Powers of Attorney: What You Must Know

Understand Your Power

We’re talking financial concepts not Ayurvedic. You’re planning for retirement and what will hopefully be decades of exiting “later life” following. You coordinate your financial and estate planning. That’s a good start. Part of that planning includes a boring, standard, non-needing any attention, power of attorney.

Not so fast slim. Do not pass Go. Do not collect $200.

While everyone knows that you wanted Boardwalk and Park Place on the old Monopoly board, don’t assume that the decisions for your power of attorney are just as obvious, or that the same properties are the right ones for everyone. Not so. The old standby power of attorney, the document which, as you know, enables you to designate an agent to handle legal and financial matters if you’re disabled, is vital for you to understand. In many cases, your being proactive to assure that provisions you’ll encounter are properly addressed, is crucial. Don’t fall prey to the “expert syndrome” and assume whatever a lawyer gives you, or the some zooming legal website generates, is blindly what you want. You need to have input.

While your power of attorney designates someone to manage your financial and legal affairs if you cannot do so, what more should be considered? This article will provide an overview of some of the points to consider. It will not provide a basic overview of all issues to address in your power of attorney. The point is to illustrate why you need to tailor the document you use and not rely on mere standard forms.

Can Your Client’s Agent Make Gifts

Gift provisions were a key component of many family financial planning and estate tax planning. If a power of attorney does not include an express authority for your agent to make gifts, state law may prohibit the agent from doing so. The IRS will not recognize the gifts made under these unauthorized circumstances, and will include the assets given away in your taxable estate. PLR 9509034.

For estate tax purposes, especially you are older conventional wisdom has been that affording your agent the ability to make the annual gifts to heirs ($14,000/done in 2014 but adjusted for inflation in future years), could be the cornerstone of your plan to avoid estate taxes. With a large enough family a gift program could swing your estate below the estate tax threshold. In such situations, your agent should be expressly authorized to make gifts. Your power of attorney should also specify which people, or classes of people (e.g., children, descendants, etc.), can be recipients of gifts by your agent. If your family is unequal in size (e.g., one child is single, the other is married with 15 descendants) the issue of equalization should be expressly addressed in your power. Do you want to permit the maximum tax advantaged gifts, or assure that gifts by child family line are equal, or some other arrangement?

Is this conventional wisdom still true? With a $5 million inflation adjusted exemption very few estates will ever be subject to an estate tax. If you are unlikely to be subject to a federal estate tax, are you subject to a state estate tax? Is that state tax sufficient to warrant gifts? If your potential tax exposure is not that significant perhaps your power of attorney should prohibit gifts. This may minimize the risk of the power being used in an elder financial abuse scheme to defraud you.

Apart from the tax planning component of the gift provision may be your personal desire to help family members or others. Do you help out ailing parents, children, or other family members? Even if your estate is not going to be subject to an estate tax, it could be vital that gifts be permitted to enable your agent to continue to help out key family members or others. Many power of attorney forms that address gifts limit them to lineal descendants. While that may encompass the most common donees, it really doesn’t address the largesse you may want.

529 College Savings Plans

529 college savings plans having become a ubiquitous planning technique. Can your agent make gifts to a 529 plan if you are is disabled? Many powers of attorney even if they permit gifts, may limit gifts to individuals with certain familial relationships to your client. 529 plans aren’t natural persons and may not be qualified donees under many powers of attorney. You should be certain that if funding 529 plans is an appropriate strategy that the gift provision in your clients power of attorney permits gifts to 529 plans. What about front loading five year’s of 529 plan contributions into a single year. Again, this is a tremendous planning opportunity, but one that would not be permitted by a typical power of attorney. Many of the powers that do permit gifts, limit the maximum gifts to the amount of the annual gift tax exclusion. That would effectively stymie funding a maximum contribution.

When is the Agent’s Power Effective

The simplest format for a power of attorney is for it to be effective when signed by you. That type of power would permit your agent to immediately take action. However, most people are reluctant to authorize an agent, even a child, to act on their behalf unless they really need the help. The help is typically needed when you are sick or disabled, so the power may be limited so that your agent cannot act until then. This type of power, called “springing power” provides that your agent’s authority to act spring into effectiveness upon you become disabled. The common use of this type of provision belies the complexity and administrative issues it can create for you. How can anyone know the power is effective? Many form springing powers are silent on this issue so that to protect themselves a bank or other third party might insist on a legal opinion or court ruling stating that you are in fact disabled and your agent’s authority is operative. Better drafted forms with this provision may include a mechanism for determining when you are deemed to be disabled so that your agent can act. These provisions, while possibly better than no provision, can raise a host of issues for banks and others trying to determine if they can rely on the agent. If the mechanism to “spring” the power requires a letter from a physician, do they need that physician letter? How much disability is required? Can it be demonstrated? If you have two children who don’t get along, and one is named as first agent under such a power, banks and others may fear the exposure of the second child suing if they abide by the instructions of the first child/agent.

An Affidavit to Encourage Banks and Others to Accept Your Agent’s Authority

You might take some reasonable steps to facilitate your agent being able to act for you. Ideally, long before a power is needed you should have a meeting with your bank or financial advisor and show them a copy of the power and request that they hold a copy in their files and if possible have their counsel or compliance department approve it.
Before your agent’s authority will be accepted someone might require any of the following:

You have been given an accurate photocopy of the actual power of attorney.
The client is alive (death terminates the power).
The client has not revoked the power.
The power of attorney remains in force
The agent has the authority to act on behalf of the client.
If the power of attorney is a springing power, the mechanism to make it effective has been properly triggered.

Some powers of attorney include an affidavit the agent can sign when trying to use it to attest the above items.

Can Your Agent Sign an IPS

You know what an investment policy statement (“IPS”) is. Right? It’s the form your broker, trust officer or wealth manager make you complete so that they have an idea of how to invest your assets. Without guidance they cannot know your risk tolerance, cash flow needs, time horizon and more.

If you’re disabled your investment allocation may warrant re-evaluation and perhaps significant change. Does your agent have the authority to execute a new IPS governing that new allocation? While you could rely on general language in a standard power form permitting the agent to make investment decisions, hire advisers and the like, it might be more secure if the power of attorney document expressly stated that the agent has the authority to execute a new IPS governing the new circumstances. Even if technically unnecessary this might highlight for the agent the importance of having an IPS to protect himself or herself, and your investments. Further, an express grant to change your investment allocation in light of changed circumstances might give your agent the awareness to act to authorize investment changes that are appropriate in light of the changed situation. Absent an explicit authorization, the agent may be reluctant to make necessary changes for fear of exposing himself or herself to claims by your or your heirs. The reality is that many agents, perhaps most, maintain the investment status quo (i.e., whatever investments you had) even if that is no longer optimal.

Conclusion

Powers of attorney are one of the most common financial and estate planning documents. Their common usage should not lull you into treating them as standard documents. The provisions can vary dramatically from document to document. The inclusion of certain key provisions in the power can facilitate your better protecting yourself and your loved ones if illness or other adversity occurs.