The Agent’s Role in Power of Attorney Matters
The Legal Intelligencer, February 3, 2015
Powers of attorney have become commonplace for any estate plan, and for obvious reasons they should be. These documents serve as a safety net for clients who become unable to handle their finances. It is no secret, however, that these documents, if used imprudently, can also be the source of mistrust, abuse and familial turmoil. Whether a power of attorney works as the principal intends requires that the agent have a reasonable sense of what those intentions are when he or she implements the document, which is frequently not the case. Therefore, whether the power of attorney works to the benefit or detriment of the principal is ultimately dependent upon the actions of the agent.
Because the agent’s role is so crucial to the success of the power of attorney, one would assume that substantial attention is dedicated to educating the agent about expectations, his or her authority under the power of attorney, and the ramifications of breaching his or her duty under the document; however, most attorneys will say that the opposite is true. Typically, a power of attorney is boilerplate prepared by a lawyer—or assistant—with little variation from client to client and with relatively little discussion with the principal. The agent, if not the principal’s spouse, often does not participate in the process at all until asked to sign an agent acknowledgment form after the power of attorney has already been prepared and signed. This cavalier approach must change in light of recent changes to the statute, and significantly more attention must be focused on making sure that the agent knows, with particularity, what is expected.
While attention is typically focused on agents who act egregiously, most abuses are not malicious. Most problems arise because the principal gave the agent broad discretion without being clear about his or her intentions, or because agents acting in genuine good faith have the ability to rationalize almost anything to justify actions that also serve their self-interest. This problem has arguably become more acute because of the broad discretion available to agents acting under Pennsylvania Act 95 of 2014 and the absence of useful instruction to agents who implement that discretion.
Act 95 is the most recent amendment to the power of attorney statute—the provisions relevant to this article took effect Jan. 1—which continues the General Assembly’s trend of expanding the authority of the agent to provide flexibility in handling the principal’s estate. Although much of the prior statute was simply reorganized and clarified to more closely align with the Uniform Power of Attorney Act, significant changes were also incorporated that substantially broaden the authority of the agent. If lawyers respond to Act 95 by redrafting their form power of attorney to read as expansively as the law permits, and then use the new form indiscriminately, they will be doing their clients and their clients’ agents a disservice. This is especially true in two areas: (1) examining the new agent acknowledgment form and (2) reviewing the changes made with respect to gifting and testamentary transfers.
The agent acknowledgment has changed dramatically under Act 95. The basic, common-sense requirements under the prior version have been replaced with a broad, discretionary standard.
The language of the revised form agent acknowledgment, which came into effect Jan. 1, reads in relevant part:
“I shall act in accordance with the principal’s reasonable expectations to the extent actually known by me and, otherwise, in the principal’s best interest, act in good faith and act only within the scope of authority granted to me by the principal in the power of attorney.”
This language replaced the prior version of Section 5601(d), which had stated in relevant part:
“I shall exercise the powers for the benefit of the principal. I shall keep the assets of the principal separate from my assets. I shall exercise reasonable caution and prudence. I shall keep a full and accurate record of all actions, receipts and disbursements on behalf of the principal.”
In comparing the two agent acknowledgments above, the agent’s role and authority are now extremely difficult to discern. The specific, benchmark requirements contained in the prior version, which an agent could read, understand and follow, were removed, and the agent is left with requirements that rely heavily on the agent’s understanding of his authority and good judgment.
The language of the prior agent acknowledgment, however helpful to the agent, was arguably not fully consistent with the statute itself. Under the prior statute, the principal did have the authority to waive those requirements, and in such cases, the agent acknowledgment lost all meaning. Therefore, because the powers that a principal may convey to his or her agent have become so incredibly expansive, the General Assembly decided it was advisable to provide an equally broad standard so it may apply to all agents regardless of the specific powers authorized in their documents.
