A power of attorney can be a very effective estate-planning tool. It’s often the single most important instrument in avoiding a costly guardianship proceeding for aging relatives and is routinely packaged by estate planning practitioners as one of the “necessary” documents (a will/pour-over trust, health care proxy and living will being the others). However, several high profile cases brought to light the abusive use of powers of attorney by agents who used these documents against unwary principals to steal their assets at a time when such principals were most vulnerable.1 As a result, effective Sept. 1, 2009, New York State made broad sweeping changes to its laws governing powers of attorney designed to discourage fraud and other perceived abuses in elder care and estate planning.2 The legislation dictated a much lengthier statutory form of power attorney than prior statutory forms and required the execution of a separate rider if the agent was to have the power to make major gifts on the principal’s behalf. While the law was well intended, the changes caused an uproar in both the estate planning community as well as in other areas of business and commerce. As enacted, the law had what many perceived as unintended consequences and a few ambiguities that demanded amendment. And on the effective date, remedial legislation was already pending to address some of these concerns.
The legislature adopted corrections on Aug. 15, 2010 that took effect Sept. 12, 2010 and were retroactively applicable to powers executed on or after Sept. 1, 2009.3
So how useful is New York’s new power of attorney law? What does it really offer to protect principals against fraud? Does it help to make a power of attorney a continued realistic alternative to guardianship proceedings? To answer these questions, let’s take a closer look at some of its provisions, as they’ve been clarified and amended.
Cautionary Language and Formatting Requirements
When used as a tool to avoid guardianship proceedings, New York’s historical statutory durable power of attorney had the potential to give an agent unfettered control over a principal’s assets. An unwary principal may not understand the full impact of the powers he’s giving his agent. And an agent may not understand the responsibilities and fiduciary duties that he takes on when he agrees to so act. To ensure that individuals executing powers of attorney fully understand the implications of doing so, the 2009 law required that all powers of attorney executed within the state of New York include certain cautionary language and adhere to very strict formatting requirements.4 Regardless of whether the power of attorney is a statutory or non-statutory form, if it’s executed in the State of New York, to be valid, it must be written and must include very specific language cautioning the principal with respect to the consequences of executing such a document, the scope of powers which may be granted to an agent and the powers and rights retained by the principal. It must also include specific language informing the agent of his legal responsibilities, the limitations on the agent’s power and the liability imposed on the agent for acting outside the scope of the authority granted to him. Although the new law makes clear that typographical errors will not void the validity of an otherwise properly executed power, deviation from the exact language of the statute isn’t permitted. Furthermore, the principal and the agent both must sign the power of attorney and both of their signatures must be acknowledged in the manner required for the conveyance of real property (which basically requires that the signatures be validly notarized). Whether the power of attorney is to be effective currently or upon the happening of a specified event, the agent’s authority will not begin until the agent has signed and his signature has been acknowledged. If two or more agents are designated to act together, both agents must sign the power of attorney and both of their signatures must be acknowledged before it’s effective.
As originally enacted in 2009, powers of attorney covered by the law weren’t limited to those used specifically for financial and estate planning. On its face, the requirements of the 2009 power of attorney law were seemingly applicable to all powers of attorney executed within New York by individuals on or after Sept. 1, 2009, regardless of the context in which such powers were granted. This very broad application meant that the very technical aspects of the statute were made applicable to powers issued in connection with a whole host of business, commercial and real estate transactions that were never really considered customary for the types of financial planning powers of attorney the statute was meant to address, thus rendering invalid any such powers not in strict compliance with the statutory requirements. This created havoc among the financial and real estate legal community as practitioners scrambled to make powers routinely issued in connection with business transactions compliant. As this was clearly not the intent of the 2009 statute, the new law added a new section to the power of attorney law5 that specifically excludes powers issued in connection with these business transactions from the application of the statute. The excluded powers include:
• a power given for a business purpose;
• a power coupled with an interest;
• a power given to a creditor in connection with a loan or other credit transaction;
• powers given to facilitate the transfer of stocks, bonds or other assets;
• proxy powers to exercise voting or management rights;
• a power used by a governmental subdivision, agency or instrumentality;
• a power authorizing a third party to prepare and file documents with the government or other third parties;
• a power authorizing a financial institution to take action relating to an account held at the institution;
• a power given as part of a holding in a business entity or condominium;
• a power contained in a business agreement authorizing an agent to take action relating to said business;
• a power given to a condominium managing agent;
• a power given to a real estate broker;
• a power authorizing the acceptance of service of process; and
• a power created by statutes, such as a power authorizing an agent to make health care decisions or decisions regarding disposition of remains.
