Powers of attorney are the primary means of planning for incapacity

This is the second blog concerning incapacity planning. Powers of attorney are the primary means of planning for incapacity

Basics of Durable power of attorney

A durable power of attorney is a creation of statute. Under the common law an agent’s authority ceased when the principal no longer had the capacity to act as the agent was deemed to be able to do only what the principal was capable of. The current statute, 12 Del. C. Ch. 49A become effective October 1, 2010. The personal power of attorney statute specifically excludes any power of attorney governed by another chapter of the Delaware Code or by the common law. This includes a list of powers of attorney listed in Section 103, which are largely concerned business or commercial purposes.

In the past, when a guardian had to be appointed by the Court of Chancery because a power of attorney was inadequate, the guardianship order supplemented and not supplanted the power of attorney. Under Section 108, the appointment of a guardian or other fiduciary essentially terminates the power of attorney, except to the extent the court may permit the agent to act. Under Section 108, the person who serves as agent of the principal, absent cause to the contrary, is appointed guardian.

A personal power of attorney terminates when the principal dies or revokes the power of attorney. A defining event term within the power of attorney can also terminate the agent’s authority. Section 110. Pursuant to Section 116, Judicial relief, the list of persons who may file a petition with the Court of Chancery to seek relief under Chapter 49A is extensive, and includes the principal or agent, near relative of the principal, and any interested person so long as that person can demonstrate to the Court that the complaining person is interested in the welfare of the principal and has a good faith belief that the Court’s intervention is necessary and that the principal is incapacitated at the time of the filing of a petition.

Execution and required elements

A power of attorney is durable if it contains the statutory words found in Section 104, to wit: This power of attorney shall not be affected by the subsequent incapacity of the principal, or similar words which show the intent of the principal to have authority conferred notwithstanding the subsequent incapacity.

Under Section 105, a personal power of attorney must be:

• In writing;
• Signed by the principal or another person on the principal’s behalf in the principal’s presence and at the express direction;
• Dated;
• Notarized; and
• Witnessed by an adult who is neither related to the principal by blood, marriage or adoption; nor entitled to any portion of the principal’s estate at the time the power is signed.

Section 105 requires the use of a notice, for which a statutory form is provided, otherwise the agent has the burden of demonstrating that the power of attorney is valid. Although the statutory notice is optional, all agents must sign a certification, which must be attached to the durable personal power of attorney, otherwise the agent has no authority to act. 12 Del. C. § 105.

“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. Section 109. However, a power of attorney may be “springing”, that is becomes effective upon the triggering of a future event or contingency. A power of attorney may also be ineffective unless the principal authorizes the agent by executing a certificate of authority.

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. Section 109.

In practice, using a springing power of attorney can be as cumbersome as a guardianship proceeding. We usually discourage their use. 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, a state with a lot of elderly citizens, 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.” The exception being a military power of attorney based upon deployment. Fla. Stat. § 709.2108

Specific authority for certain powers

The Delaware statute splits the exercise of personal powers into two categories: general authority and specific authority. General authority with regard to 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. Below follows an example of general authority with respect to a descriptive term and the Code section for those areas over which general authority may be granted.

The statute permits exercise of general authority with respect to all the powers described in 12 Del. C. §§ 49A-204 through 49A-217, as may hereafter be amended, specifically including general authority with respect to:

• Real Property (12 Del. C. § 49A-204).
• Tangible Personal Property (12 Del. C. §49A-205). 
• Stocks and Bonds (12 Del. C. § 49A-206).
• Commodities and Options (12 Del. C. §49A-207). 
• Banks and Other Financial Institutions (12 Del. C. §49A-208). 
• Operation of Entity of Business (12 Del. C. §49A-209).
• Insurance and Annuities (12 Del. C. §49A-210). 
• Estates, Trusts, and Other Beneficial Interests (12 Del. C. § 49A-211).
• Claims and Litigation (12 Del. C. § 49A-212).
• Personal and Family Maintenance (12 Del. C. § 49A-213).
• Governmental Benefits Programs or Civil or Military Service (12 Del. C.  § 49A-214).
• Retirement Plans (12 Del. C. § 49A-215).
• Taxes (12 Del. C. § 49A-216).
• Gifts (12 Del. C. § 49A-217). 

Specific powers are governed by Section 201(b). 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 in excess of the federal gift exclusion;
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; and
7. Renounce or disclaim a share of an estate, trust or other beneficial interest.

The grant of authority to make gifts under the Delaware statute is subject to Section 217 which limits gifts to the annual exclusion amount under the IRS Code. This includes gift splitting. Unless specifically stated otherwise in the power of attorney, Section 217 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.

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. Failure to properly include gift and trust creation provisions in powers of attorneys is a frequent short coming, even in powers of attorneys drafted by competent estate planners.

Third-party acceptance

If a person refuses to accept an acknowledged personal power of attorney, court ordered can be obtained compelling acceptance of the power and liability for damages, including reasonable attorney’s fees may be awarded. Section 120 (c).

Current problems with Third party rejection of powers of attorney

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

A significant issue is the rejection of agency, business or bank of a power of attorney other than their own form. Financial institutions frequently flaunt law and common sense as set forth in the May 10, 2016 New York Times article:
https://www.nytimes.com/2016/05/10/health/finding-out-your-power-of-attorney-is-powerless.html?_r=0

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 on a regular basis, contrary to the purpose of a durable power of attorney. A financial advisor told his mother, in my presence, that a power of attorney needed to be updated every three years! Ironically, banks have pointed to an investor alert by the Financial Industry Regulatory Authority (FINA) to suggest that the bank’s form may be required. It does not take imagination to guess what happens when there are multiple powers of attorney, each purporting to be authoritative.

https://www.finra.org/investors/learn-to-invest/key-investing-concepts/estate-planning-power-attorney
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 limit the power of attorney or give the bank discretion to disregard it.

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

We will look at a better solution to powers of attorney in a future blog.