THE THREE FORMS OF POWERS OF ATTORNEYS

There are three forms of Powers of Attorney, viz., "Nondurable," "Durable," and "Springing" Powers of Attorney. A "Nondurable" Power of Attorney takes effect immediately. It remains in effect until it's revoked by the principal, or until the principal becomes mentally incompetent or dies. It is often used for a specific transaction, like the closing on the sale of a residence, or the handling of the principal's financial affairs while the principal is traveling outside the country. A "Durable" Power of Attorney enables the agent to act for the principal even after the principal is not mentally competent or physically able to make decisions. The "Durable" Power of Attorney may be used immediately, and is effective until it is revoked by the principal, or until the principal's death. A "Springing" Power of Attorney becomes effective at a future time. That is, it "springs up" upon the happening of a specific event chosen by the principal, and spelled out in the Power of Attorney. Often that "springing" event is the illness or disability of the principal. It will frequently provide that the principal's physician will determine whether the principal is competent to handle his or her financial affairs. A "Springing" Power of Attorney remains in effect until the principal's death, or until revoked by a court. Now under the new law, there is a “springing event” to all Powers of Attorney as the date on which an agent's signature is acknowledged is the effective date of the Power of Attorney as to that agent; if two or more agents are designated to act together, the power of attorney takes effect when all the agents so designated have signed the power of attorney with their signatures acknowledged. NY G.O.L. § 5-1501B subd. 3 (a). Of course, if the Power of Attorney is a “Springing Power of Attorney (“to take effect upon the occurrence of a date or contingency”), the occurrence of the contingency is also required. NY G.O.L. § 5-1501B subd. 3 (b). Both "Durable" and "Springing" Powers of Attorney are frequently used to plan for a principal's future incapacity or disability and loss of competence resulting, for example, from Alzheimer's Disease or a catastrophic accident. And by appointing an agent under a "Durable" or "Springing" Power of Attorney, the principal is setting up a procedure for the management of his or her financial affairs in the event of incompetency or disability. Which is better for the principal?

THE POWER OF A POWER OF ATTORNEY

One of the principal provisions of the new law regarding Powers of Attorney is that it is durable, i.e., not affected by the subsequent incapacity of the principal unless the document so states. NY G.O.L. 5-1501A. What I have seen many times is a Power of Attorney executed while the principal is incapacitated. For example, I was presented with a situation where a client discovered that a wealthy relative, who had previously made the client a primary beneficiary of the wealthy relative's estate, had executed a Power of Attorney to other relatives who were not named in the will. The wealthy relative was suffering from dementia and was attended to on a 24 hour basis. Of course, the other relatives who were not named in the will and who now had a Power of Attorney changed the will, established trusts for their benefits, etc. Another situation I was faced with was a client, who was living with a significant other who had a terminal disease, discovered that the significant other was basically no longer competent and wanted to get a Power of Attorney from the significant other to settle affairs. These situations illustrate a very important ethical question regarding the Power of Attorney - who does the attorney represent? The principal or the agent? And if the attorney, as I believe, should and must be the attorney for the principal and not the agent, should the attorney meet the proposed agent prior to the execution of the document and explain to him/her the obligations of a fiduciary under the new law, or is separate counsel needed? Remember: the Power of Attorney is a powerful too.

EXAMPLES OF ABUSE OF POWER OF ATTORNEY

The potential for fraud exists in every power of attorney arrangement, through self dealing, embezzlement, and unlawful gifting. In some situations, a power of attorney holder will significantly deplete an estate, leaving the heirs of the principal with little or no inheritance. Other ways in which a power of attorney can be abused include changing beneficiary designations on life insurance or annuities, and opening bank accounts with joint title or pay on death provisions in favor of the agent. The potential for power of attorney disputes is large and can lead to lawsuits. In many situations, the power of attorney abuse is part of a broader pattern of elder abuse. If the principal has passed away by the time the power of attorney abuse has been discovered, the principal's estate or the intended beneficiaries of the property may, in New York, be able to sue the agent for breach of fiduciary duty. For example in Matter of Ferrara, 3 NY3d 244 (2006), the Court of Appeals determined that additional powers added to a statutory form, in particular the power to make gifts to an agent, must be exercised in the best interest of the principal. In Ferrara, an attorney who represented the agent, not the principal, prepared a Power of Attorney for the agent’s uncle without having met the uncle. The authority to make unlimited gifts to the nephew agent was included as an additional power to the statutory powers. The document was executed before an attorney/notary who had not previously met the uncle and who testified that she had acted only as a notary and had not explained the provisions of the Power of Attorney to him. The nephew then made gifts of approximately $800,000 to himself, in conflict with his uncle’s previous Will. When the charities named in the original Will sued to recover funds from the nephew, the lower courts upheld the gifts, as there was no evidence that the uncle had not properly executed the Power of Attorney. The Court of Appeals, however, reversed, stating that all powers must be exercised in the best interest of the principal, and that there was no possible benefit to the principal from the nephew’s actions.

MORE ON POWERS OF ATTORNEYS

Before we discuss the new Power of Attorney rules which begin on September 1 of this year, let us discuss the general rules of what a Power of Attorney is. A Power of Attorney is an agreement between two parties: a principal and an attorney in fact. The attorney in fact need not be an attorney at law (a lawyer). A Power of Attorney gives the attorney in fact rights to act in the principal's place. They are, in effect, fiduciaries of their principals. Powers of Attorney may be general, limited, or special. They are usually written documents, and New York imposes special requirements on their form or substance. General Powers of Attorney allow agents to take any legal action their principals may take. For example, the agent could open or close bank accounts in the principal's name, invoke or waive the principal's contractual rights, or buy or sell stocks for the principal. In New York, even a general Power of Attorney is not unlimited due to statute or court precedent. A principal may grant a limited Power of Attorney by placing restrictions in the Power of Attorney. New York also allows special Powers of Attorney for certain situations. Most often, special Powers of Attorney are used to appoint people to make medical decisions on the principal's behalf when the principal is incapacitated - a health care proxy. New York also has the Standby Guardian Designation, discussed in an earlier blog. Normally, a Power of Attorney only remains effective as long as the principal is alive and competent to make decisions. Principals may, however, grant durable Powers of Attorney that persist after they are no longer able to make their own decisions.

THE DOMESTIC ASSET PROTECTION TRUST

The Domestic Asset Protection Trust (DAPT) is variously known as an Alaska Trust, Delaware Trust, or Nevada Trust, since those states have been in the lead in authoring rather blatantly anti-creditor legislation that allows self-settled spendthrift trusts. I recently read an article (date unknown) about how it is an effective tool to protect your assets from creditors. Bottom line: it isn't. The 2005 changes to the Bankruptcy Code have created a new 10-year limitations period for transfers to self-settled trusts which are meant to hinder, delay or defraud creditors. This effectively means that all transfers to domestic asset protection trusts will be suspect for the 10 years prior to the date that a bankruptcy petition is filed. Because of this, domestic asset protection trusts should not be considered for asset protection planning and, indeed, in most circumstances it might be malpractice per se for an advisor to form a DAPT for his client if asset protection is a concern.This 10-year clawback by itself should be enough to keep people for using DAPTs for asset protection. Of course, this isn't going to stop the trust companies from marketing them. Moreover, if you are a New York resident, and but is not in bankruptcy and you are still considering using one of these out of state trusts, read my July 10 blog.