Limits on Gifts
To ensure that a principal doesn’t unwittingly give an agent a power to make gifts of the principal’s assets in a manner inconsistent with the principal’s wishes, the new law severely limits the ability of a principal to grant a power to the agent to make gifts. A power of attorney by itself may be used to make gifts only in accordance with a preexisting pattern of gifting and only up to $500 per year.6 As originally enacted, the law was ambiguous as to whether the $500 limit was to be applied in the aggregate or per recipient. The new law makes clear that the limit applies in the aggregate. All other gift-giving authority of any kind must be made in a separately executed “statutory gifts rider,” which must be executed simultaneously with the short form power of attorney to be effective.7 The statutory gifts rider must be written and executed simultaneously with the execution of a power of attorney and must be accompanied by the statutory short form power of attorney. The rider must also state who prepared the document. Whether a statutory or non-statutory form is used, to be valid, any instrument attempting to convey the authorities contemplated by a statutory gifts rider must be signed by the principal and acknowledged in the same manner as a deed conveying real property. In addition, it must be executed in the presence of two witnesses who aren’t potential gift recipients. To clarify an ambiguity with respect to the formal execution requirements of the law, the new law explicitly provides that the notary acknowledging the principal’s signature on a statutory gifts rider can also serve as one of the two witnesses.
Even if a statutory gifts rider is used, the agent’s authority is still limited.8 The principal may grant the agent authority to make gifts only to the principal’s spouse, children and more remote descendants and parents and such gifts may not exceed the annual federal gift tax exclusion amount. To make gifts in excess of the annual exclusion amount or to other beneficiaries or to make other types of transfers, the principal must separately and specifically state such grant of authority. This includes authority to create or modify any joint tenancy; to change beneficiary designations on life insurance policies;transfer on death accounts or retirement accounts; to purchase new policies of insurance on the principal’s life; and to create, amend or revoke inter vivos trusts. Under no circumstances may an agent make gifts or transfers to himself of any kind unless the principal grants specific authority to do so.
Authority over Health Care Records
Although New York requires the execution of a separate “Health Care Proxy” to grant someone authority to make medical or health care decisions, the new law allows a principal to grant an agent authority with respect to rights granted under the Health Insurance Portability and Accountability Act (HIPAA).9 Specifically, the new law allows a principal to appoint an agent to act as the principal’s personal representative under HIPAA, to access records relating to the provision of health care and to make decisions relating to the past, present or future payment of health care services which were, are or will be consented to by the principal or on his behalf by an agent authorized pursuant to a Health Care Proxy. It doesn’t, however, grant authority over whether to provide the health care services themselves.
This grant of authority is extremely useful given the strict restrictions imposed under HIPAA. For example, the power to access the principal’s medical records is essential if an agent is to determine whether a medical bill charged to the principal should be paid. In addition, the power to access a principal’s medical records would be necessary if a separate power granted pursuant to a statutory gifts rider to procure life insurance on the principal’s life is to be executed effectively as most life insurance policies require a review of the insured’s recent medical history.
Accountability of the Agent and Compensation
Some of the most important changes to New York’s law are those that address the agent’s fiduciary duties and accountability. The new law makes clear that an agent must exercise a standard of care consistent with that exercised by any prudent person dealing with the property of another.10 Although historically implicit, the new law explicitly states that the agent has a fiduciary duty to act in accordance with the principal’s instructions and in the best interests of the principal, to avoid conflicts that would impair the agent’s duty to do so, to keep the principal’s property separate from the agent’s own property and to keep a record of all transactions. An agent is required to disclose the agency relationship whenever signing documents for the principal. Because very few agents will actually review the law, these duties are spelled out for the agent in the information that’s required to be included in every statutory form of power of attorney.
The ability to appoint a “monitor” to oversee the actions of the agent is another measure the new law includes to protect the principal from abuse of the agency.11 The monitor has the power to request, receive and compel the agent to provide a record of all transactions and to request and receive a copy of the power of attorney. However, the law imposes no fiduciary duties on the monitor.
