Three Powerful Provisions to Consider in Your Financial Power of Attorney
In a financial power of attorney, you name a trusted decision-maker to act on your behalf. This person is called your agent or attorney-in-fact.
Depending on the authority you grant, your agent may be able to:
- Buy and sell property
- Manage bank accounts
- Pay bills
- Handle investments
- Manage retirement benefits
- Apply for government programs
- Address tax matters
- Start or defend legal actions
A financial power of attorney can be useful if you become disabled or unable to manage your financial affairs. However, depending on its terms, the agent’s authority may begin immediately rather than only after incapacity.
You should carefully consider three particularly powerful provisions:
- The power to make gifts
- The power to create or change certain parts of an estate plan
- The power to prosecute and defend legal actions
Each power can give your agent valuable flexibility. Each can also create opportunities for financial abuse if it is not carefully limited.
Why Does the Language in a Financial Power of Attorney Matter?
A power of attorney does not necessarily give your agent every authority you may need.
The document must describe the powers being granted. Some actions that could reduce your property or change who receives it at your death may require specific authorization.
The Maryland statutory financial power of attorney separates general authority from several sensitive powers. It warns that granting certain powers could significantly reduce your property or change how that property is distributed at death.
You do not have to grant every available power. Your document can include limits, conditions, or approval requirements based on your goals.
1. The Power to Make Gifts
The power to make gifts authorizes your agent to give away some of your money or property.
The people or organizations that may receive gifts depend on the language in the power of attorney and applicable law.
Why Might an Agent Need the Power to Make Gifts?
This power may allow your family to complete necessary Medicaid or other public-benefits planning after you become incapacitated.
It can also allow your agent to continue your established gifting practices. For example, your agent may be able to continue:
- Tithing to your church
- Donating to charities
- Contributing to scholarship funds
- Making customary birthday or holiday gifts
- Providing financial assistance to family members
- Contributing to certain trusts or accounts
Without gifting authority, your agent may be unable to continue those practices, even if you clearly would have wanted them to do so.
The authority may also provide flexibility when a family member develops an unexpected financial or medical need after you can no longer manage your own affairs.
What Are the Risks of Gifting Authority?
The power to make gifts creates a clear opportunity for financial exploitation.
An agent could be tempted to transfer your property to themselves, their spouse, or their children. Those gifts could reduce the assets available for your care and disrupt your estate plan.
For example, suppose your will divides your property equally among your three children. One child serves as your agent and uses the gifting power to transfer substantial assets to themselves during your lifetime.
Those transfers could defeat the equal distribution you intended.
Improper gifting could also:
- Create gift tax reporting requirements
- Affect Medicaid eligibility
- Reduce funds available for long-term care
- Change the intended shares of beneficiaries
- Create family conflict
- Expose the agent to legal liability
How Can the Power to Gift Be Limited?
You may choose to limit gifting authority instead of granting unrestricted power.
Possible safeguards include:
- Limiting gifts to specific people or charities
- Limiting gifts to a stated annual amount
- Permitting only gifts consistent with your previous practices
- Prohibiting gifts to the agent
- Requiring gifts to remain consistent with your estate plan
- Allowing gifts only for Medicaid or tax planning
- Requiring approval from an independent third party
- Authorizing gifts only to a trust that preserves your intended distribution
For example, the document could require an independent person to approve any gift made to the agent or the agent’s family.
The appropriate limit depends on your assets, family relationships, charitable goals, and potential long-term care needs.
2. The Power to Create or Change Parts of Your Estate Plan
An agent generally cannot create, sign, or change your will for you.
However, a financial power of attorney may grant authority over other arrangements that affect how your property will pass. Depending on the document and applicable law, this could include authority to:
- Create, amend, revoke, or terminate a living trust
- Transfer property to a trust
- Change rights of survivorship
- Create or change certain beneficiary designations
- Disclaim an inheritance
- Exercise certain powers involving trusts or estates
These actions can significantly change who receives property at your death. They should be granted only after careful consideration.
Why Might This Authority Be Helpful?
Circumstances can change after you lose capacity.
For example, one of your children might develop an addiction after you and your spouse become incapacitated. An outright inheritance could make the situation worse.
Carefully drafted authority might allow your agent to place the child’s inheritance in a trust. The trust could provide support while protecting the property from harmful use.
Similar planning may help a beneficiary who is:
- Going through a difficult divorce
- Facing bankruptcy
- Experiencing creditor problems
- Developing a disability
- Receiving means-tested government benefits
- Struggling to manage money
The power can give a trusted agent flexibility to respond to a situation you could not predict when the original estate plan was created.
What Are the Risks?
This authority also creates a serious risk of abuse.
An agent could modify a trust or change a beneficiary designation so the agent receives more property. The agent could also reduce or eliminate another beneficiary’s inheritance.
Even when an agent believes a change is helpful, the change may not reflect your actual wishes.
It could also create:
- Gift or estate tax consequences
- Income tax consequences
- Problems with retirement accounts
- Loss of creditor protection
- Changes to government-benefit eligibility
- Disputes among beneficiaries
How Can Estate Planning Authority Be Limited?
