The Impotent Power of Attorney

The General Durable Power of Attorney (GDPOA) has a mixed reputation, judging by articles in financial magazines and newspapers. Some tout it as a powerful tool, whose broad and sweeping grant of authority to another can well serve the maker.  Others warn of its misuse by others in facilitating financial fraud.  The public is left twisted and confused. Moreover, planners and drafters often reflect, sometimes intentionally, this schizophrenic view of the document, and its attendant risks, and draft either "watered-down" documents or "springing" powers designed to capture the "best of both worlds."  Unfortunately, we know intuitively that the "best of both worlds" approach often leaves much to be desired; aren't we taught that a house divided cannot stand? 

For most estate plans, the GDPOA is employed to permit a surrogate to make decisions during a time that the principal is unavailable, incapacitated, or incompetent.  As such, the grant of authority should generally be broad and comprehensive.  Limiting the grant of authority only means that the authority of the attorney-in-fact is limited, and, therefore is his or her ability to solve problems or complete necessary tasks.  Because one never knows what decisions will be needed at some future date, limiting the attorney-in-fact means limiting the available solutions, options, and opportunities. 

Generally, then, "springing,"  "contingent," or "limited" powers should be avoided in broadly defined estate planning.  Financial institutions have a variety of incentives to reject, for their own reasons and purposes, an otherwise enforceable GDPOA.  Forcing a financial institution to "jump through hoops," in order to verify the occurrence of conditions, contingencies, or circumstances, before accepting a GDPOA only increases the likelihood that the attorney-in-fact will be thwarted. 

Springing, contingent, or limited powers make sense in specific situations and should be so tailored to fit the situation presented.  For example, an elderly homeowner desiring to grant a local grandchild authority to sell a home while the homeowner vacates with his children warrants a limited power of attorney.  An elderly business owner desiring to grant authority to vote his shares of stock in any emergency meeting called for specific purposes, such as to cause the the sale of assets, warrants a springing GDPOA.  Conditioning a GDPOA upon "unavailability," "illness," "dementia," "incapacity," ""incompetency" or any marital circumstance (separation, dissolution, or divorce) may be tantamount to no grant of authority at all.

For those with estate plans employing a revocable trust, it is important to remember that the attorney-in-fact, the person who you appoint by your GDPOA, is not necessarily your Trustee, and the authority of an attorney-in-fact is limited regarding trust assets.  In other words, an attorney-in-fact cannot, using your GDPOA, legally direct trust assets.  An attorney-in-fact will typically have the authority, if such authority is included in the GDPOA, to transfer or convey assets to the trust.  Moreover, the attorney-in-fact may have the authority to amend the revocable trust, so long as that authority is included in both the GDPOA and the trust.  In many cases, this power to amend is limited to administrative provisions of the trust and does not permit amendment to the distribution provisions of the trust. 

For those who have a revocable trust, the common question is, "why do I needa GDPOA?" There are several important objectives served by the GDPOA in an estate plan  governed by a revocable trust:

• The attorney-in-fact can convey property and assets to the trust in the event that the trustee becomes incapacitated or incompetent;

• The attorney-in-fact can manage or direct insurance policies, annuities, retirement plans, and accounts that are left out of the ownership or control of the trust;

• The attorney-in-fact can communicate with third parties, and manage debts of the estate, such as credit cards, mortgages, and utilities; and

• The attorney-in-fact can communicate with government agencies, such as the social security administration, internal revenue service, and the united states postal service. 

A GDPOA is, undoubtedly, an indispensable legal document in a comprehensive estate plan. Sadly, many people do not have one, and most of those that do have one, rely upon a document that does not contain powers and provisions that are absolutely essential in the modern world of estate planning.

Properly drafted powers of attorney should include a broad grant of authority to the attorney-in-fact.  But there are some specific "powers" that are best made specifically, and best included in almost every GDPOA. The first of these is the power to make gifts.  Tax considerations for gifts generally do not discourage gifting; there is a five-million-dollar exemption for all lifetime gifts before a gift tax is levied.  There is, nonetheless, an annual gift tax filing exemption for gifts in the amount of $14,000.00 to any one person.  Such gifts do not need to be reported. Keep in mind, that you are also permitted to make unlimited gifts for medical expenses so long as the payments are made directly to the medical care provider, as well as unlimited gifts for educational expenses so long as the payments are made directly to the educational institution.

