Illness and injury can happen to anyone at any time, though they are more common for older persons. In the worst case they can lead to the incapacitation of the stricken individual. The authors demonstrate how, in such circumstances, establishing a power of attorney in advance can lead to far better outcomes than going through a guardianship proceeding. They discuss the statutory requirements and potential modifications to such arrangements, as well as their pertinence to tax and gifting matters, particularly under New York law.
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When an individual lacks capacity and there is no valid power of attorney in place authorizing someone else to manage his financial affairs, the only resort may be a guardianship proceeding, wherein the individual is declared incapacitated and a guardian appointed to manage his property and personal needs. There are huge drawbacks in having to resort to a guardianship proceeding, however, including the time and cost of the proceeding and the emotional toll on the incapacitated person (IP) and his family. In terms of cost, it is not unusual for a guardianship proceeding to cost more than $15,000 at the outset to cover attorney’s fees, the cost of the mandatory court evaluator (appointed by the court to interview all interested parties and report the findings to the court), and bonding fees. There may be additional fees for a court-appointed attorney and other court-appointed professionals. Moreover, there are annual costs for court examiners (court appointees who review yearly accounts prepared by the guardian), attorneys or accountants who assist in preparing the annual accountings, annual bond premiums, and the possibility of commissions awarded to guardians.
The Guardianship Proceeding
In addition to being very costly, a guardianship proceeding is also a lengthy process, sometimes taking months to complete, especially if it is contested by family members. Furthermore, the eventual guardian may not be the same person the IP would have chosen if given the opportunity. But the most significant drawback to a guardianship proceeding—one that cannot be calculated—is the emotional toll on the incapacitated person. This is because the IP, who is usually an older individual suffering from confusion and anxiety, must meet with a court evaluator—a stranger—and often be hauled into court for questioning as part of the guardianship hearing. This can be a frightful experience for an individual suffering from cognitive impairments.
CPAs should advise their clients to meet with an attorney in order to execute a POA that includes spe cific powers relating to tax matters, tax filings/reporting, and the ability to work with the IRS.
The difficulties of the guardianship do not end at the appointment of a guardian. For example, the guardian must prepare yearly accountings for submission to the court. In addition, the guardian must also apply to the court for authority to undertake certain actions, including a change of the incapacitated person’s abode. The guardian must also apply to the court for authority when contemplating actions that are not granted by the appointing order, including, for example, the authority to make gifts on behalf of the IP for purposes of qualifying for Medicaid. (This is because the IP retains all of the powers and rights not specifically given to the guardian.) Finally, upon the death of the IP, the guardian must prepare a final accounting on notice to all interested parties to cancel the bond, if any, discharge the guardian, and pass the remaining funds of the guardianship to the representative of the IP’s estate. Fortunately, all of these drawbacks can, in most cases, be avoided with proper planning. The most important planning tool is a well-drafted and properly executed power of attorney.
The Power of Attorney
A power of attorney (POA) is a legal document through which one person (the principal) grants to another person (the agent) the authority to act on his behalf with respect to legal or financial matters. State laws vary as to the statutory requirements of a POA; some state laws provide a roadmap of sorts, while others provide an actual statutory form to be used. In New York, for example, the creation of a valid POA must, at a minimum, meet four statutory requirements:
- The POA, if typed, must be of no less than 12 points in size.
- The POA must be signed and dated by a principal with capacity—that is, the ability to comprehend the nature and consequences of the act of executing and granting, revoking, amending, or modifying a power of attorney, any provision in a power of attorney, or the authority of any person to act as agent under a power of attorney.
- The agent must sign the POA with his signature acknowledged.
- The POA must contain certain advisory language, including a section entitled “Caution to the Principal” and another entitled “Important Information for the Agent.”
Additionally, if the principal desires to have the agent make gifts on her behalf—for example, as part of an estate, tax, or Medicaid plan—the principal must initial that authority within the POA and attach a separate document called a statutory gifts rider (SGR). The SGR is also signed by the principal, with his signature acknowledged and witnessed by two witnesses who are not recipients of the proposed gifts.
The New York General Obligations Law (GOL)—the set of statutes governing powers of attorney in New York—provides model forms under sections 5-1513 and 5-1514, which, when used, will be construed as a statutory short form POA and an SGR, respectively. The benefit to using the statutory forms is that the GOL also provides a special proceeding for expeditiously resolving claims dealing specifically with POAs that were drafted using the model forms (section 5-1510). The proceeding may, for example, be used to approve records of receipts, disbursements, and transactions entered into by the agent on behalf of the principal; determine the validity of a POA, including the principal’s capacity at the time of signing it and whether the POA was procured by fraud, duress, or undue influence; and compel third parties (e.g., banks) refusing to honor the POA to accept it. Another benefit of using the statutory forms is that the GOL provides rules of construction for each of the enumerated powers in the statutory short form POA. In other words, the GOL defines what is meant by each of the enumerated powers in the model form so that if a principal chooses one of the enumerated powers (e.g., tax matters, as below), he knows exactly what authority is being conferred upon the agent.
Using the POA in Tax Matters
The GOL, under section 5-1502M, construes tax matters to mean that, when authorized, an agent can prepare, sign, and file federal, state, local, and foreign income, gift, payroll, federal insurance contributions act, and other tax returns. In addition, an agent may, if properly authorized, sign any power of attorney required by the IRS. This may include, for example, the authority to sign an IRS Form 2848, Power of Attorney and Declaration of Representative, for tax-related matters. This is significant because a principal may not, in all likelihood, sign the form in anticipation of a future event because the form itself refers to particular tax matters on particular tax years, which may be unknown at the time the form is signed (see David Goldfarb and Joseph Rosenberg, New York Elder Law, Matthew Bender, 2016). In fact, the instructions to the Form 2848 indicate that the IRS will not record on the CAF system (an identification number that the IRS assigns to representatives) future tax years or periods listed that exceed three years from December 31 of the year that the IRS receives the POA. Also, the form is routinely revised so that it is likely to appear different at the time it is needed (Goldfarb and Rosenberg 2016).
