The historical property management and decision making
tool - guardianship - is intrusive, inflexible, embarrassing, and costly.
Inter-vivos trusts are popular but are complicated, expensive, and of too
limited applicability to meet all the property management needs of an
incapacitated person. A revocable living trust is not going to help the
client's family sign a tax return or handle an IRA. Joint ownership of
bank accounts is far too limited and can involve an undesired transfer of
beneficial interest. It's not surprising that most individuals with the
advice of their lawyers turn to the power of attorney as the incapacity
planning tool of choice.
Unfortunately while the power of attorney may be
perceived as a standard commodity by the client, a standard form document
may omit functions that can be essential to managing the affairs and
meeting the unique goals of a potentially incapacitated principal. An
incapacitated elder usually need more than just someone to pay the bills.
A client worried about the potential cost of long term illness may want
the agent to be authorized to divest assets from the principal's ownership
in order to preserve those assets for the principal's spouse or other
family members. On the other hand, a power of attorney can become a tool
for elder abuse or to overturn a client's testamentary estate plan. So a
power of attorney must be finely tailored to meet the client's goals given
the client's unique circumstances, concerns, and needs while protecting
the client from the potential for abuse. Contrary to most client's
perception, this is not a simple document.
The use of powers of attorney to authorize gifting has
long been particularly troublesome. Does an agent have the power to make
gifts on behalf of the principal? For years, Pennsylvania law regarding an
agent's authority to make gifts and accomplish other estate planning on
behalf of an incapacitated principal has been plagued with uncertainty.
Prior to the enactment of Chapter 56 of the PEF Code (20 Pa.C.S.A §5601
et. seq) in 1974, Pennsylvania's law regarding powers was entirely based
on common law. A fundamental principal of common law is that "powers
of attorney are strictly construed and the grant of specific powers is not
to be enlarged unless this is clearly intended." Estate of
Reifsneider, 531 Pa. 19, 610 A.2d 958 (1992) at 960. In recognition of the
growing importance of the document, Pennsylvania enacted a new and
expanded the power of attorney statute in 1982. The 1982 law added a new
section 5602(a) which permitted a principal to authorize an agent to
exercise nine functions, including making gifts, either
"limited" or "unlimited", by inclusion of the language
set forth in the statute or of "language showing a similar
intent."
Between 1982 and 1991 several Superior Court decisions
held that under Pennsylvania law an agent had no authority to make gifts
unless the gifting function was specifically referred to and authorized in
the document. General language was not sufficient.
In 1992, the Supreme Court threw open the door of
uncertainty by reversing the line of Superior Court cases and holding that
the functions delineated in Section 5602(a) did not need to be
specifically authorized in the document but could be inferred from any
general language showing a similar intent. All that is needed, said the
Court in Estate of Reifsneider, 531 Pa. 19, 610 A.2d 958 (1992), is that
the general language used in the power of attorney, "according to its
common usage, would be understood as encompassing such power or
powers." Estate of Reifsneider, 531 Pa. at 26, 610 A.2d at 962.
After Reifsneider it was not clear exactly what language
was required to sufficiently indicate the principal's intent that the
agent be authorized to make gifts. But in several subsequent cases general
language was found sufficient even in cases of self dealing where the
agent makes the gift to himself. See, Taylor v. Vernon, 438 Pa.Super 479,
652 A.2d 912 (1995).
As a result, since Reifsneider agents have been
relatively free to make transfers of an incapacitated principal's assets,
even where that authority has not been clearly given in the document, and
even in circumstances which would otherwise constitute a breach of
fiduciary duty.
Powers of attorney are easy to implement,
easy to understand and use, and inexpensive to create. This makes them
exceeding valuable planning tools but also exceedingly dangerous in the
wrong hands where they can be instruments of financial abuse. One result
of Reifsneider was that it became hard to prosecute cases of alleged abuse
of powers of attorney. It is difficult to prosecute theft when the agent
arguably has the power to transfer the principal's assets. Thus
legislative reversal of Reifsneider and reformation of other aspects of
Chapter 56 was sought by the Philadelphia District Attorney's Office and
the Pennsylvania District Attorney's Association. This effort culminated
in the enactment of Act 39 of 1999. (See the discussion of the history of
Act 39 by Neil E. Hendershot, Esq., in The Pennsylvania Prudent Investor
Act & Power of Attorney Act (Act 39), PBI Publication No. 2000-2529).
Powers of Attorney Become More
Complicated
While the goals behind Act 39 are laudable, the
legislation itself raises at least as many questions as it answers. And it
certainly makes the drafting, execution, and administration of powers of
attorney more complicated and perilous for the principal, the agent, and
the lawyer.
The new law, generally effective on Dec 12, 1999 (with notice and
acknowledgment requirements effective April 12, 2000), should cause
lawyers to carefully reconsider their approaches to client counseling,
drafting, and implementation of powers of attorney. The law has
complicated the power of attorney process in each of its stages:
- At the client interview the lawyer needs to go into
depth in explaining not only the importance of the document but its
inherent dangers. The lawyer needs to explore with the client the many
choices that must be made such as (a) who to name as agent or
co-agents and successors; (b) the extent of gifting power to be
authorized, if any; (c) whether to waive any of the agent's fiduciary
duties (e.g. that the agent act with reasonable caution and prudence,
avoid self-dealing, and keep a full and accurate record of all
actions, receipts, and disbursements made).
