The most necessary and most troublesome part of estate planning is planning for incapacity. Everyone wants to talk about who gets what when they die. That is the fun part of estate planning. But bring the conversation to incapacity and clients look as uncomfortable as hearing, “who is going to change your diapers when you are old?”

The primary tool for incapacity is the durable power of attorney. While there are other tools, such as trusts and supportive decision makers, powers of attorney are essential in order to avoid the dreaded process of guardianship.

• “Immediately effective” vs. “springing”

Unless a power of attorney provides to the contrary, it is effective as soon as it is executed by the principal. However, a power of attorney may be “springing”, that is becomes effective upon the triggering of a future event or contingency. 

While it is commonly thought that everyone should have a power of attorney in case of incapacity, many healthy adults are uncomfortable with the idea that an agent, even if a trusted friend or relative, has the authority to access one’s bank account, sell the house, negotiate loans etc. at will. Therefore, many powers of attorneys are “springing”, and are effective only if the principal is deemed incapacitated.

The determination of incapacity is flexible and depends upon the principal’s whims. The triggering event may be determination of incapacity by one physician, two physicians wholly independent of one another, or for the truly paranoid or cautious, a disability committee.

Absent any direction in a power of attorney, or the unwillingness or inability of an agent to act, a record by a physician (otherwise undefined) or the order of a court of competent jurisdiction that the principal is incapacitated can effectuate the power of attorney. An agent authorized by the principal to determine whether the principal is incapacitated may act as the principal’s representative pursuant to HIPPA. 

In practice, using a springing power of attorney can be as cumbersome as a guardianship proceeding. Every time an agent seeks to use the power of attorney, the agent may be required to prove the principal is incapacitated. The physician’s or physicians’ notes may have to be renewed whenever the power is presented. When Florida promulgated its new power of attorney statute, effective October 1, 2011, it eliminated the springing power. “[A] power of attorney is ineffective if the power of attorney provides that it is to become effective at a future date or upon the occurrence of a future event or contingency.”

• Specific authority for certain powers

Delaware (and other states) split the exercise of personal powers into two categories: general authority and specific authority. General authority regarding certain enumerated powers may be granted by referring to the subject matter and Code section. The agent may exercise general authority as described in the applicable Code section. Other states have similar short form methods. 

Pursuant to law, an agent may exercise certain authority only if the power expressly grants the agent the specific authority. These include:

1. Creating trusts;
2. Making gifts;
3. Rights of survivorship:
4. Changing beneficiary designations;
5. Delegating authority under the power of attorney when there are no successor agents;
6. Exercise fiduciary powers of the principal; 
7. Renounce or disclaim a share of an estate, trust or other beneficial interest; and
8. Digital assets and digital accounts. And as we all know, most accounts, banks and financial institutions provide access electronically.

The grant of authority to make gifts and the form most powers of attorney follow limits gifts to the annual exclusion amount under the IRS Code. This includes gift splitting. Unless specifically stated otherwise in the power of attorney, the statute limits an agent’s ability to make gifts only to the extent the agent determines the gift is consistent with the principal’s objectives. If the principal’s objectives are unknown to the agent, the agent must consider the following:

1. The value and nature of the principal’s property;
2. The principal’s needs and obligations;
3. Minimization of taxes;
4. Eligibility for benefits and programs; and
5. The principal’s history of making gifts.

While this has been standard language for years, it impairs transferring assets to protect them in some circumstances. It also presumes that agents tend to misuse powers of attorney. The fear is that a trusted agent is not so trusted as they may make gifts to oneself or other family members that the principal would not approve.

In the context of elder law, particularly with regard to Medicaid and Veterans benefits, the ability to create trusts and make gifts is extremely important. For example, in long-term care Medicaid, many Medicaid applicants have excess income under the Delaware rules. Therefore, an irrevocable income trust must be created. If the applicant is incapacitated and the power of attorney does not permit the agent to create a trust, then a guardianship must be sought.

• Current problems with Third party rejection of powers of attorney.

“This is a wonderful power of attorney. This should be used as a model in all law schools. You should be proud to have an attorney like Bill Erhart; but we want you to use our form.”

A significant issue is the rejection of agency under a power of attorney other than their own approved form by financial institutions as set forth in a May 10, 2016 New York Times article.1.

Banks and other financial institutions frequently insist that their form of power of attorney be used regardless of whether the principal has capacity. Some insist that it be updated every three years, contrary to the purpose of a durable power of attorney. Ironically, banks have pointed to an investor alert by the Financial Industry Regulatory Authority (FINRA)2. to suggest a firm’s particular form may be requested. 

If a client is inclined to sign a financial institution’s form it needs to be read carefully for arbitration clauses, indemnity provisions, and other language which limits the power of attorney or gives the bank discretion to disregard it.

Another issue is the disavowal of concurrent agents by banks. Banks do not like powers of attorneys with concurrent agents, which means either/or. Many institutions, including their attorneys, do not understand that concurrent does not mean joint. But they fear that they may be faced with dueling agents, particularly if the agents are concurrent. So banks will insist that one of the concurrent agents resign in order for the bank to honor the power of attorney.

Poor Choice of Agents.

A mother with four children comes into the office with one of the children. She hands me one of our questionnaires. On it she indicates who she wants to be her healthcare agents and financial agents if she is incapacitated. It lists oldest to youngest.

Reviewing the listed agents with her one by one we learn: Oldest child is not good with money and borrows from mother regularly. Second child lives far away. Youngest child has not yet finished her prison term. The only available trustworthy child is the one with her at the meeting. 

For whatever reason, people always list their children. And always list them from oldest to youngest. Often they include all the children even if one is clearly unsuitable or unavailable “because we don’t want to leave them out and hurt their feelings.” A large part of our process is spent reviewing the responsibility of agents with clients and helping them decide which agents are suitable for what. A good agent for financial decisions may not be the right person to decide whether life support should be stopped for mom.

A consideration appropriate for many clients, but again one they do not like to here: “Hire a professional.” Children are not always appropriate. And many senior orphans have no children or trusted relatives. But there are many skilled professionals with fidelity insurance and experience as agents.

Powers of attorney are essential. But they are not simple. Careful thought and consultation need to be given to the power of attorney and who the trusted agents will be. We can help you with that.

1. www.nytimes.com/2016/05/10/health/finding-out-your-power-of-attorney-is-powerless.html
2. www.finra.org/investors/alerts/power-of-attorney-and-your-investments