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Editor: W. Patrick Tandy

May, 2004

 

To Give or Not To Give the Power To Give:
That is the Question

By Anne DeNovo

“Do you want to give your agent or attorney-in-fact the power to give away your assets if you are too disabled to make the decision yourself?” Whenever an attorney is called upon to prepare a durable general power of attorney for financial matters, the attorney should ask the client this question. Almost invariably, the client responds: “Why on earth would I want to do that?”

There are several possible reasons why a client would want to authorize the agent to make gifts: 1) to reduce federal estate taxes, especially by means of annual exclusion gifts; 2) to contribute to the support of minor children or other dependents; 3) to carry out the client’s plan for lifetime giving, including charitable gifts; and 4) to plan for possible future Medical Assistance eligibility. This last reason is particularly important for people of modest means. If they require nursing home care, run out of money and qualify for Medical Assistance, a trusted family member or friend who has received financial gifts will be able to provide for their needs which are not covered by Medicare or Medical Assistance.

The starting point for the lawyer is to read King v. Bankerd, in which the Court of Appeals held that a general power of attorney authorizing the agent to sell and convey property does not authorize the agent to make a gift of the property. The court specifically stated that an agent with a broad power of attorney lacks the power to make a gift of the property of the principal, unless that power is expressly conferred is necessarily implied from the powers conferred or was clearly intended by the parties. The court emphasized that an agent has a duty of loyalty to act in the best interests of the principal and recognized that the power to make gifts may be contrary to the interests of the principal. Therefore, the court concluded that the power to make gifts cannot be inferred from broad, all-encompassing grants of powers to the agent, which are to be disregarded as meaningless verbiage.

So if clients want to authorize their agent to make gifts, the power to make gifts must be expressly stated in the power of attorney. General language such as “my agent may do any and all things that I could do if personally present” is not sufficient.

If the client is considering gifting powers, the lawyer will also ask: To whom do you want your agent to be allowed to make gifts? To your spouse? To your children? Perhaps to your grandchildren and further descendants as well? What about their spouses? Must gifts be equalized among the children? Will the agent be required to obtain the consent of any other person before making gifts? Will prior written consent of all the children be required? The client may want to consider giving more extensive powers to make gifts to the primary agent (such as the spouse) but restrict the power to make gifts granted to alternate or successor agents.

Clients must consider whether the attorney-in-fact will be allowed to make gifts to himself or herself. Each client must evaluate carefully the possibility of conflict of interest. Some commentators have raised the possibility that an unlimited power to give away the assets of the principal to the agent may be considered a general power of appointment for federal estate tax purposes. Others dismiss this possibility as highly unlikely. In any event, any potential general power of appointment problem can be solved by requiring the consent of an adverse party for any gifts such as another adult child if the agent is one of the children of the principal or by making giving to the agent subject to an ascertainable standard (“health, education, maintenance and support”).

Related questions include whether the agent will have the authorization to make or change beneficiary designation for life insurance, IRAs, retirement plans, annuities and other accounts. This question is assuming greater importance as Payable on Death (POD) and Transfer on Death (TOD) beneficiary designations are used more frequently to avoid probate. The power of attorney must also be specific about whether the agent is authorized to disclaim or to establish trusts, such as supplemental needs trusts for a disabled beneficiary.

The power of attorney document must also be specific regarding what powers the agent has with respect to any already existing revocable trust established by the client. The agent’s powers under the power of attorney must be coordinated with the provisions of any existing trust. It is extremely important to have a power of attorney even for clients whose primary testamentary document is a revocable living trust. The power of attorney is necessary to handle assets that are not in the revocable living trust (such as IRAs and retirement accounts) to authorize filing for income tax matters and for contracts and insurance matters. If the grantor of a revocable trust becomes incapacitated, does the agent under the power of attorney have the grantor’s reserved powers to revoke or amend the trust, to remove or replace a trustee or to withdraw property from the trust? Or are all of those powers suspended during the grantor’s incapacity so that no one can exercise them? Both documents must be drafted so that the answer is clear, particularly when the successor trustee under the revocable trust and the agent under the power of attorney are two different people.

When a client becomes incapacitated and it comes time to use the power of attorney, problems due to thoughtless drafting often become apparent. These include:  

  • The power of attorney does not allow any gifts at all.
  • The power of attorney does not allow transfers without consideration between spouses (one spouse now has a disability and it is advisable to transfer some or all of the assets into the name of the other spouse).
  • The power of attorney does not allow gifts to the agent and there is no other possible logical recipient.
  • Gifts are limited to the annual gift tax exclusion (currently $11,000 per year per person) for a client whose estate never exceeded the federal estate tax exemption (currently $1.5 million) and never will.
  • The power of attorney document contains confused or contradictory provisions about gifts, such as different limitations on the powers to make gifts, in different paragraphs or appointment of a “gifting attorney-in-fact” whose powers are not clearly defined.

The question of whether to give the power or not is not a simple one. It is hoped that this brief article will provide the drafter with a summary of the important questions to consider.

Anne DeNovo is a member of the MSBA Elder Law Section Council and Editor of the Section’s newsletter, The Elder Law Extra.

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Publications : Bar Bulletin: May, 2004

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