Powers of Attorney: Your Most Significant Document

Power of attorney is a basic standard
document in which you name a person (agent) to handle legal and tax matters if
you can’t. Call a general practice attorney and they’ll likely quote you a
price of $100-$350 for such a document. But what are you really getting? In some cases a typed
version of a standard pre-printed form with a few modified paragraphs. Not the
planning you want or need.  A
poorly drafted power can be a financial disaster for you and your heirs.  Consider the following issues. If you
have a power, take a look and see how (if) these matters are dealt with. Even
as a layperson, you will probably quickly discern significant issues.

o Springing
Power:

Can your agent sign
your checks today, or does the power require that you first be disabled before
your agent’s rights become effective (spring)? This prevents your agent from
having any authority until you are actually disabled and need assistance. Many
people prefer this approach. What does your power say about this? If the
mechanism that springs your power into effect isn’t clearly delineated in the
document, your agent might need significant legal involvement to convince a
bank that your agent has the authority to act. Not exactly the quick
intervention you intended when you signed the power. Some powers might provide
that a letter signed by your attending physician stating you are unable to
handle your affairs will suffice. An improvement, but you’re not home yet. The Health
Insurance Portability and Accountability Act of 1996 (HIPAA), 42 USC 130d and
45 CFR 160-164,  includes significant restrictions on any physician
disclosing your private health information without the your approval. So, your
power should include an express waiver of these restrictions. If it doesn’t,
get it revised! You might also indemnify the physician for issuing any such
letter in good faith. Fear of a lawsuit can make a letter difficult to obtain.

o To
Gift or Not To Gift:

That
would have been Shakespeare’s question if he’d been a tax attorney. A key clause
in your power is the right to make gifts. If your power doesn’t expressly
authorize your agent to give away your assets, they probably can’t. Do you
always want a gift provision? No. So on one end of the planning spectrum your
power could expressly state that your agent doesn’t have the authority to make
gifts to minimize the risks of abuse.  Many standard powers permit gifts without limit! The right to
unlimited gifts makes your power more significant then your will! Yet you
probably treat your will with great deliberation, and your power as a mere
formality.  In other cases the
right to make gifts could be crucial to your planning. On the opposite end of
the planning spectrum your power could authorize your agent to give away all of
your assets. Why no limit? To facilitate elder law planning, tax minimization
and probate avoidance. There’s lots of ground in between no gifts and unlimited
gifts.  What point on the spectrum
is right for you? Does the provision in your power get it right?

o How Much to Gift:

If your power authorizes your agent to make gifts, but you don’t want the risk
of unlimited gift giving, the document could limit gifts to the maximum gifts
your agent can give away for you without any gift tax consequences,
$12,000/year, plus direct payments of tuition and medical expenses without
limit. The tax laws increase the $12,000 maximum for inflation. Does your power
provide for that?  Many powers
permit annual gifts but not payments for tuition or medical costs. You could authorize
unlimited gifts to your spouse to facilitate planning. Code Section 2503(b) and
2503. The power should authorize your agent to split gifts with your spouse.
That permits your spouse to gift $24,000 to one person (donee) and treat it as if half were from you to avoid gift tax
implications.  Does your power
permit this?  Many forms don’t
include the right to make gifts to Section 529 college savings
plans. To assure that these plans can be funded under your power an
express clause should be included.

o Gift Equalization:

So you have three kids. One is single. One is married with no children. And the
other has rabbit genes: a spouse, 6 kids (all married), and 21 grandchildren. $12,000
per person annual gifts will create a huge imbalance. Do you limit the gifts?
To what amount? Do you give the agent the right to make $12,000 annual gifts
since it costs more to raise and care for all those children? Do you include a
make up bequest in your will to equalize your two children who don’t have
descendants? Do you simply leave it up to the children to make it right on
their own? The bottom line, you have to evaluate what is appropriate for you
and your family and be sure your power provides accordingly. The odds of a
standard form having exactly what is appropriate for your family is pretty
slim. Read the gift provision in your existing power and see what it says.

o Divorce:

Some say
the divorce rate for first marriages is 50-60%+, and for second marriages 75%+,
but few people address this issue in their powers. Might your soon-to-be
ex-spouse use your power without your knowing to transfer all of your accounts
out of your name?  If the marriage
gets rocky, destroy all original powers and consult your attorney about
formally cancelling them.

o Business Document
Coordination:

Be sure your power has detailed provisions giving your agent
the authority to deal with a wide array of business and investment issues. When
using a power to plan for disability, don’t overlook coordination of
appropriate business documents. If you have a professional practice or business
corporation draft the necessary minutes to assure at least a second signatory
on business bank accounts. Shareholder, partnership and operating agreements
should address disability planning to assure that successor officers, directors
and managers can serve. Even a one member LLC can create a succession plan
through a one-member operating agreement designating you as current manager,
and naming a replacement if you are disabled.

o Cooperation with
Professionals:

A major reason for your signing a power is to assure someone
can handle matters when you’re disabled. Often the first call an agent makes is
to your attorney to ask for guidance and financial information. Attorney ethics
and in particular the duty of confidentiality your attorney has may inhibit
your attorney from fully cooperating with your agent. To address this your
power could include an express provision authorizing your attorney (and other
professionals) to discuss any matters with your agent. If your power, doesn’t,
an update might be in order.

o Make it Practical:

Your agent will need your Social Security number and key financial, tax and
other data. Be sure its available. Have you spoken to your agent about the
appointment and responsibilities? The best document is of limited use if the
agent is uncertain as to what to do.

Powers of attorney are almost always
treated as a footnote to most estate and financial plans. To the contrary, a
power can be your most important planning tool. Great care must be taken to
appropriately address vital provisions in a manner that accomplishes your
goals. Relying on standard documents might be cheap and quick, but you wouldn’t
go to the Golden Arches for your child’s wedding, so don’t use a form power for
what might be your most important document.