Therefore, the better practice is to have the agent, who is properly authorized in tax matters under the statutory short form POA, sign Form 2848 if it ever becomes necessary. CPAs must be aware of these specific considerations, which can have a significant impact on the type of planning and reporting they are charged to perform on behalf of individual clients. As such, CPAs should, in most cases, advise their clients to meet with an attorney in order to execute a POA that includes specific powers relating to tax matters, tax filings/reporting, and the ability to work with the IRS and the relevant state departments of taxation.
The critical importance of including proper gifting provisions in the POA, and, more specifically, the SGR in New York, cannot be overstated.
Modifications to the Statutory Form
Although a principal must use the precise language provided for in the New York statutory short form POA and SGR, a principal may nevertheless include additional powers without affecting their validity and benefits as statutory forms (Goldfarb and Rosenberg 2016). The inclusion of additional powers must be made in the portion of the forms designated “Modifications.” Furthermore, it is often recommended that a principal modify her POA by including additional powers—and not simply relying on the “all other matters” authority listed in the statutory form—because the document should be tailored to each individual’s needs to the greatest extent possible based on her estate, tax, and financial plans. It is critical that the inclusion of additional powers contain, at a minimum, the authority of an agent to transfer the principal’s assets for purposes of qualifying the principal for Medicaid. There are, however, two significant points of caution when modifying the statutory forms. First, the drafter must be careful to prevent the additional clause/s from being interpreted as limiting the construction of the particular power (Goldfarb and Rosenberg 2016). Second, the added power, if inconsistent with any of the statutory requirements, may preclude the POA or SGR, or both, from being viewed as statutory forms, thereby losing the corresponding benefits (Goldfarb and Rosenberg 2016).
The Power to Make Gifts
The critical importance of including proper gifting provisions in the POA, and, more specifically, the SGR in New York, cannot be overstated. This is because the gift-giving authority is what allows an agent to make transfers to qualify the principal for Medicaid while protecting the transferred assets against a future Medicaid recovery. With proper advance planning, an agent can protect most—if not all—of a principal’s assets in anticipation of Medicaid. An example of this would be the ability to create and fund irrevocable trusts on behalf of the principal. The POA should, in most cases, give the agent the ability not only to create an irrevocable trust for purposes of Medicaid planning, but also to transfer the principal’s assets to such trust.
An agent in New York can also, if properly authorized, protect a portion of the principal’s assets in the event the principal needs Medicaid immediately (where sufficient advance planning has not been undertaken) by utilizing what has been termed a “gift/promissory note” plan. This kind of plan, which is widely utilized for last minute planning, entails gifting a portion of the principal/Medicaid applicant’s assets, which results in a period of Medicaid ineligibility. The applicant, or the agent acting on his behalf, simultaneously loans the remaining portion of the assets to the gift recipient, evidenced by a note promising to repay the loan in monthly installments. These repayments are used to privately pay for nursing home care during the penalty period created by the gift, thereby saving the gifted portions of the assets from any possible Medicaid recovery. This is a critical tool used by many Medicaid applicants who have failed to do advance planning; however, if the Medicaid applicant has advanced dementia or lacks sufficient capacity in another way, then the only way this plan can be effected is if someone else has the authority to do so on the applicant’s behalf. Thus, the importance of proper and specific gifting provisions within the POA cannot be stressed enough.
How CPAs Can Help
As described above, CPAs should ensure that all of their individual clients have a validly executed POA that includes the appropriate aforementioned powers. Not only must a CPA make sure that the proper tax matters provisions are included, she should also discuss and review all important POA provisions with an individual. Unlike attorneys, CPAs regularly meet and speak with individual clients; they are, in most cases, alongside these individuals as they age, retire, experience life-changing events, and experience the need for long-term care. In many ways, CPAs are the most constant professional presence in an individual’s life. Many CPAs inquire as to the existence of a POA in their initial intake meetings with clients; this should be a common practice. As professionals, CPAs, attorneys, and financial advisors are being tasked with helping individuals achieve their tax, financial, and long-term care planning goals. A POA is critical for ensuring that such professionals can properly protect individuals and provide for the highest level of representation.
Provided that care is taken in drafting the form, a properly drafted POA provides a great measure of comfort that, in the event of the principal’s incapacity, an agent with requisite authority is in place to make legal and financial decisions without having to involve the courts for the appointment of a guardian. The POA is perhaps the most important financial planning tool, and CPAs are uniquely positioned to ensure that their clients are properly protected.
Power of Attorney Checklist
- ___ Has the CPA asked the individual if he has a power of attorney (POA)?
- ___ Has the CPA reviewed the POA to ensure all tax-related powers are included?
- ___ Does the POA include the authority to access a safe deposit box?
- ___ Does the POA include the authority to act regarding retirement accounts?
- ___ Does the POA include the authority to handle insurance matters?
- ___ Does the POA include the authority to employ, retain, and compensate attorneys, accountants, and investment advisors?
- ___ Does the POA include the authority to create, amend, and revoke trusts?
- ___ Does the POA include the authority to make loans?
- ___ Does the POA include the authority to open or terminate bank accounts?
- ___ Does the POA include the authority to make and split gifts?
- ___ Does the POA give the agent the ability to sign an IRS Form 2848?
- ___ Does the POA include the authority to implement Medicaid planning, including a promissory note plan?