In my years of reviewing financial powers of attorney (e.g., general or limited powers of attorney) prepared by others, I am surprised by the provisions which are included in those powers of attorney and the lack of any discussion as to the serious consequences of having any one of those provisions in the documents. In a financial general power of attorney, you are giving an agent or attorney-in-fact, the ability to act on your behalf with regards to most, if not all, of your assets, real and personal. Most powers of attorney come into effect immediately once an individual signs the document; some come into effect upon a condition (e.g., incompetence as certified in writing by a physician, etc.).
Once a power of attorney comes effective, your agent knows it is effective and has it or a certified, true copy of it from the register of deeds, then these are some of the provisions that can cause negative consequences to you or to your agent:
- Your Social Security Number or Your Agent’s Social Security Number.To date, I have never had a power of attorney rejected by a bank or financial institution when it did not contain a social security number. Putting your or your agent’s social security number on a power of attorney potentially exposes either of you to identity theft and/or theft of your assets. In North Carolina, a power of attorney will or may have to be recorded at the register of deeds in order to continue to be effective or to be honored. Due to identity theft, the register of deeds has a policy of whiting out or blocking social security numbers prior to a power of attorney’s recordation; once it is recorded a power of attorney becomes a matter of public record (anyone can look at it). In Mecklenburg County, recorded powers of attorney can be viewed online.In addition, your agent will have to provide your power of attorney to many financial institutions and individuals and each exposure of your or your agent’s social security number further raises the risk of theft of identity or theft of assets. If a social security number appears anywhere on a power of attorney, I would highly recommend that you redo the power of attorney.
- Gifting Powers. In some powers of attorney, the drafter of the power of attorney has included broad gifting powers, sometimes unlimited, or limited by phrases such as “based on my history of gifting” (but potentially unlimited). What is a “gift”? A gift is defined as something given voluntarily without payment in return or a present. If a power of attorney includes unlimited gifting powers to anyone including, but not limited to, your agent, do you really want to have someone else have the authority to give all of your assets, land, cars, insurance, retirement benefits, etc. to anyone including your agent? Why is that power necessary? It may be applicable in limited circumstances (e.g., possible Medicaid or State Special Assistance qualification planning), but only after lengthy discussion and explanation. Otherwise, in general, if gifting is desired, I limit gifting to qualify under the federal annual exclusion (currently $14,000.00 of total gifts per recipient per calendar year) and/or the annual exclusion for tuition and health. In most circumstances unlimited gifting is unwise and I would not include it in a power of attorney; if it is in your document, then I would advise you to redo your power of attorney. Providing gifting powers to an agent to himself or herself which is not limited to a relative small amount or to what is known as a 5 and 5 power (i.e., no greater than $5,000 or 5% of your assets) can cause potential adverse gift tax consequences to your agent (e.g., agent deemed to be making a gift to himself or herself whether or not he or she actually makes a gift).. More than a certain amount or unlimited gifting amounts can cause potential estate tax consequences to your agent (e.g., inclusion of your assets for estate tax purposes in your agent’s estate). In most circumstances unlimited gifting or gifting more than a limited amount (e.g., limited to annual exclusion) is unwise and I would not include it in a power of attorney; if it is in your document, then I would advise you to redo your power of attorney.
- Power to Create, Modify or Terminate Trusts. You have created a trust which distributes or disposes of a part or all of your assets not effectively disposed of through other means (e.g., account joint tenants with rights of survivorship with an individual, etc.). You have prepared estate planning documents (e.g., will, power of attorney, trust, etc.) which you want honored, not changed by anyone other than you. If you give your agent the ability to create, modify or terminate your trust, beyond the potential income, gift or estate tax consequences to your agent, your agent can defeat your estate planning wishes and goals. If you do not want your agent to have these powers, then you should redo your power of attorney.
- Make or Change Beneficiary Designations. You have named beneficiaries for your retirement plans (e.g., 401(k) plan), annuities, IRAs and life insurance policies. Should your agent have the power to make, change or modify those beneficiary designations? If you give your agent the ability to do that, then those powers can defeat your estate planning goals and cause negative potential gift and estate tax consequences to your agent if he or she can name himself, his estate, his creditors or creditors of his estate as beneficiary, possibly even if the agent never exercises those powers. In addition, such provision can cause family disunity to the extent that they are exercised by your agent. If your power of attorney contains those powers, I would suggest that you have it reviewed by an attorney.
There are other powers which could cause negative consequences, but I see these as some of the major ones. If our Charlotte attorneys can help you with any of your estate planning needs or any other matter, please contact us.