Powers of Attorney

A general Durable Power of Attorney can be an important part of one’s estate plan.

Pennsylvania and New Jersey, like all other states, specifically empower us to delegate important powers to an individual or an institution. Typically, the authorization is in the form of a written document known as the Power of Attorney by which our client (the principal) authorizes an agent (sometimes known as an attorney-in-fact) to act on his or her behalf. Powers of Attorney may be general or limited. Banks provide limited Power of Attorney cards for their depositors to allow others to handle their accounts. Sometimes, a person may want to allow another to handle a specific transaction, such as a real estate transaction, and grants a limited power for that purpose.

From an estate planning standpoint, however, the document called a “Durable Power of Attorney” can be an essential financial planning tool. In general, a Durable Power of Attorney is a broadly written power that permits the agent to handle every conceivable financial matter, even if the principal becomes incapacitated. Accordingly, the word “Durable” is important. The use of the word “Durable” means that the Power of Attorney is intended to continue in force even if the principal becomes incapacitated. This document becomes more important as we age because of the increasing possibility of mental incapacity. If no Power of Attorney is in place and an agent has not been formally designated, the only one who can be empowered to manage financial affairs for an incapacitated person is a duly appointed guardian of the person’s estate. The guardian is an individual, or corporate fiduciary, who is formally appointed by a judge after an adjudication of incapacity in a proceeding that most families wish to avoid. The process of obtaining the appointment of a formal guardian carries with it an attendant stigma, additional expense and trauma to the family, and generates the requirement of subsequent court supervision.

When does the Power of Attorney become effective and how long does it last? While it is possible to prepare a “springing” Durable Power of Attorney that does not become effective until a designated time, usually the principal’s incapacity, it is far more common and less burdensome if the power is effective immediately. Of course, it is generally understood by the agent that the Power will not be used unless the principal specifically authorizes its use or does, indeed, become incapacitated. In both Pennsylvania and New Jersey, a Durable Power of Attorney is valid forever. Those who may be asked to rely upon it have the right to seek proof of its continued existence, however.

Beware of stationers or printed forms providing for the designation of an agent. The most frequently encountered problems with form Powers of Attorney are that they are either not comprehensive enough or they do far more than the principal may have intended. For these reasons, all general Powers of Attorney should be prepared by a lawyer after determining the client’s wishes. Furthermore, since laws vary from state to state, lawyers must pay particular attention to the possible residences of a client when drafting the document. The real estate clause or the execution requirements may need to be quite specific in some states and, if the client owns and operates any businesses, that portion of the Power of Attorney may have to be broader than usual. One power which can be granted to an agent, but has the potential for abuse and has caused many problems, is the right to make gifts. Anyone signing a Power of Attorney should be certain that he or she is aware of what powers can be given to the agent for gifting purposes and under what circumstances these powers can and should be exercised. The principal and drafting attorney should even consider specific limitations on the class of donees and the amounts that can be given, if appropriate.

Care in the selection of the agent is also very important. The Durable General Power of Attorney is one of the most powerful documents that we can place in the hands of another. Obviously, the agent or agents selected should be trustworthy and responsible. In fact, there may be reason to select more than one agent, either to have the agents work together as a check on one another, or to bring to bear certain expertise for various purposes such as running a business or handling investments. In addition to the selection of the primary agent or agents, care should also be taken in the selection of successor agents in the event the named party is unable or unwilling to act. It is important to note that in Pennsylvania, although an agent may be given very broad powers and even agree to serve, the courts have held that an agent need not begin to perform under the Power of Attorney even if the principal later asks him or her to do so or becomes incapacitated. Clearly, then, one should select as the agent someone who will feel morally obligated to perform his or her responsibilities, such as a spouse, child, sibling or close friend.

The manner of signing Powers of Attorney is important. In Pennsylvania, the principal must sign a formal warning of the document’s power, which gives notice and serves as a cover sheet for the document. Furthermore, before the agent is permitted to act, he or she must sign a document acknowledging that he or she understands the obligations and fiduciary responsibility of serving as an agent. Finally, of course, any Power of Attorney should be signed in front of two witnesses and a notary public, and notarized (New Jersey specifically requires this formality). The presence of the notarial seal makes it clear that the document can be recorded, if necessary, and in many states the recording of a Power of Attorney is a prerequisite to its validity. In addition, recording is important if the agent is going to become involved in real estate transactions. Frequently, lawyers ask the client to sign two or more original Powers of Attorney in the event one must be permanently lodged with a recorder of deeds or must be circulated for review and approval by financial institutions. Out of an abundance of caution, many clients do not let the original Powers of Attorney out of their possession and some even have their lawyers retain them. As noted above, these documents are extremely powerful and the principal often does not want them available for use until the use is necessary. Furthermore, by refraining from circulating the document, the client will feel much freer to make changes in the terms of the document and the identity of the agents.

One should also consider signing limited Power of Attorney forms and documents for banks, brokers and financial institutions in conjunction with the general Power of Attorney.

Those who have had experience convincing banks and financial institutions to honor the typical attorney-drafted general Power of Attorney know how time consuming and troublesome the process can be. When it is clear that a client, typically one who is well beyond retirement years, wants to enable a spouse or child to handle his or her bank account and brokerage account transactions, it is always helpful to sign the preprinted forms provided by such institutions and lodge them promptly with the institution. This step can save considerable time and prevent frustration in the event the agent is called upon to act. Keep in mind, too, the most frequently desired assistance is with bank accounts and brokerage accounts with the Durable General Power of Attorney kept in reserve for more significant junctures such as the sale of real estate.

Regulations Governing Retirement Plans

On January 11, 2001, the Internal Revenue Service issued new proposed regulations governing minimum distribution rules for IRA’s, 403 (b) plans and qualified plans. The proposed regulations substantially simplify the method by which distributions are calculated during the plan participant’s lifetime, and also address issues concerning beneficiary designations. This update will highlight two of the most notable facets of the new regulations.

The most substantial change is that the “required beginning date” is now simply the date by which you must start taking distributions. It is no longer the date by which the participant must (irrevocably) elect the recalculation or life expectancy method for determining the amount of the required distribution, or the date by which your beneficiary designation would be reviewed in terms of qualification for payment options. Now there is a unified table for computing the minimum distributions which will apply to all participants, except the participant who designates a spouse who is more than 10 years younger than the participant. In most cases, use of the new unified table will reduce the amount of the required minimum distribution.

Second, although the plan participant’s beneficiary designation must be in place at the participant’s date of death, the determination of whether a beneficiary is a “designated beneficiary” eligible to take distributions over his or her lifetime will not be made until December 31 of the year following the year in which the plan participant’s death occurred. If for some reason there is no designated beneficiary, the default provision is to take the distributions over the participant’s remaining life expectancy (now a fixed term). This default provision is a vast improvement over the prior rule which required distribution within one year of death if the plan participant had elected the recalculation method, died after the required beginning date and had no designated beneficiary in place as of the required beginning date.

The new regulations are effective for distributions for calendar years beginning January 1, 2002, and may be used for computing minimum required distributions for calendar year 2001.