The "durable power-of-attorney" is one of the most powerful and important planning tools that an attorney can recommend to a client, not only for estate planning, but also for Medicaid and other public benefit planning.
When a person (the principal) signs a power-of-attorney, he gives another person (the agent) the power to act in his place and on his behalf in managing his assets and affairs. The agent's powers may be broad and sweeping so as to include almost any act which the principal might have performed. It should be noted, however, that in general, acts which are inherently testamentary in nature, such as the authority to make or revoke a will, may not be performed by an agent.
A power-of-attorney can be either a "general" power-of-attorney, where the agent may perform almost any act the principal might have performed himself regarding the financial management of his affairs, or a "limited" power-of-attorney where the agent has one or more specific powers, such as the power to sell a particular property to a particular purchaser at a particular time. A single principal may name one or more agents who can be authorized to act either "jointly" or "severally" (alone without the signature of the other agents or agents).
The "durable" power-of-attorney is unlike the ordinary power-of-attorney which becomes inoperative upon the incapacity of the principal. The durable power-of-attorney, provides that those powers granted to the agent shall not be affected by the subsequent disability or incapacity of the principal or by the lapse of time.
Most powers-of-attorney become effective immediately upon execution by the principal. Many principals, however, are justifiably wary about giving a currently exercisable power-of-attorney to the agent. Accordingly, most states allow a durable power-of-attorney to be drafted in such a way that it becomes effective only upon the principal's disability. Such a legal instrument is called a "springing" power-of-attorney, signed when the principal has capacity and not effective until the occurrence of a triggering event such as the onset of disability of the principal. The primary disadvantage of the use of the springing durable power is that because its operation is triggered by disability, the occurrence of the event may have to be conclusively established to the third person in order to induce such person to accept the authority of the agent. The document, therefore, should contain a clear definition of the term "disability."
In most states, the principal, in planning for asset management, should consider granting to the agent other important specific powers in addition to those enumerated by statute and found on the conventional pre-printed form power-of-attorney. Unless such additional powers are specifically drafted into the document, the agent will have no authority to act. The following are a few of many specific powers which the principal should consider including in the power-of-attorney:
- The power to make gifts. In states where there is no specific legislative gift-making power, the attorney-draftsperson of the power-of-attorney should consider providing "gifting" authority for the agent. Such a power may be vital for both estate tax planning, in the event of the principal's incapacity, and for Medicaid and other public benefit planning. Caution must be exercised, however, in drafting the "gifting" power since, if drafted too broadly, the Internal Revenue Service may argue that the agent had what is called a "general power of appointment" so as to include the entire amount of the principal's assets in the agent's own estate for estate tax purposes should that agent die before the principal.
- The power to change the principal's domicile to another state where the Medicaid eligibility rules are more favorable.
- The power of access to safe-deposit boxes.
- The power to renounce or disclaim an inheritance and/or insurance proceeds. This power could be another powerful estate and Medicaid planning tool where not prohibited under state law.
- The ability to sign tax returns, IRS powers-of-attorney and the power to settle tax disputes.
- The power to settle, pursue or appeal litigation on behalf of the principal.
- The power to deal with and collect proceeds from health and/or long-term-care insurance.
- The power to set up and fund trusts and the power to amend existing trusts.
- The power to revoke or amend the power-of-attorney itself.
In drafting powers-of-attorney, care should be given to confer powers with as much specificity as possible in order to avoid the possibility of a court construing a specific omission as an intent to fail to grant that specific power. Such an adverse finding could be to the detriment of the principal's assets.
Advantages for the Seriously-Ill
The use of a power-of-attorney for the management of the assets of a seriously-ill or disabled person has several advantages. It is especially useful in situations where the disabled person's assets may be modest and, accordingly, do not warrant the greater expense associated with other planning techniques such as trusts, conservatorships, committeeships or guardianships.
The greatest advantage of the durable power-of-attorney is that it remains effective after the principal's incapacity. The agent, therefore, can act immediately, upon the principal's incapacity, to manage his assets in a falling stock market or to take various emergency measures without initiating costly and time-consuming court guardianship proceedings to attain court authorization for such transactions.
The durable power-of-attorney is also a useful planning tool for married couples where property is jointly owned. When one spouse becomes incapacitated, the other acting as the agent, can avoid a court proceeding and act promptly in situations where, although assets are held jointly, one spouse cannot act alone to sell, transfer or refinance property or registered securities without having to obtain the consent of the other joint owner.
Care should be taken regarding the formalities involved in signing a durable power-of-attorney. Some states such as South Carolina require the same formalities as are required when a will is signed. Other states require that the durable power be signed with the same formalities necessary to make it recordable as a deed to real property. For example, in Missouri, if the agent is given the power to convey real estate, the power-of-attorney itself must be recorded. Although the Florida statute does not require it to be signed before a notary, as does the New York statute, if real property is involved, it is advisable to have the document notarized since it may have to be recorded with the deed, at which point it will have to be notarized. Similarly, California's statute governing notarization of documents is very detailed.
In most states, the power-of-attorney must be signed by the principal before a notary public. This is advisable even in those states without such a requirement since this serves to authenticate the signature of the principal to the party to whom the power-of-attorney is presented. Additionally, although not statutorily required in any state, it is advisable, where there is a question of competency, to attach an affidavit from the attending physician that the principal is competent.
And although not statutorily required by any state, a power-of-attorney should contain the notarized signature of the agent selected by the principal, since after all, it is the authenticity of that signature upon which the person to whom the power-of-attorney is presented will be relying upon.
A durable power-of-attorney ceases to have effect upon the death of the principal, upon the revocation by the principal, assuming the principal has the requisite capacity to do so, or upon the court order. If the principal revokes the power-of-attorney himself, such revocation may either be in writing or by the principal conducting himself inconsistent with the power (e.g., destroying the power-of-attorney document). In those states where, upon the appointment of a conservator, committee or guardian for the principal, the power-of-attorney terminates, it is advisable for the principal to name a person of his choice in the document to act as his conservator, committee or guardian. Lastly, a power-of-attorney can terminate if a specified time limit is specified in the document itself or if a specific event as set forth in the document has occurred.
In a few states, a principal is allowed to delegate to the agent in the durable power-of-attorney various healthcare powers in addition to control over financial matters. In most states, however, a healthcare power-of-attorney must be a separate document from a power-of-attorney used to manage the property and financial affairs of the principal. A detailed discussion of heathcare powers-of-attorney will be discussed in a later issue of The Bulletin.
Note: No power-of-attorney should be drafted without the advice of an attorney.
Carole C. Lamson is an attorney on the New York State Bar Association's Trust and Estate Section.