In the event of your incapacity, however, the person holding your Durable Power of Attorney cannot legally make the tax-free gifts unless they specifically have the power to make those gifts. Moreover, the IRS does not consider a gift made under a Durable Power of Attorney that does not specifically mention the power to make gifts to be tax-free.  A general power to do “anything that I can do myself” or words to that effect is not specific enough, at least in the eyes of the IRS. You might believe that this is not an important power because you don’t commonly make gifts to your family, but this power may be more important than you think.

Consider a situation where you need long-term care and don’t have enough money to support yourself for the rest of your life. Or you might find yourself in a situation where your long-term care costs may financially ruin your family, leaving your spouse or other loved ones destitute. In this situation, the person holding your Durable Power of Attorney may need to transfer assets out of your name so that you can qualify for Medicaid, or for the veterans' benefit Aid and Attendance.  Here the power to make a transfer in the form of a gift is vitally important.

The second power is to establish and fund trusts. In a situation where you are incompetent but you need the person holding the Durable Power of Attorney to qualify you for Medicaid as I described in the last paragraph, not only must the holder of your Durable Power of Attorney need to have the ability to make transfers of your assets, but they also may need the power to create and fund trusts. Trust planning may be integral to qualifying for long-term care benefits – or minimizing taxes. Unless the Durable Power of Attorney specifically includes such powers, chances are the governmental agencies dealing with the issues will not consider it to be sufficient for the holder of your Durable Power of Attorney to create and fund your plan legally.

The third power concerns the authority to direct retirement plan assets, including, but not limited to the authority to withdraw funds from a retirement plan or IRA, to alter automatic payments, and the authority to control the minimum required distribution.   When you attain the age of 70½, the IRS mandates that you withdraw a minimum distribution from your account annually.  You may already have the minimum distribution automatically deposited into your checking account. But if there is a medical or other emergency requiring greater access to the IRA account, your Durable Power of Attorney should the power holder the ability to withdraw funds from the account, or to change your minimum required distribution.

The fourth power that might be important for your Durable Power of Attorney regards third parties.  The GDPOA should include not only provisions for your own financial and medical care and support, but provisions to authorize distributions to others, particularly if you are responsible for the financial or medical care or support of another.  A common example is when you might be financially supporting an aging parent or another relative. If you should fall ill, the person holding your Durable Power of Attorney should be expressly authorized to use your financial accounts to continue to support those that you have always supported and who may need your support.

Finally, although not a "power," the GDPOA should contain provisions encouraging third parties to accept the GDPOA when presented.  These provisions include a release of liability for third parties accepting the power of attorney, and a provision permitting the copy of the document to serve as an original.  GDPOAs are routinely rejected by financial institutions, one of the many reasons supporting use of a lifetime trust, and the document should be drafted and executed to minimize this risk.

A GDPOA does present a risk of misuse, and particularly in an estate plan where the existence of a trust does not naturally limit the attorney-in-fact, the possible damage from misuse can be substantial.  There are, of course, steps one should follow to minimize the risk. First, and foremost, only appoint someone with whom you have the utmost trust and confidence. Second, review the appointment frequently for changes in circumstances that might suggest a lack of trustworthiness or competence.  Third, appoint another fiduciary, such as a trustee of a trust, that can review the decisions of the attorney-in-fact.  Fourth, keep the GDPOA  in safe-keeping until it is needed, thereby minimizing the temptation and opportunity for misuse.        

The bottom line is that you should consider your Durable Power of Attorney an important document necessary to fulfilling the objectives of your estate plan. You simply should not accept an impotent document, unable to protect you or your estate when needed.  Read it carefully to ensure that it is drafted completely and correctly, and if not, consult an elder law attorney for revision.