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The Tricky Business of Drafting Financial Powers of Attorney to Address Gift Giving

If you’re reading this you probably already know that a properly drafted estate plan includes much more than a will. After all, while setting for forth your wishes regarding distribution of assets and care of minor children is essential, these are far from the only matters covered by an estate plan. Other essential components include ensuring your life’s work is not eaten up by probate costs and unforeseen tax consequences, organizing your assets such that you have affordable access to long-term care when you need it, and making sure power of attorney designations are in place so that your wishes are respected even when you are unable to communicate them, yourself. This article will focus on the latter two points as failure to understand their complexity can provoke tragic outcomes at precisely a time when the last thing a family needs is more tragedy.

Understanding Power of Attorney

In the simplest terms, a power of attorney (POA) document is a legal instrument that gives one person the power to act on behalf of another. POAs play a crucial role in estate planning as the process serves not only to prepare for a person’s eventual passing but for the possibility that one day they become unable to self-advocate. This can happen because of incapacitating injury or severe illness and, as the Covid-19 pandemic has proven, is a concern even healthy adults should heed.

Two principle types of power of attorney exist: medical and financial. The former designates a loved one to make medical decisions on your behalf, such as to what extent doctors should intervene in the case of life-threatening illness and whether any treatment methods might conflict with your values, while the latter allows a loved one to pay bills, transfer assets, and even sell property on your behalf.

POA documents can provide broad or limited legal authority (you get to decide) and can either be drafted in conventional, durable, or “springing” terms. A conventional POA terminates when the creator become incapacitated and generally serves to enable a loved one to handle financial or medical affairs in your stead when, say, you are travelling or otherwise predisposed. A durable POA, on the other hand, remains in force when you are incapacitated precisely for the purpose of managing your affairs when you, yourself, cannot. Lastly, a springing POA “springs” into action only if and when the creator suffers incapacitation. All three can be revoked by the creator (or, in legalese, the principle) at any time and can also end if invalidated by a court, if the designated person (the agent) loses the ability to carry out their responsibilities, or if divorce occurs and an (ex)-spouse had been named agent.

The Essential Role of POA Documents in Long-Term Care Planning
Often, those needing long-term care become unable to manage taxing financial matters (no pun intended). Ensuring proper POA documents are in place allows a loved one to take care of such issues as handling bank accounts, signing checks, selling property and assets like stocks, filing taxes, and so on. In addition, if carefully drafted, a durable POA of allows the agent to make financial gifts on the principal’s behalf. This is a critical matter should you wish to avoid crippling nursing home or home care costs.

Elder law attorneys often advise that an individual gift assets to accelerate Medicaid eligibility. This is because those who qualify for the program are subject to strict income and asset limitations. While shuffling around your money in order to gain Medicaid coverage is no fun, it beats paying the average $4,576 monthly cost of a home health aide or the $8,821 per month cost of a nursing home. The problem is that empowering a loved one to make financial gifts on your behalf through a durable POA is no simple matter.

First, many POA forms do not authorize the agent to make gifts (which is why you shouldn’t opt for DIY forms available online); second, those that do may unwittingly trigger substantial tax consequences. Inclusion of a simple, blanket provision such as, “my attorney may make gifts of my personal property” may in certain cases be sufficient to authorize gift-giving but risks falling victim to the hidden tax traps covered under IRS Code sections 2041 and 2514 (which are too complex to get into here). Income tax can also materialize if an agent makes gifts via POA to a person to whom the agent owes a duty of support (which is another issue that goes beyond the present article).

If all of this sounds incredibly complicated it is because it is. Luckily, several strategies exist that keep a POA from triggering gift and estate tax. These include exploiting the annual gift tax exclusion under Code section 2503 or ensuring gifts are approved by a person possessing a substantial interest in the property subject to the power. When these solutions fail, gifts may be authorized under what is referred to as a “compromise approach.”

The long and short of all the above is that POA documents play an essential role in ensuring one receives affordable, high-quality long-term care but only if they are carefully drafted and not simply prepared by a fill-in-the-blanks approach. An experienced estate planning attorney can take care of this for you but they first need to be made aware of your goals, needs, and financial position. The sooner you sit down to have this conversation, the greater likelihood your plan will succeed—which is why you shouldn’t wait! Contact Anderson Elder Law today to book your appointment. You can also give us a call at (610)-566-4700 or email and it would be our pleasure to talk through your case and design solutions that are sure to work for you.