by Julian E. Gray, CELA

Pennsylvania’s Durable Power of Attorney

Many of us plan for the future. We invest in retirement plans, college savings funds and various types of insurance. But, how many of us plan for our own incapacity? Whether you’re on a month long vacation in Europe, the victim of a catastrophic accident or suffering from Alzheimer’s disease, the result is the same. Someone must handle your financial affairs. That is where a Durable Power of Attorney (generically termed a “power of attorney”) can be a lifesaver.

A power of attorney is simply a legal document signed by a person, or principal, which appoints another person as an agent to perform a variety of transactions on behalf of the principal, as if the principal were present. Most recent powers of attorney are “durable”, which means that the legal effect of the document continues after a principal becomes incapacitated. Over the years, the power of attorney has appeared in many forms to serve a variety of purposes. The laws in Pennsylvania governing powers of attorney have undergone many changes as well, the most significant of which occurred in 1999. Under the latest revision, powers of attorney must now contain a conspicuous notice to the principal outlining the legal effect of this document. The principal must sign and date this notice apart from the actual signing of the power of attorney to acknowledge the principal’s receipt of the notice. In addition, any agent appointed under the power of attorney must now sign a notarized acknowledgment confirming the agent’s legal responsibilities.

General powers of attorney usually authorize the agent to engage in a wide variety of financial transactions on behalf of the principal. These transactions include: banking, investments, real estate, tax and legal claims. One subtle but immensely important change to the power of attorney law involves the power to make gifts. Prior to 1999, many “boilerplate” powers of attorney included a provision to make gifts. Unfortunately, the language used to indicate this power was somewhat vague and raised many legal, tax and ethical issues.

For example, each U.S. citizen has an annual gift tax exclusion of $11,000 ($10,000 prior to 2002) per donee. This means that you can give $11,000 per year to an unlimited number of recipients each year without incurring a federal gift tax liability or even having to file a federal gift tax return. Sometimes, agents appointed under a power of attorney, without consulting a legal or tax advisor, make gifts on behalf of their principal in excess of the annual exclusion, thus incurring a gift tax liability to the principal. Some powers of attorney specifically place annual gifting limitations upon the agent. Some do not.

Another unfortunate situation occurs when an elderly incapacitated principal has specifically limited gifts by the agent to the annual exclusion amount. If you have read my previous articles, you know that it is possible for a nursing home patient to gift assets to family members (or others) in order to expedite qualification for Medicaid coverage. However, a power of attorney that limits gifts to $11,000 per year does little to preserve the assets of a nursing home patient who is spending $72,000 per year for care. In addition, there continues to be a growing ethical concern for agents who have the power to make unlimited gifts of a principal’s assets to anyone, including the agent.

In an attempt to clarify the intent of the principal, for purposes of authorizing gifts by the agent, Pennsylvania law was changed in 1999 to require a principal to specifically state in the language of the power of attorney that the principal intends unlimited gifting. Therefore, powers of attorney executed under the new law which only state that the agent has “the power to make gifts” will be presumed to mean a maximum amount of the current annual exclusion. Therefore, principals should carefully outline the details of any gifting provisions, should they desire to include them.

What happens if you decide not to sign a power of attorney? You run the risk of court action in case of incapacitation. This usually means a guardianship proceeding. Besides the huge disparity in legal fees between preparing a power of attorney and engaging in a guardianship proceeding, the latter ranks right up there with a root canal on the enjoyment scale. I often say that for simple estates, the power of attorney is the most important document you can have. If you ever need one, you’ll know why.

Copyright 2003 Julian E. Gray - Published in Pittsburgh Boomers Magazine, (various editions)

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