Finally, unless the principal specifically provides for compensation of the agent, an agent isn’t entitled to compensation from the principal’s assets.12 However, the agent is entitled to be reimbursed for reasonable expenses actually incurred in connection with the performance of the agent’s duties.
Third Party Acceptance
In practice, powers of attorney presented to third parties have often been rejected for various reasons, hindering the usefulness of such powers. Sometimes the powers are rejected simply because the third party prefers to use their own form. However, when powers of attorney are used in lieu of guardianship proceedings, the principal is often no longer in a position to execute a new power that complies with the third party’s requirements. The new law mandates third parties to honor statutory short form powers of attorney and statutory gift riders unless they have reasonable cause not to.13 The new law specifies that third parties include banks, trust companies, savings and loan associations, credit unions, public pension funds, retirement systems, securities brokers, dealers and firms and insurance companies as well as individuals acting for themselves or as fiduciaries or as an official of any legal, governmental or commercial entity. Failure to honor the statutory short form because it doesn’t accord with the third party’s own proprietary form is presumptively unreasonable. It’s also presumptively unreasonable for a third party to fail to accept a statutory power of attorney if the sole reason for rejecting the power of attorney is a lapse of time between execution and presentment or between execution by the principal and the agent. Other forms of powers of attorney may be used under certain circumstances, but the new law doesn’t require compliance with such powers by third parties.
Special Enforcement Proceeding
The new law also specifically authorizes a special proceeding to enforce the authority and powers of any appointed monitor, to determine the validity of any power of attorney, to determine the entitlement of the agent to compensation or the reasonableness of such compensation, to approve the agent’s record of transactions, to remove the agent, to construe any provision of the power of attorney and to compel acceptance of the power of attorney by a third party.14 Certain enumerated persons interested in the scope and execution of the agent’s authority can bring a special proceeding. These people include the agent, any designated monitor and any third party required to accept a power of attorney as well as the spouse, child or parent of the principal and the principal’s successor in interest.
A Final Correction
The 2009 power of attorney law provided that powers executed on or after Sept. 1, 2009 automatically revoked all prior powers of attorney (even those in place for limited purposes), unless the principal specifically provided otherwise. This led to the unintentional revocation of many powers of attorney by unwary principals who inadvertently revoked powers of attorney executed for other purposes. Limited powers of attorney are often executed in connection with specific financial transactions which may be easily forgotten by the principal, such as for real estate transactions or brokerage accounts. For example, a principal may request a securities broker to perform extensive investment functions on the principal’s behalf, independent of the principal’s advice utilizing a power of attorney granted to the broker to trade in the principal’s account. As originally drafted, the law provided that the execution of a new power of attorney for general estate-planning purposes would automatically revoke the prior powers granted to the principal’s broker unless the principal specifically stated otherwise. The new law reverses this presumption so that the execution of a power of attorney no longer automatically revokes powers of attorney previously executed by the principal, unless the principal specifically provides otherwise.15 As this correction was meant to address inadvertent revocations, any revocations of prior powers of attorney actually delivered to the former agent prior to Sept. 12, 2010, remain valid.
Whether the checks and balances that New York’s new power of attorney law provides prove to be a deterrent to financial fraud against elders is yet to be proven. But if used properly, a New York power of attorney is clearly still a useful tool in estate and elder planning.
1. See Matter of Ferrara, 7 N.Y.3d 244 (2006); Matter of Mueller, 19 Misc.3d 536 (Surr. Ct., Westchester County 2008).
2. Laws of 2008 of the State of New York, Chapter 644.
3. Laws of 2010 of the State of New York, Chapter 340.
4. N.Y. General Obligations Law Section 5-1501B.
5. N.Y. G.O.L. Section 5-1501C.
6. N.Y. G.O.L. Section 5-1502I.
7. N.Y. G.O.L. Section 5-1514.
9. N.Y. G.O.L. Section 5-1502K.
10. N.Y. G.O.L. Section 5-1505.
11. N.Y. G.O.L. Section 5-1509.
12. N.Y. G.O.L. Section 5-1506.
13. N.Y. G.O.L. Section 5-1504.
14. N.Y. G.O.L. Section 5-1510.
15. Laws of 2010 of the State of New York, Chapter 340; N.Y. G.O.L. Section 5-1513.