Wednesday, October 13, 2010

Power of Attorney: The most Important AND Dangerous Estate Planning Document

A Power of Attorney may be the most important AND the most dangerous document a lawyer drafts for a client. In the event of the client’s incapacity, a power of attorney can help ensure that the desired decisions will be made for the client by the desired people at the desired time. A well-drafted power of attorney will increase the likelihood that the client’s values will be respected and his or her intentions and goals will be pursued despite any future incapacity.

The power of attorney document can be the key that opens the door to effective asset protection planning and the preservation of the family’s financial security. On the other hand, a power of attorney can be used as a tool for elder abuse or to thwart a client’s established estate plan.

Despite its importance and potential for abuse, the power of attorney may be perceived as a standard commodity both by the client and the lawyer. A standard “one-size-fits-all” form may be prepared with little thought or discussion.

To provide quality service, the lawyer must finely tailor the document to meet the client’s goals, given the client’s unique circumstances, concerns, and needs, while protecting the client from the potential for abuse. Frequently, this legal planning is provided to clients with diminished capacity and who may be subject to family influence. And the lawyer must be careful to comply with complicated and somewhat illogical statutory requirements governing powers of attorney.

Contrary to the perception of most clients and some lawyers, this is not a simple document. Here are some of the issues the lawyer should address when a power of attorney is prepared.
1.         Clients need wise and practical counsel about the risks inherent in granting power to an agent and the importance of exercising due care and prudence when selecting an agent.

2.         Clients need to consider options that can limit the potential for exploitation by the agent—e.g., limiting the agent’s power to make gifts, naming co-agents, requiring reporting by the agent to a third party.

3.         Agents need to be educated about their responsibilities. The lawyer may want to consider including separate explanatory information as an accompaniment to the power-of-attorney document. The lawyer does not want to create a lawyer/client relationship with the agent and needs to be careful to avoid this; but the lawyer can provide some general information to the agent about his or her responsibilities and suggest that the agent seek legal advice when embarking upon his or her duties. Some elder law attorneys accompany copies of the power of attorney with a booklet explaining the nature and use of the power of attorney. The booklet can cover issues such as the need for the acknowledgment to be signed by the agent, and the fiduciary duties of an agent. The agent receives the booklet when the agent receives a copy of the power of attorney. 

4.         A nominated agent should seriously consider whether or not to accept the responsibilities of agency before commencing down this perilous road. Family dynamics should be considered before the first action is taken. Legal and accounting help from the outset may be advisable.

5.         Lawyers should not merely grab a convenient “standard” power of attorney form from the shelf or computer. The lawyer must consider with care the client’s circumstances, needs, and goals and draft a document particularly suited to that client.

6.         The lawyer should have an in-depth discussion with the client about gifting. Failure to have the appropriate gifting provisions in the document is one of the most frequently encountered problems with powers of attorney. This failure can result in the need for guardianship or other court involvement, the potential for litigation between family members, and difficulty and embarrassment for the lawyer. In addition, the lawyer may have the ethical obligation to discuss gifting with the power of attorney client:
(a)                    In Pennsylvania, the Lawyer's Rule of Professional Conduct 1.4(b) provides that “A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Other states have a similar rule. It is difficult to imagine that a senior client who is concerned with protection of assets and long-term care issues can make an informed decision about a power of attorney if gifting has not been discussed.
(b)                    Rule of Professional Conduct 1.1 provides that “A lawyer shall provide competent representation to a client.” Given the importance and complexity of the gifting issue, drafting of a power of attorney without consideration of the gifting issue may not be competent representation and may violate Rule 1.1.

7.         Consider incorporating language into the power of attorney that provides for the fiduciary investment standards to which the agent will be bound.

8.         Consider whether to waive fiduciary duties for trusted family members. In many family situations, the principal will not want the agent to be burdened with the record-keeping mandated by the laws of Pennsylvania and many other states. In Pennsylvania, the record-keeping requirement, prohibition against self-dealing, and other fiduciary duties can be waived by the principal when creating the power of attorney, but the waiver must be explicit.

9.         Where the agent does not have clear authority to make gifts, consider advising the agent to seek court authorization. Put this advice in writing. Remember the admonition of Pennsylvania Rule of Professional Conduct 1.2(d) that “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent[.]” To protect yourself from a later claim by the agent that “the lawyer said I could do it,” put your advice in writing.

10.       Be careful during your consultation with the principal that there is no undue influence being exerted by a family member interested in gaining the power to make gifts. If other family members are present during your meeting, your client may be reluctant to speak candidly with you. Try to create an opportunity for the client to talk with you alone. Some elder law attorneys follow a rule that they always must meet with the client alone at some point. However, this can be difficult to accomplish and may sometimes be counter-produc_tive. Other elder law attorneys do not always insist on a private meeting. Recognize that a private meeting with the client may be particularly important in situations where the family member will be appointed as agent or otherwise stands to benefit from the decisions being made by the elder.  In any event, try to avoid putting the onus on the client to ask other family members to leave the room. Some possibilities:
(a)                    You can ask to speak with the client alone at some point as part of the session—sometimes this works best at the outset, especially if you have a prior relationship with the client and the client feels comfortable with you. On the other hand, a new client may be reluctant to meet with the attorney alone; in such cases it may be best to wait until you have established some trust with the client (but beware: if you wait, critical decisions may have already been made). Frequently, however, the client will want the family to take part in the entire consultation. Forcing the client to meet with you alone may impair your relationship with the client.
(b)                    Advise the client that he or she can call you at any time after the appointment to discuss any additional matters that may have been missed.
(c)                   The lawyer may need to be proactive and call the client after the appointment, especially if there is any concern about undue influence. The client may provide the lawyer with additional information during this call. The call also gives the lawyer the opportunity to repeat the major decisions that were made and confirm the client’s desires, without the influence of other family members.

11.       Protect the client from inappropriate use of gifting powers by the agent. You can build in protections against abuse of gifting power by:
(a)        requiring that all gifts be approved by persons other than the agent;
(b)        limiting the persons to whom unlimited gifts can be made (e.g., allowing gifts to be made only to the principal’s spouse);
(c)        requiring equality among donees;
(d)        requiring that the agent report all gifts made by the agent (e.g., to another family member);       
(e)        creating an Irrevocable Grantor Trust and permitting gifting only to the trust (if the client’s primary goal in permitting gifting is to protect assets from nursing home costs).

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