The Power of Attorney in 2010

The Power of Attorney in 2010

By: Russell Haddleton, Haddleton & Associates P.C.

The durable power of attorney is coming of age. It is a marvelous tool to provide for financial matters in the event of disability, and to avoid the necessity of a guardianship or conservatorship. There have been significant developments in the last twenty years. Adoption of the Uniform Power of Attorney Act will make it even more valuable than it is now.

A power of attorney (called a "mandate" in some jurisdictions) is an authorization by a grantor, principal, or donor to an agent to perform some action for him. In the United States the agent was commonly referred to as ("attorney-in-fact") to distinguish him from an attorney at law. Since those licensed to practice law in other countries are usually not called attorneys, the term "attorney-in-fact" is not needed to distinguish the agent from an attorney at law, so that in other countries the agent is simply referred to as "attorney." The agent is sometimes erroneously referred to as the principal's "power of attorney" - the power of attorney is embodied in a document.

A verbal power of attorney would be sometimes enforceable, but it should be in writing, and the principal should acknowledge his signature before a notary public.  If the durable power of attorney is to be used to enable the agent to do an act which requires acknowledgement before a notary public, as, for example, to execute a deed for real estate, then the power of attorney must be notarized.

The power of attorney may be general or specific as to purpose, and may be limited or unlimited in time.  For instance, it may be specifically drawn to authorize an agent to represent a principal in one real estate transaction within a given time frame or in an almost unlimited number of areas for an indefinite period.

Unless the power of attorney ends earlier according to its terms, or the principal cancels the power of attorney, it ends with the death of the principal. In states that have enacted power of attorney laws, it is provided that staleness is not a detriment to powers of attorney. In many cases, notwithstanding statutory direction to the contrary, banks and other institutions have been hesitant to accept powers of attorney more than a few years old.

The power of attorney may be drawn so that it is effective immediately, or it may provide that it will not become effective until the principal becomes incompetent or some other event occurs. If the power of attorney becomes effective upon a contingency, it is referred to as a "springing power."

Many experts see a problem with the springing power, since it may be difficult to satisfy the person to whom the power is presented that it has in fact sprung. If the power of attorney is drawn to spring into effect upon the medical disability of the principal, it should contain HIPAA powers, so that an attending physician would be able to confirm to the agent and others that the principal was ill and the power had sprung.

The power of attorney is grounded in the law of agency, and unless some provision is made to the contrary the agent has only the power to act that the principal has.  At common law, when the principal became disabled, the power of attorney was most needed, and it was not available. This deficiency has been cured by references in the document to the effect that the power of attorney will be "durable" and continue in force notwithstanding the incompetence of the principal, or by statute.

Under some state laws today (such as New York GOB, Title 15, Section 5­1501A) a power of attorney is considered to be durable unless specified to the contrary -- that is, it continues in force notwithstanding the disability of the principal. This makes the power of attorney a marvelously valuable tool, since it usually avoids the necessity of a guardianship or conservatorship if the principal becomes incompetent.

The agent is a fiduciary. He owes a duty of loyalty to the principal, and he should act in the best interests of the principal. The responsibility of the agent is to do what he believes the principal would do under the same circumstances, not what he, the agent, would do.

Unless otherwise provided, the power of attorney is terminable at the will of the principal by notice delivered to the agent. It would be well to serve notice upon all those with whom the agent may have had dealings, if the circumstances require.

The draftsman should provide for an alternate agent, so that if the named agent is unavailable or unable to act, the alternate agent can carry out what needs to be done. It is possible to name more than one agent to act at the same time, but this is not recommended -- if this route is chosen, the instrument should specify what is to happen if the agents do not agree, or if one of the agents is not available. The power of attorney may grant the agent the authority to delegate powers to a substitute.

Absent authority to the contrary in the instrument, the agent may not make gifts of the principal's assets. The purpose of the durable power of attorney is to advance the interests of the principal, and usually making gifts of the principal's assets does not advance the interests of the principal.

