Every estate planning attorney utilizes powers of attorney in their practice. They are a useful part of every estate plan.
However, powers of attorney can be very broad or very limited. For example, a power of attorney (or POA) could give the agent the authority only to sell a car or some other asset. On the other hand, a POA could give the agent extremely broad authority to do whatever the agent could do himself or herself.
Last week, I wrote about the nee for clients to think about estate planning for their adult children who are going away from home. In such a limited circumstance, perhaps a POA may suffice. However, in some cases clients attempt to use a POA as their primary estate planning tool with poor results. A recent article in the New York Times discussed the drawbacks of using a POA as the primary planning tool and mentions a revocable trust as an alternative.
There are other potential drawbacks to using a POA. If the POA is too broad in scope, it may include all of the principal’s property in the agent’s estate for estate tax purposes. The reason for this is that it could be a general power of appointment (GPOA) for the agent.
A GPOA can easily arise if the agent has the power to make gifts. If that power to make gifts includes the power to gift to the agent themselves, then it would create a GPOA in the agent.
An unlimited power to make gifts may be useful in some limited circumstances. For example, it may make sense in the following situation:
- Client wants to do Medicaid planning
- Client may lose capacity in the future
- Client has only one adult child (or other beneficiary) whom they trust completely
- Adult child has no creditor problems
- Adult child does not have a taxable estate
If all of the above do not apply, then the unlimited power for the agent to gift to themselves may be quite dangerous. It may expose the assets of the principal to the agent’s creditors. It may expose the child to estate taxes. It may cause turmoil in the family.
However, most importantly, powers of attorney may be used by the agent to do things which the principal had not intended. Sometimes, they are involved in cases of elder financial abuse or fraud. That’s one reason one should be very careful before drafting a broad power of attorney, especially one that includes unlimited gifting powers. That’s also one reason that many financial institutions are reluctant to take POAs.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555