The power of attorney can include safeguards such as:
- Requiring changes to remain consistent with the existing estate plan
- Prohibiting the agent from increasing their own inheritance
- Requiring approval from an independent third party
- Limiting the authority to particular trusts or accounts
- Permitting changes only for tax, Medicaid, or benefits planning
- Requiring equal treatment of similarly situated beneficiaries
- Requiring written documentation explaining the reason for a change
Maryland law requires particular attention to these powers. The statutory form separately identifies authority to create or change trusts, make gifts, change survivorship rights, and modify beneficiary designations.
Because these actions can alter the distribution of your property, the document should state your intended limits clearly.
3. The Power to Prosecute and Defend Legal Actions
The power to prosecute and defend legal actions allows your agent to handle claims and litigation on your behalf.
Depending on the language in the document, the agent may be able to:
- Start a lawsuit
- Defend a lawsuit
- File a claim with a court or agency
- Settle a dispute
- Participate in mediation or arbitration
- Appeal a decision
- Recover property or damages
- Respond to bankruptcy proceedings
- Receive settlement proceeds
The Maryland statutory power of attorney includes authority involving claims and litigation. This includes asserting claims, raising defenses, seeking damages, addressing settlements, and receiving proceeds.
An Example of Why Litigation Authority Matters
Helen visits her estate planning attorney and signs a power of attorney that includes the authority to prosecute and defend legal actions.
A short time later, Helen enters a nursing home. She suffers a fall that causes a stroke.
The nursing home staff fails to check on her for more than 18 hours. The delay results in brain damage and leaves Helen significantly paralyzed.
Helen’s son is her agent under the power of attorney. He speaks with a medical malpractice attorney, who advises him that Helen may have a claim against the nursing home.
Because Helen’s power of attorney authorizes her agent to pursue legal action, her son can work with the attorney to protect Helen’s claim.
Without sufficient authority, the family might need to ask a court to appoint a guardian of the property before someone could act for Helen. That process could create additional delay and expense.
What Are the Risks of Litigation Authority?
An agent could misuse the power to pursue a personal grudge or involve you in unnecessary litigation.
For example, the agent might bring a claim against a sibling because of a family dispute rather than because the lawsuit benefits you.
Unnecessary litigation could:
- Waste your money
- Damage family relationships
- Expose you to counterclaims
- Create legal fees
- Distract from your care
- Reduce your estate
Can Litigation Authority Be Limited?
The document may place reasonable limits on the authority.
Possible restrictions include:
- Requiring the agent to consult an attorney
- Requiring an independent person to approve certain claims
- Prohibiting actions based solely on the agent’s personal dispute
- Requiring the agent to consider the likely cost and benefit
- Limiting authority involving particular family members
- Requiring written documentation of settlements
Limits should not be so restrictive that the agent cannot act quickly when a filing deadline or statute of limitations is approaching.
What Duties Does an Agent Have?
Granting broad authority does not allow an agent to use your property however they want.
An agent generally has a duty to:
- Act according to your reasonable expectations when known
- Act in good faith
- Stay within the authority granted
- Avoid improper conflicts of interest
- Keep records of transactions
- Preserve your estate plan when appropriate
- Act with care, competence, and diligence
An agent who misuses a power of attorney may be required to return property or pay for losses caused by the misconduct.
Careful drafting is still important. Legal remedies after abuse occurs may not fully recover missing property or repair damaged family relationships.
Questions to Ask Before Granting These Powers
Before signing a financial power of attorney, consider the following questions:
- Do I trust this person with broad access to my finances?
- Should my agent be allowed to make gifts to themselves?
- Do I want charitable or family gifts to continue?
- Could Medicaid or long-term care planning become necessary?
- Should my agent be able to create or amend a trust?
- Should anyone be allowed to change beneficiary designations?
- Would those changes need independent approval?
- Could my agent pursue a legal claim if I become incapacitated?
- Who should monitor the agent’s actions?
- Who should serve if my first-choice agent is unavailable?
You may decide that different people should hold different powers. You may also name a successor agent or require another person to approve particularly sensitive transactions.
Review Your Financial Power of Attorney Regularly
A financial power of attorney should be reviewed as your circumstances change.
A review may be appropriate after:
- Marriage or divorce
- The death or incapacity of an agent
- A significant change in assets
- A move to another state
- A change in family relationships
- A new medical diagnosis
- A change in your estate plan
- A change in long-term care goals
An older power of attorney may not reflect your current wishes or address changes in the law.
Discuss These Powers With an Estate Planning Attorney
The powers to make gifts, change certain estate planning arrangements, and prosecute or defend legal actions can be extremely useful.
They can also expose you to financial exploitation or unintended changes to your estate plan.
An estate planning attorney can help you weigh the benefits and risks, select the right agent, and draft appropriate limits.
If you would like to discuss ways to protect yourself, your loved ones, and your life savings if you can no longer manage your affairs, contact McDonald Law Firm:
- Howard County: 443-741-1088
- Montgomery County: 301-941-7809
- District of Columbia: 202-640-2133
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
