Attorneys frequently recommend that everyone should have basic estate planning documents in place – this usually means a Will, Health Care Proxy, and Power of Attorney. These documents are common enough that most people have a general idea of what they are and what they do: a Will directs the disposition of assets upon a person’s death; a health care proxy appoints an individual to make health care decisions in the event of incapacity; and a power of attorney appoints an agent to handle a person’s property and financial affairs during his or her lifetime.
Of these “basic” documents, the power of attorney is perhaps the most misunderstood. Its purpose is to give someone (the “agent”) the legal authority to act on behalf of the person signing the power of attorney (the “principal”). There are a variety of reasons this might be beneficial, whether for convenience or necessity, but it is usually recommended during estate planning to address a potential future situation in which the principal loses the capacity to manage his or her own affairs. In that case, the agent can step in for the principal and continue paying bills and managing assets without interruption.
In New York, our form power of attorney document is statutory, meaning that the text of the form is actually set forth in the law. While this is helpful because it means that everyone’s documents are uniform, it is also a challenge because the form itself is very long and can be confusing. It is easy to make mistakes in executing it that could render the document invalid, especially when people try to sign the document without a lawyer’s assistance.
The statutory form also has built-in “protections” for the principal, such as language directed to the agent advising of the agent’s obligations to act in the principal’s best interest. It also contains a default restriction in the agent’s ability to make gifts of the principal’s assets. This may sound like a good thing, but it can be problematic in unexpected ways. There may be legitimate estate or Medicaid planning reasons to transfer or re-title assets, whether to family members or to a Trust that may be created. As an example, we recently had a client who wished to put his home, jointly titled with his wife, in his name alone when his wife entered a nursing home. He did not have the authority as agent under power of attorney to make the transfer, and his wife did not have the mental capacity to sign off on the transfer herself.
Under the current form, an agent can only make gifts totaling $500 per year from the principal’s assets, unless a “Statutory Gift Rider” is also signed by the principal. The Gift Rider is a separate document that must be executed at the same time as the form power of attorney and which requires two disinterested witnesses to the execution. If a Gift Rider is completed and properly signed, then the agent can transfer or make gifts of the principal’s assets in accordance with any restrictions set out in the Rider. Without a gift rider, the agent, like our client, is limited in what he or she can do to transfer assets, even when it may be consistent with what the principal would want.
A power of attorney is an important tool in any life or estate plan, but it is critical to make sure that it achieves your objectives. If you have a power of attorney created in 2008 or later, it is important to review it to ensure not only that the individual(s) you’ve named remain appropriate agents but also that the scope of the authority that you’ve given them is sufficient as well.