- At the document drafting stage, the lawyer must take
the time needed to carefully tailor the document to the specific
choices, circumstances, and goals of the client. "One size fits
all" form documents will not do, and may constitute malpractice
as well as violations of Rules of Professional Conduct 1.1
(Competence) and 1.3(b) Communication.
- At the execution stage, the lawyer must make certain
the notice is signed, explain any inconsistencies between the required
notice and acknowledgment provisions and the document's actual
provisions regarding the authority and obligations of the agent, and
make decisions about the timing of the execution of the acknowledgment
by the agent.
- At the execution stage, the lawyer must make certain
the notice is signed, explain any inconsistencies between the required
notice and acknowledgment provisions and the document's actual
provisions regarding the authority and obligations of the agent, and
make decisions about the timing of the execution of the acknowledgment
by the agent.
Even a lawyer who was not involved in drafting the
document is going to be confronted with difficult issues when an agent
seeks advice. How is the lawyer to counsel the agent who seeks the
lawyer's advice regarding actions the agent has taken or wishes to take
under authority that is not clearly specified in the power of attorney?
For example, what does the lawyer advise the wife of 50 years whose
husband is in a nursing home but whose power of attorney does not
authorize gifting? Does the lawyer tell the wife it's okay for her to
transfer her husband's assets into her name because her husband is not
permitted to own more than $2,400 under the Medicaid regulations? Or does
the lawyer tell her, too bad, you can't transfer your husband's assets to
yourself without a court order? Will the wife have to file for
guardianship? Does the lawyer tell the wife that there may be a cause of
action against the lawyer who drafted the husband's power of attorney
without ever discussing the potential need for gifting with the client?
Major Changes Resulting From Act 39
Among the significant aspects of Act 39 are
its provisions in regard to execution of documents, gifting, and fiduciary
duties.
1. Execution Requirements.
The new requirements regarding document
execution and agent acknowledgment are set forth as modifications of
Section 5601.
- All powers of attorney shall include a statutorily
prescribed warning notice in capital letters at the beginning of the
document. The statute mandates that all powers of attorney shall
include the notice. The principal is to sign the notice. The effect of
the principal's failure to sign the notice does not invalidate the
power of attorney but shifts to the agent the burden of proof of
demonstrating that the agent's authority under the power of attorney
is proper. The statute is silent as to the effect of the complete
failure of the notice to appear at the beginning of the document. (Is
a distinction to be made between a power of attorney that has a notice
that is unsigned, and a power of attorney that has no notice
whatsoever? Is a document without the notice totally invalid, or is it
valid with a shift in the burden of proof? What if the notice is
placed somewhere other than at the beginning of the document?)
- The agent(s) must sign an acknowledgment to abide by
strict fiduciary standards in handling the principal's affairs. The
agent has no authority to act until this form is signed and has been
attached to the power of attorney. By signing the acknowledgment the
agent agrees to act for the benefit of the principal, keep the assets
of the principal separate from the agent's, act with reasonable
caution and prudence, and keep a full and accurate record of all
actions, receipts, and disbursements made. The existence of this
signed acknowledgment should make criminal prosecutions of agents
simpler, and also should provide ample ammunition to any disgruntled
family member still suffering from sibling rivalry.
2. New Requirements Regarding Gifting.
Beginning with documents signed on December 12, 1999 an
agent is definitely not authorized to give away any of the principal's
assets unless the gift is specifically permitted by clear language in the
power of attorney.
Act 39 is less clear about its effect of documents
executed prior to that date. Act 39 repealed pre-existing Sections
5602(a)(1) and 5603(a)(1) which authorized unlimited gifting through
inclusion of the language "to make gifts" "or by inclusion
of other language showing a similar intent on the part of the
principal." Act 39 states that the repeal of the "to make
gifts" language in those sections "shall not affect the
authority of an agent to make unlimited gifts under any power of attorney
relying on those sections" executed before December 12, 1999. (See
Section 13(5) of Act 1999-39).
Does this provision Act 39 only validate unlimited
gifting if the pre December 12th power of attorney uses the language
"to make gifts" or specifically incorporates the pre-existing
Sections 5602(a)(1) and 5603(a)(1) by reference? Or does it maintain the
validity of Reifsneider for pre December 12, 1999 documents so that broad
non-specific language that makes no mention of gifts or of the repealed
sections may nevertheless authorize unlimited gifting?
3. Fiduciary Duties of the Agent.
Act 39 also clarifies and codifies certain fiduciary
duties of the agent (20 Pa.C.S.A §5601(e)). These obligations, which may
create problems for close family members who are serving as agents,
include the duties to:
1.Exercise the powers for the benefit of the principal;
2. Keep separate the assets of the principal from those of an agent;
3. Exercise reasonable caution and prudence;
4. Keep a full and accurate record of all actions, receipts and
disbursements on behalf of the principal.
Its likely that agents have had these obligations all
along. But their codification, combined with the requirements that the
agent acknowledge acceptance of these obligations before acting and that
the acknowledgment be attached to the power of attorney, should raise the
awareness of these responsibilities both by agents and by persons seeking
to criticize the actions of agents. Note that the fiduciary duties of the
agent can be modified by a specific provision to the contrary in the power
of attorney (20 Pa.C.S.A §5601(e)).
The changes and clarifications brought about by Act 39
are not surprising. But the devil is in the details.
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