A power of attorney (POA) is an essential element of any good estate plan. However, it is important to understand that powers of attorney are not all created equal. It should be customized to your particular needs and circumstances. Should your power of attorney be durable? Springing? Immediate? One agent at a time or multiple agents? With independent authority? Or joint authority authority? These are just a few issues you should discuss with your estate planning attorney.
I reviewed a POA recently for a new client. The POA had not been prepared by me. I was shocked to see a provision in the POA that was completely inappropriate for this client. This particular POA prohibited the making of gifts in excess of the annual gift tax exclusion. That would be appropriate, perhaps, for someone who was worried about running out of exclusion and incurring gift tax, but this individual was never bound to even come close to running out of lifetime gift tax exclusion, given that the lifetime exclusion amount (in 2021) is more than $11 MILLION per person.
How did this happen? My guess is the person who prepared the POA used an OLD form created back when the annual gift tax exclusion was really low, like it was decades ago, such as $600,000 per person. That person never updated his or her "form" to delete that provision for people whose entire net worth is nowhere close to $11 million. In other words, most people could give away everything they own, all at once, all to the same beneficiary, and not incur a gift tax.
Why is this a problem? Well, the ability to make gifts is incredibly useful when the principal needs long-term care and would like to apply for Medicaid to help pay the bill. Sometimes it is necessary to transfer (gift) assets to the principal's spouse in order to reduce the principal's countable assets to the level of Medicaid qualification. The same goes for single persons except that gifts would be made to persons other than a spouse, obviously. (But this should never be done without the advice of an experienced elder law attorney.)
If the principal has no POA or a POA with no gift giving authority or a POA with provisions that place draconian limits on the ability to make gifts, the only alternative to "repair" that deficiency is to go to court to get a conservator appointed for the principal, which takes quite a bit of time when time is limited and is quite expensive, a lot more expensive than a complete estate plan with an appropriately tailored POA would have cost.
Take a look at your POA. If it has a provision that reads something like this, you might want to take it to an attorney and talk about replacing it with a more appropriate POA:
"My Agent may make gifts or other transfers of my property without adequate consideration so long as those gifts are eligible for the annual gift tax exclusion."
Here's another one to look out for:
"My Agent may make gifts or other transfers of my property without adequate consideration so long as those gifts . . . will not make me
ineligible for long term nursing home care (Medicaid)."
The foregoing is a problem because sometimes it is advantageous to make one or more gifts at the last minute, just before applying for Medicaid, and intentionally trigger a penalty period, i.e., a period of Medicaid ineligibility, because it is worth it to protect the amount of the gifts. (But this should never be done without the advice of an experienced elder law attorney.)
And here's another one:
"My Agent shall not exercise this power in favor of my Agent, the Agent's estate, the Agent's creditors, or the creditors of the Agent's estate."
Well, crumb, what if the Agent is the principal's only child or one of several children. Either way, why would the principal allow gifts to be made to anyone BUT that child, the very child that the principal trusted to serve at Agent/Attorney in Fact? Does that seem right? Or fair? As an estate planning attorney, of course, I know why that provision exists. It is there to protect the Agent from having the principal's estate included in the Agent's taxable estate and/or to prevent the principal's estate from being exposed to the claims of the Agent's creditors. But why not insert a workaround if those are real issues or, as is more likely the case, go ahead and allow gifts to the Agent if the Agent has no creditor issues and would not have a taxable estate even if the principal's entire estate were included in the Agent's estate?
The bottom line is it is important to tailor your POA to YOUR goals and circumstances.
Call us if you think you might need to update your power of attorney. We can help.