A Guide for Consumers and Their Advisors
Pennsylvania has made dramatic changes to the laws governing financial powers of attorney (POAs). The new rules apply mainly to POAs that you create in order to allow someone else to manage your financial and property matters such as in the event of your future disability or incapacity.
The new law, Act 95 of 2014, is designed to better protect you from potential financial abuse. It is also intended to protect financial institutions and other third parties from liability for accepting a power of attorney that later is determined to have been invalid.
These well-intentioned changes come at a cost to consumers. When the new law takes full effect on January 1, 2015, POAs will be more complicated to prepare, more difficult to get properly executed (two witnesses and a notary are required), and more susceptible to rejection by your bank. And you will need expert help if you want your POA to give your agent authority to protect your assets and qualify you for benefit programs in the event you ever need long-term care at home or in a nursing facility.
Here are some things that consumers and their advisors need to know about the new law.
What is a Power of Attorney?
A Power of Attorney (POA) is a written document in which you (the “principal”) give another person (your “agent”) the authority to act on your behalf for the purposes you spell out in the document. Most POAs are “durable” meaning they continue to operate and are legally valid even after you become disabled or incapacitated.
Why is it Important to have a Power of Attorney?
A POA gives you better control over your future. With a POA you decide who will be authorized to act for you in the event an accident or illness, and you define the powers and authority that person will have. If you have a family, your POA can help prevent family disputes and allow your agent to meet your family’s needs during the time you are incapacitated.
If you do not have a POA and become unable to manage your financial affairs, it may become necessary for a court to appoint someone to handle your finances. In Pennsylvania this person is referred to as your “guardian.” Your court-appointed guardian may not be the person you would have chosen. A guardian has whatever powers the court gives them. This may be very different than the powers you would want them to have. You can usually avoid putting yourself and your family through this kind of costly and embarrassing public court proceeding by creating a POA.
So, having a POA gives you the freedom to choose the person you think is best suited to step in for you in the event of your incapacity. It allows you to decide, while you are competent, not only who that person will be, but what powers they will have. It protects both you and your family. It is a vastly important and relatively inexpensive document. Every responsible adult should have a POA.
What changes does Act 95 make?
In its many pages, Act 95 makes numerous changes to the law governing POAs. Some of these are obvious, while others are more subtle but important. In this article, I will highlight some of the changes that are most significant to older adults and their agents and advisors.
1. Notice and Acknowledgement. The most obvious changes are to the notice and acknowledgment forms that are signed by the principal and the agent.
The principal signs a notice form that contains state mandated information about the significance of the POA. Act 95 revises the language that is to be used in the notice. The new Act 95 language warns the principal that a grant of broad authority may allow the agent to give away the principal’s property while the principal is alive or change how the principal’s property is distributed at death. The notice advises the principal to seek the advice of an attorney.
The agent signs an acknowledgment form accepting the duties that go with acting as an agent, and agreeing to act in conformity with the principal’s expectations, in good faith and only within the scope of the authority granted in the document. The form must be in substantial conformity with the new language set out in the Act. An agent has no authority to act until he or she has signed this acknowledgment form and it is affixed to the POA document.
It is important to note that Act 95’s provisions regarding the new language in the notice and acknowledgment forms do not take effect until January 1, 2015. POAs signed before that date should continue to use the language from the prior law.
2. New Execution Requirements – 2 witnesses and notarization. Before Act 95, there was normally no requirement that a POA be notarized or even witnessed. The new law requires both. Beginning with documents signed on or after January 1, 2015, a POA must be notarized and have two qualified witnesses.
The new requirements for witnesses and notarization are seen as being more protective of the principal by reducing the potential for situations involving undue influence or duress or for POAs being signed by individuals who don’t know what they are doing. Having documents witnessed and notarized carries the additional benefit of resulting in documents that can be recorded if needed, as with real estate transactions.
On the minus side, these more demanding requirements may raise the expense of getting a POA signed, especially when the signing is to take place in a nursing home or other institution. Many institutions won’t let their staffs witness legal documents so witnesses and notaries are hard to find at such locations.
Note that commercial POAs used in commercial transactions are exempt from these requirements. And POAs that are limited to health care do not have to be notarized.
3. The Agents powers and duties must be laid out with greater care.
A POA can be an inexpensive, efficient and relatively private method of managing your financial affairs. A skillfully prepared POA which gives your agent asset protection authority is the crucial planning tool that can protect your family’s financial security in the event of your incapacity.
But, in the wrong hands, a POA can also be an instrument of financial exploitation. So, the law tries to strike a balance which gives you the ability to give your agent the powers you desire him or her to have, but which also helps prevent, detect, and prosecute abuse by the agent.
The abuse prevention protections in Act 95 include provisions that specify duties that the agent owes to the principal as well as limitations on the certain actions that may be taken by the agent.
The agent’s duties are divided into mandatory duties that apply in every case, and default duties that the principal can waive in appropriate circumstances. The agent’s mandatory duties are to act in good faith, within the scope of the authority granted, and in accordance with the principal’s expectations. These cannot be waived.
Duties you may want to waive. In addition to those mandatory duties, your agent will be subject to a number of default duties which will apply unless the POA specifically directs otherwise. These “waivable duties” are set out in § 5601.3 of Act 95. Among other things, they include duties to keep the agent’s and principal’s funds separate, to keep a record of all receipts, disbursements and transactions made on behalf of the principal, and to attempt to preserve the principal's estate plan.
You may decide that your agent should not be bound by some of these requirements. For example, you may want to relieve your agent from the requirement to keep a receipt every time they buy something on your behalf. Or you may want your child/agent to be able to commingle your funds with theirs, or to transfer some of your assets in order to facilitate your eligibility for Medicaid, VA pension, or other benefit programs. If you want to release your agent from any of these duties, that waiver must be included in your POA document.