Some state statutes, such as New York GOB Title 15, §5-1514, have special directions for providing for gifts. What is required will depend upon state law, and gifts should be clearly spelled out. If it is intended, for example, that gifts should be made to the extent of the annual federal gift tax exclusion amount this should be spelled out.

From time to time the question is raised as to whether the agent who has broad powers to make gifts of the principal's assets might be held to have a general power of appointment for federal or state transfer tax purposes. This issue has never been judicially resolved, but if it is a matter of concern the power might be drafted to give one agent the power to make gifts to other than himself, and another person might be given the power to make gifts only to the first agent.

There have been problems with the durable power of attorney. Some of these can be resolved, and others will have to be accepted as a cost of the usefulness of the durable power.

One issue is that some institutions refuse to accept other than their own forms of durable power of attorney. In most cases, if it is impossible to execute another durable power of attorney, the institution will accept the power that is presented. In some cases the state law will impose a sanction if they do not do so.

This problem can be avoided if the draftsman of the durable power will inquire as to where the client may be using the durable power, and check with those institutions. Also, over time, it is likely that the powers of attorney prepared for in-house use and the powers of attorney prepared by outside counsel will come closer together.  The Internal Revenue Service has specific requirements as to powers of attorney. The Veteran's Administration and some other government agencies also have their own forms. A possible solution to the demand for special forms is to provide that the agent may execute, on behalf of the principal, any further forms of power of attorney which may be requested.

There are some actions, such as contracting marriage, voting, and making a will, which cannot be delegated to an agent. Some jurisdictions specify by statute that the agent may not make a will on behalf of his principal. For example, California Probate Code Section 4265 states: "4265. A power of attorney may not authorize an attorney-in-fact to make, publish, declare, amend, or revoke the principal's will."

While an agent may not make a will for a principal, the agent may create a trust and move the principal's assets into the trust. This, therefore, works out to about the same thing, and it carries again the message that the principal must be very careful whom he or she appoints as agent. While it is possible to sue the agent and recover funds, this is expensive and risky.

The Uniform Power of Attorney Act addresses the estate plan issue, by requiring that the agent shall "attempt to preserve the principal's estate plan... to the extent actually known by the agent, if preserving the plan is consistent with the principal's best interest based on all relevant factors ...."

The provisions of the law with respect to powers of attorney vary somewhat from state to state. For instance, if a power of attorney is to be used to convey real estate in Florida, it should be drafted with particular language and in a particular format. It would be well to consult a practitioner in a particular state where the power of appointment is to be used to make sure that any local requirements are satisfied.

The National Conference of Commissioners on Uniform State Laws (now known as the Uniform Law Commission) was established more than a century ago in order to bring commonality to the laws in various states. Without such legislation as the Uniform Commercial Code commerce in the United States would not be as efficient as it now is. Other material such as the Uniform Probate Code make it convenient for those who move about the country. The Uniform Durable Power of Attorney Act was originally promulgated by the National Conference of Commissioners on Uniform State Laws. That was supplanted by the Uniform Power of Attorney Act, which supersedes the Durable Power of Attorney Act, the Uniform Statutory Power of Attorney Act, and Article 5, Part 5 of the Uniform Probate Code. The Uniform Power of Attorney Act has been adopted in Colorado, Idaho, Maine, Maryland, Nevada, New Mexico, U. S. Virgin Islands, Virginia, and Wisconsin. This year the Power of Attorney Act was introduced in Minnesota, Ohio, and West Virginia.

The act is a set of default rules that can be drafted around. It clarifies some issues which have arisen -- for example, though we understand that the agent is a fiduciary, some state laws are vague as to just what that means.

There have been complaints about the abuse of powers of attorney. On some occasions the agent has used the power of attorney to spend the principal's resources on improper objectives. There are ways to reduce the risk of this, but there remains a possibility that the agent, if not chosen carefully, may prove to be untrustworthy.

One of the devices which has been used to curb the abuse of the power of attorney has been the designation of a monitor, to whom the agent must account for his doings with the principal's assets. This, however, may not be effective, because the principal may not wish to slight the agent by suggesting that he or she needs to be supervised.

