obligated to act in the best interests of the principal. Estate planning frequently involves the lifetime gratuitous disposition of property to others, in many cases to avoid or reduce estate taxes. The reduction of estate taxes does not benefit the principal personally and directly. The disposition of the principal's property gratuitously has a negative personal and financial impact upon the principal. In addition, where the agent is intended to be a donee in such gratuitous transfers, there is also the problem of conflict of interest.
The first caveat, to the extent that it exists, cannot be resolved, it can only be avoided. Clearly, an agent cannot make testamentary decisions for principal. Whether, in a particular case, other kinds of transactions involving will-substitutes are included in a general common law prohibition against delegation of testamentary decisions will depend upon local law.
The second caveat can be resolved by very specific authorization in the durable power of attorney document and careful drafting to avoid tax traps.
A. Implementing/continuing estate plan.
In some instances, an agent under a durable power of attorney containing appropriate authorizations, can continue a series of transactions necessary to carry out the principal's estate planning. The most common example is the continuation of a gifting program.
B. Avoid disrupting estate plan.
In authorizing an agent to implement the principal's estate planning, for example, using gifts, it is important that the agent (i) be aware of the principal's estate plan, (ii) be directed to review it, with the advice and counsel of the principal's lawyers and accountants, and (iii) be directed to avoid transactions that would disrupt the plan.
C. Medicaid Qualification.
In preparing a durable power of attorney to cover the attempt to qualify the principal for Medicaid, particularly nursing home financial assistance, there are several matters that should be considered:
1. Power to divest. If the aggregate value of the principal's assets is large enough to disqualify the principal, an agent under a durable power of attorney may be able to divest the principal of sufficient assets to qualify him for Medicaid assistance. Any divestment by the agent (involving a gift of the principal's assets to himself) will involve a conflict of interest on the agent's part. A divestment (requiring gifts to others) will involve what is normally inimical to the principal/agent relationship (i.e., a reduction of the principal's assets without an offsetting benefit). These problems can be overcome by specific authorizing language in the power of attorney. Set forth below is some suggested language:
to claim and apply for all benefits available to me from any governmental agency, (such as Supplemental Social Security (SSI), Medicaid, Medicare, and Social Security Disability Insurance (SSDI) and to utilize all lawful means and methods to qualify me for such benefits. The authority herein granted shall include divesting me of any assets by transferring such assets to other persons.
In making any divestment of assets in order to qualify the principal for Medicaid, the agent should be given some direction concerning the donees or recipients of such divested property. A direction to the agent to take into account the principal's estate plan should be included.
2. Power to convert to exempt assets. As an alternative or supplement to the agent's authority to undertake a divestment of the principal's assets, the agent should be authorized to convert the principal's assets into other assets (to be owned by the principal) that are exempt from the resource counting that is required by the Medicaid rules and regulations. Such a conversion might be reasonable and prudent only in the context of an attempt to qualify for Medicaid.
In order to qualify me for governmental benefits, my Agent may convert my assets into assets that do not disqualify me from receiving such benefits.
3. Power to disclaim inheritance. Occasionally, a person who is about to qualify for Medicaid assistance, or who has already qualified, will become entitled to an interest in an estate. If the interest is actually received, Medicaid eligibility may be revoked, or deferred, or become unavailable. In some states, a disclaimer does not constitute a gift for Medicaid purposes. For that reason, the drafter of durable power of attorney may want to consider authorizing the agent to disclaim.
III. Power to change domicile.
Because the local laws of some states may be more beneficial than the laws of other states in various particulars, and the variations can be significant. It may be helpful if the agent is given the authorization to change the domicile of principal to another state. But merely changing the physical location of an incompetent will not generally change his domicile. The general rule governing the domicile of an incompetent seems to be:
An adult who, because of unsoundness of mind, lacks the actual mental capacity to entertain an intent or to make a choice, necessarily lacks the capacity to change his domicile voluntarily and by his own act. Therefore, after an adult has been shown or has been judicially determined to be a mental incompetent at the time he departed from his previously established domicile for a new residence or place of abode, it is held that he is, or is presumed to be, incapable of acquiring a domicile of choice, absent an affirmative showing that he in fact had sufficient mentality to choose a new domicile, and his domicile therefore continues to be what it was when he became incompetent. 25 Am Jur 2d, Domicile, §77, at page 55.
The following is an example of such a provision:
I authorize my Agent to establish a new residency or domicile for me, from time to time and at any time, within or without the state, and within or without the United States, for the purpose of exercising effectively the powers granted to my Agent in this document.
IV. Providing for dependents.
In planning for the possible future incompetence of the elderly client, some consideration should be given to those who are dependent upon the elderly client for financial assistance and support. An incapacitated client may have a non-propertied spouse who may depend upon the client for financial support. If the incapacitated client owes a legal duty of support to his spouse, a general authorization to the agent to pay debts may be sufficient. However, it seems prudent to authorize the agent specifically to provide support for the dependent, perhaps at a more generous level than the law requires.
V. Providing for incompetent dependents.
In some cases, a child or other dependent of the elderly client may not only be dependent upon the client for support, but may also be an incapacitated person who may now or in the future be eligible for Medicaid assistance. In such instances, some special authorizations to the Agent to provide special needs assistance to such a presently incapacitated dependent, without endangering Medicaid eligibility, should be considered.