Powers you may want to grant. The law also attempts to reduce the potential for financial abuse by prohibiting your agent from taking certain actions unless they are specially authorized in your POA. Lawyers have taken to referring to these actions that must be expressly authorized as “hot powers.” The hot powers include actions that have the potential to dissipate your property or change your estate plan - like making a gift on your behalf or changing a beneficiary designation on an insurance policy or IRA. If you want your agent to have any of these powers, the authority must be set out in your POA document.
For example, if you are naming your daughter to be your agent, you may want her to have the authority to transfer assets to your wife so that you will be able to qualify for Medicaid assistance if you ever need nursing home care. Or, you may want your agent to be able to make gifts to a disabled child, or to a charity you favor, or to support your family. If so, such authority must be included in the POA document.
As you can see, one size does not fit all when it comes to POAs. The duties and powers you want your agent to have are going to depend on your unique circumstances. You can’t rely on a standard form document to meet your needs.
When you see a lawyer to have a POA prepared, be sure to discuss whether the document will waive any of default duties and grant any of the “hot powers.” If your lawyer does not bring up this topic, you should raise it yourself. Or find another lawyer. These issues are just too important to ignore.
4. Third Party Refusals. A POA is useful only if it will be accepted by the financial institution or other third party to whom it is delivered. So, the law includes provisions that can penalize a third party for refusing to accept your POA. On the other hand, the law attempts to protect you from abuse by permitting third parties to question a POA when they have a suspicion that something is amiss or your agent is acting beyond the granted powers.
The new law expands the ability of third parties to question a POA that they are asked to accept. They are not required to accept a POA if they believe in good faith that the document is not valid or the agent does not have the authority to perform the act requested. A POA can also be refused if the third party makes a report to the local protective services agency, or if they know that a report has already been made.
In addition, before accepting the POA a third party can ask the agent to certify that it has not been revoked or otherwise terminated and to provide other factual information concerning the principal, agent or POA. An agent can also be required to obtain an opinion of counsel as to whether the agent is acting within the scope of authority granted under the document.
If the agent has fully complied with the requirements of the law, a third party that refuses to comply with the proper instructions of the agent is subject to liability for financial harm caused to the principal by the refusal and to a court order mandating acceptance of the POA.
5. Exemption of Health Care Powers of Attorney from some Requirements.
Act 95’s requirements regarding notarization, the notice signed by the principal, the acknowledgment signed by the agent, and the provisions relating to an agent’s duties do not apply to a power of attorney which exclusively provides for making health care decisions or mental health care decisions. Nor do these financial protection provisions apply to certain POAs used in certain commercial transactions.
6. Should you Update your Existing POA?
Some of the most noticeable changes made by Act 95 do not apply to POAs that were created before the changes become effective. This includes the new witness and notary rules, the new notice and acknowledgment forms, and the requirements for authorizing “hot powers” authority. POAs that used the old notice and acknowledgment forms and that were in conformity with the law at the time they were signed remain valid.
It is notable that the changes to the duties placed on agents do apply to any actions taken by an agent after January 1, 2015. This is true even though the POA itself predates the new law. These changes include the requirements that the agent act so as not to create a conflict of interest and that the agent attempt to preserve the principal’s estate plan. Act 95 provides that these duties can be waived in the POA document. But, that may be a problem for documents that were created before the provisions of Act 95 were known.
In addition, if you have an old pre-Act 95 POA, your agent may run into practical difficulties using it after 2015. Even though your old POA may remain valid, a bank officer or other third party may not be comfortable making that decision. A financial institution may ask your agent to provide an opinion of counsel. Or, since they are not experts on the new law, some may just (however improperly) reject an older POA that does not contain the updated notice and acknowledgment forms.
So, while Act 95 does not require that you get a new POA, it makes sense to have your current document reviewed by a lawyer who is familiar with the new law. Legally, existing POAs remain valid. Practically, your old POA may not be the best document for you or your agent. You may want to update your POA so that it will more likely be readily accepted by your bank and other financial institutions.
While you are getting your existing document reviewed for adequacy under the new law, be sure to consider whether it truly meets your current needs and circumstances. For example:
- Is the person you named as agent still the best person for the job?
- Should the person(s) you named as back-up agent(s) be changed?
- Does your document accurately express your desires regarding the duties being placed on your agent and any hot power authorities he or she is given?
- Should some of the agent's duties be waived so that a trusted family member who is your designated agent doesn’t violate them?
Be especially wary of any POA that was not prepared by a lawyer who is an expert in the requirements of Pennsylvania law on the subject. And if your document was not prepared by a lawyer (for example, if you got it online) you cannot rely on its adequacy. Don’t be penny wise and dollar foolish - see a lawyer.
Bottom Line: 2015 seems like the perfect time to review the quality and appropriateness of your existing POA and update it as needed.
Act 95 makes changes to Title 20, Chapter 56 of the Pennsylvania Probate, Estates and Fiduciaries Code (20 Pa.C.S. §§ 5601 - 5612). This statute and other Pennsylvania laws are available online on the Pennsylvania General Assembly website at http://www.legis.state.pa.us/.
Last month I wrote a more concise article on the Act 95 changes. See, Now is a Good Time to Review your Power of Attorney.
I wrote an earlier article on Act 95 when it became clear the law would be enacted. That article contains some additional information about the new law. See, Pennsylvania Revises Law on Powers of Attorney (June 19, 2014).
Power of Attorney: Things You Need to Know (April 12, 2014) discusses some critical issues you should consider before you have a power of attorney prepared.