If the monitor does discover theft or misapplication of the principal's funds, this may amount to closing the barn door after the horse has been stolen, ridden to death, and carted off to the glue factory, because the assets will be gone and the agent may be insolvent. The same applies in the case where recourse to the court is sought for oversight of the agent. What this says is that the principal must choose the agent with care.

The power of attorney must be judged on where it stands in the range of devices available to the planner. The continuum extends from the joint account to the guardianship or conservatorship.

A person might be added to a bank account as a signatory, but this would be limited to that account alone, and thus inadequate. There is the possibility that the person with the signing power might decamp with the funds.

Bank accounts or other property could be made joint. This presents a problem familiar to probate lawyers, because we see the results when someone is made joint owner of an account, the primary owner dies, and the issue arises as to whether the account belongs to the surviving joint owner or it is a convenience account, and should be treated as part of the estate of the decedent. Here, again, the safety of the funds is not guaranteed.

The principal might establish a trust, under which the trustee would manage his affairs if he became incapacitated. The problem with this is that the trust is inflexible, even with the aid of a trust protector, and cannot be adapted to changing circumstances.

Someone might be designated as an agent under a power of attorney. This involves small cost in drafting the power of attorney, and no further cost unless the agent is to be paid for his services. Thus the power of attorney is inexpensive, flexible, and adaptable to the situation of the principal.

We might have a guardian or conservator appointed for the principal. This is invasive (the other procedures are private) and expensive, can result in delay, and is relatively inflexible. A surety bond will probably be required. There are court filing fees. The disadvantages are offset by the fact that, with the surety bond in place, losses from improper action by the guardian or conservator may be minimal.

England tried to address the problems inherent in the power of attorney by requiring registration. The "enduring power of attorney" used in England was scrapped in October 2007 and the "lasting power of attorney" ("LPA") took its place, accompanied by an administrative structure which has apparently resulted in curtailing the use of the power of attorney.

In England the Office of the Public Guardian operates a registry of powers of attorney and works with social service agencies and others in an effort to protect persons of diminished capacity. A lasting power of attorney is not effective in England until it has been registered.

The registration process involves notification of certain parties and filing an application form for registration, together with a filing fee of about $180.

Some persons find the process of preparing and registering the power of attorney burdensome, and retain solicitors to perform this work, at a cost of up to $ 1,500.

The registration application must be accompanied by a statement of a Certificate Provider. A Certificate Provider is an independent person chosen by the Donor to complete a certificate contained in the LPA to confirm that in his or her opinion the Donor:

·                understands the purpose and content of the LPA;

·                understands the extent of the powers he is giving to the Attorney;

·                is not being pressured, tricked or placed under duress by a third party to make the LPA; and

·                that there is nothing else that would prevent the LPA from being created.

A power of attorney in England is not effective until the registration is complete. Presently the registration process takes thirteen weeks. If a power of attorney must be used prior to the completion of registration, it is necessary to file a petition with the Court of Protection that involves the payment of a fee and a delay.

The Annual Report of the Public Guardian for the fiscal year ending March 2009 showed approximately 96,000 registration applications for England and Wales. This should be looked at in the context of the population of England and Wales, which then was approximately 54.1 million.

Since there is no central registry in the United States, we can only guess as to the total number of powers of attorney executed in the same period. However, having in mind that even a small law office might prepare fifty powers of attorney in a year, the results from England show that the registration process has essentially strangled the power of attorney.

The cost of preparation of the power of attorney and the time required for its registration make it an unattractive way to achieve the objective. There appears to be no statistics that would indicate whether the registration of powers of attorney in England has been helpful in curbing abuse.

The suggestion has been made from time to time in the United States, as statutes have been enacted in various states, to add registration requirements. Based upon results in England, this would appear to be highly unwise, and would do great damage to the usefulness of the power of attorney.

The durable power is a simple, effective, and very useful device. As more states adopt the Uniform Power of Attorney Act, it will become even more valuable.