VI. Safeguards against Agent Abuse.
Since the future is difficult to predict, in many cases it makes sense for a durable power of attorney to authorize the agent to undertake a broad range of activities. Such broad authority enables the agent to deal with a variety of contingencies in managing the principal's affairs. However, the potential for abuse by the agent is a matter of grave concern to many clients when powers of attorney are discussed. Even if the question of agent abuse is not raised by the client, it is both necessary and appropriate for counsel to caution a client about the possibility of abuse. There are safeguards that can be imposed upon an agent under a durable power of attorney. Conceptually, however, the need to give the agent broad powers to deal with any contingency is in conflict, to some degree, with the need to control the agent. In short, the client wants the agent to be able to do his job as long as he's doing it correctly, but he wants to stop him if he is not doing it correctly. Thus, in preparing a durable power of attorney, we are faced with the timeless question, "Who guards the guardians?"
Careful Agent Selection. The most important safeguard is careful agent selection. While a variety of drafting and/or judicial safeguards can assist in monitoring and supervising an agent, it is doubtful that such safeguards will be completely effective against a clever agent who is determined to avoid them and use the power of attorney for his own benefit. In fact, it is a legitimate question to ask a client who feels the need for safeguards in regard to a particular agent, "Should this person be appointed your agent if you feel uncomfortable with the appointment."
Will Safeguards Hinder the Agent? Some consideration should be given as to whether the safeguards will hinder the agent's legitimate functions. If the agent is required to jump through too many hoops and touch too many bases, then the safeguards may slow down or stop his effective functioning. Alternatively, he may become so annoyed and frustrated that he may resign.
How do Safeguards Impact on Third Parties? Consideration should be given to how the safeguards in the durable power impact upon third parties with whom the agent seeks to undertake transactions on behalf of the principal. Will the third party refuse to deal with the agent on the basis that the transaction has become too complicated? Will the transaction take too long? Can the third party be sure that the agent can validly exercise the power that the agent seeks to exercise in the transaction?
Before and After Incapacity. Chronologically speaking, there are two distinct periods of time involved in any durable power of attorney. The first is the period prior to incapacity and the second is the period after incapacity.
The Springing Power. For the period before incapacity, the springing power is sometimes suggested as a safeguard against agent abuse. A springing power is, of course, a power that becomes valid and effective only upon the incapacity of the principal. Since the agent has no authority to act prior to the principal's incapacity, he has no opportunity to abuse his powers. The springing power, however, has its own set of problems.
(a) Do you trust your agent? One question that may legitimately be asked a client who indicates a preference for a springing power is this. If you don't trust your proposed agent sufficiently that you are willing to give him a power of attorney while you are competent and can keep an eye on him, is this the same person that you want to give broad authorizations to act on your behalf for you after you have become incapacitated and can't monitor his activities.
(b) The Agent's burden of proof. In addition, the springing power imposes a burden of proof on the agent to demonstrate to a third party's satisfaction that the principal is not only generally incapacitated, but in fact is incapacitated at the moment that the agent seeks to bind the principal in a transaction with a third party. Where a person can potentially drift in and out of incapacity with certain kinds of illnesses, such a burden of proof may be a problem.
(c) How is incapacity defined? Finally, if the local law does not define what is meant by "incapacity" in the statute authorizing the "springing" power, then the specifications of incapacity may be unknown and no one, the agent or the third party, can determine, absent a judicial declaration of incapacity, whether the principal is in fact incapacitated.
Custody of the Power. Another possible safeguard solution is for the principal to give custody of all copies of the durable power of attorney to some third party, such as his lawyer, with instructions to deliver it to the agent only in the event of his incapacity. If the power must be recorded in order to be durable, however, such custody may not be exclusive, since the agent might be able to get a certified copy from the public records. This arrangement also relies upon the lawyer or other third party having custody of the power to monitor the principal so as to know when incapacity occurs.
Drafting Solutions. There are some drafting solutions providing some safeguards for periods both before and after incapacity.
(a) Multiple Agents. One solution may be to appoint two or more agents and require either a majority rule if there are more than two or unanimity in order to act. Abuse under these circumstances would take a conspiracy of all agents.
(b) Third Party Revocation. A second possibility is to give some third party the power to revoke the power of attorney or to remove the agent and substitute one or more new agents. The problem here is that this device requires the third party to monitor the activities of the agent and it does not prohibit a conspiracy between the agent and the person having removal powers.
(c) Third Party Accounting Power. Another alternative might be to give the third party the power to require an accounting
of the agent.
(d) Transaction Size Limitations. Yet another device would be to limit the size of the transaction to a ceiling in value such as no transaction over $25,000.00 or no transaction over $25,000.00 without the consent of one or more named parties.
(e) Division of Responsibility among Agents. Another device might be not only to have multiple agents but to divide responsibilities among them, assigning certain financial responsibilities to one agent and some to another.
(f) The Pour-Over Power of Attorney. Sometimes a combination of an unfunded living trust, and a limited durable power of attorney will prove to be an attractive compromise for a client. The Trust need not become operative until incapacity, thus avoiding trustee commissions. When incapacity occurs, the Agent, whose only authority is to transfer the principal's assets to his unfunded, revocable living trust, can act and there would seem to be little possibility of abuse by the agent in that arrangement. It is possible that if a bank is the trustee, it may be willing to serve as an agent of such a limited, financial power of attorney.
Problems with the Monitors. The difficulty with relying upon third parties to require accountings, to remove an agent, or to approve a transaction is not only the integrity and judgment of the third party but all of the other problems such as the mental capacity of the third party, the death of the third party or the unavailability of the third party at particular times when his or her consent is needed. Adding third parties also further complicates what may already be a complicated transaction.
Judicial Solutions. Finally, there may be some judicial solutions as well. Generally, an agent is a fiduciary and the court of equity would seem to have the power to require an accounting of such a fiduciary. In addition, under many state statutes, the appointment of a guardian or a conservator may have some impact upon the agency relationship. In some cases there is an automatic revocation and in other cases the guardian or conservator may have the power automatically to revoke the agency or otherwise monitor the agent.
© 1998-2003, Jan L. Warner and NextSteps®
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