Of course, the General Assembly could have gone the other direction and decided instead to prohibit a principal from waiving these requirements, but it seems that agent flexibility outweighed the risk associated with failing to provide strict guidelines with which agents must comply. This leads to the disconcerting result that an agent may be given more extensive authority by the principal—some of which is inadvisable and may be easily abused in certain situations—with less instruction on how to exercise it.
Gifts and Other Testamentary Transfers
The power that leads to the most controversy is, and will continue to be under Act 95, gifting and other testamentary transfers. The reason that gifting provisions will become increasingly problematic under Act 95 stems from: (1) the inherent ambiguity in the statute pertaining to gifting and when such authority may be employed; (2) the expansive authority and discretion that the principal may confer on his or her agent; and (3) the general lack of instruction provided to the agent regarding these complex powers.
As with existing law, a power of attorney written pursuant to Act 95 may include the power to make “limited gifts,” as defined by the statute, or more expansive gifts, which must be specifically provided in the power of attorney. Apart from verbiage, two of the main changes to gifting provisions under Act 95 are: (1) use of the word “gift” will automatically mean limited gift as defined in the statute unless the power of attorney provides otherwise; and (2) even if the form does not contain any language about gifting, limited or otherwise, an agent still has the right and duty to “attempt to preserve the principal’s estate plan,” taking into consideration the “minimization of taxes” and the principal’s “eligibility for a benefit, program or assistance.”
These provisions appear not to be fully consistent. Because gift-giving is at the heart of estate and Medicaid planning, in order to comply with the second requirement above, a provision for gifting may not be necessary at all. The authority to make gifts seems to be implicit in “preservation of the principal’s estate plan.” In short, based on the provisions above, Act 95 appears to simultaneously both limit and expand the agent’s discretion to make gifts. If this inherent contradiction causes attorneys to pause, it is highly likely that agents too will find their obligations under the document ambiguous.
Of further concern is the fact that Act 95 seems to blur the line between what is considered a lifetime transaction and a testamentary one. Pennsylvania historically has not permitted an agent to sign, amend or revoke a principal’s will. While that is not technically contradicted under Act 95, the new amendments appear to permit agents, if given such authority by the principal, to act in a manner that can indirectly achieve the same objective. Under the prior statute, an agent could create a trust for the principal’s benefit and make gifts to a trust for a beneficiary; however, under Act 95, it appears that an agent can create a revocable living trust with testamentary beneficiaries as long as the disposition is consistent with the principal’s overall estate plan. Under prior law, it was highly questionable whether an agent could retitle a principal’s assets in joint names with right of survivorship. That is now clearly permissible if consistent with the principal’s estate plan.
These changes, coupled with the right to change beneficiary designations on insurance policies, annuities and retirement accounts—which has been reaffirmed, with modest changes by Act 95 under 20 Pa.C.S.A. § 5603(p)—essentially confer on the agent the authority to distribute a principal’s assets upon his or her death. In practical terms, these powers can equate to or supplant a will.
Such extensive powers should be used rarely if at all, and attorneys should caution their clients that such powers are inadvisable in most scenarios. If such powers are conveyed to an agent, however, attorneys should take even greater care to ensure that the agent understands the magnitude of such authority and the best interest standard under which he or she must operate if such authority is exercised.
Powers of attorney are no longer one-size-fits-all documents, so it may be prudent to consider the following practice points to avoid intentional or inadvertent misuse of the document:
- The fact that a principal can give an agent the power to commingle assets or avoid accountings does not make it smart to do so. Do not do it.
- Communication with the principal (and the agent where possible) is paramount. Discuss all powers that must be specifically provided (“hot powers”) with each client individually to determine whether they are appropriate to include.
- In that same vein, if a client is elderly or in questionable health, consider scheduling a meeting among the principal, agent and other appropriate members of the family to specifically address the principal’s expectations and instruct the agent on his authority.
- When it comes to gift giving and preserving a principal’s estate plan, consider writing a short memorandum to accompany the document that describes the principal’s intentions. In particular, if the principal intends for particular children or grandchildren to be treated disproportionately, the principal should so state.
Reprinted with permission from the February 3, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.