Keeping Your Incapacity Options Flexible
While Avoiding the Lurking Power of Appointment
by Peter S. Stern, Esq.
One of the hallmarks of good incapacity planning is to build in flexibility
in estate planning and incapacity documents. Clients who want durable
powers of attorney and trusts often desire the ability to change title
to property, in order to create Medi-Cal eligibility, or to avoid Medi-Cal
recovery, but they do not want to make those changes at the time they
ask us to prepare their documents.
Powers of attorney can be used to amend and revoke trusts, and to make
gifts, so long as the trust instrument and the power of attorney expressly
permit such acts by an attorney in fact (Probate Code Sections 4264, 15401).
An attorney in fact is, of course, a fiduciary, and is bound to act on
behalf of the principal, and to manifest a duty of loyalty to the principal
(Probate Code Sections 4266, 16002, 16004), which thus bars an attorney
in fact from making gifts to him- or herself, unless the principal has
specifically authorized self-dealing in the document.
A power of attorney that permits gifting is a potent document that can
be abused. Most attorneys are aware of the dangers of broad gifting powers.
But there are some circumstances where it is not possible to meet the
objectives of the principal without providing for the power to make gifts.
A single person who wishes to qualify for Medi-Cal if her health deteriorates
in the future might, for instance, wish to permit her attorney in fact
to transfer nonexempt assets to certain individuals if she will require
long term care and could be made eligible for Medi-Cal, once she had been
properly placed in a Medi-Cal certified facility that proved to be suitable
for her needs. If the principal retained capacity, she could of course
carry out her own Medi-Cal planning. But if she suffered from the early
stages of dementia at the time she had her documents prepared, she might
well wish to provide for a time when she would no longer have capacity.
It might also be the case that she could qualify for Medi-Cal but would
have a relatively small share of cost and would want to be sure that her
exempt property could be protected from recovery in the future. In this
case, she could provide in a power of attorney, in case she no longer
has capacity in the future, for her attorney in fact to transfer her house
to her trust beneficiaries, or to the devisees of her will.
In each of these examples, the principal's power of attorney could provide
for the power to make gifts to a class of beneficiaries, or to individual
beneficiaries. Sample gifting language follows this article.
Power of Appointment
But what if the principal has named as attorney in fact one of her beneficiaries?
Most seniors do not have the luxury of having an unlimited number of persons
from which to choose an agent, and in most cases, the principal chooses
a child as agent. In some instances, the child is the sole beneficiary
of the principal's estate. By providing the agent with the power to make
a gift of the principal's property to the agent, the principal has created
a power of appointment for the agent, under Internal Revenue Code Section
2041, which defines a general power of appointment (IRC Sec. 2041(b)(1))
as a power "exercisable in favor of the decedent, his estate, his
creditors, or the creditors of his estate." Clearly, the power of
the agent to exercise a gifting provision in favor of him- or herself
would be a general power of appointment, and the consequence for the agent
is that the property over which the agent has a power of appointment is
includable in the agent's estate (section 2041(a)).
The creation of the gifting powers illustrated in the examples above
would create powers of appointment in favor of the agents, and were the
agent to predecease the principal, the full value of the property over
which the agent had been given the power to gift to him - or herself would
be subject to inclusion in the agent's taxable estate. In the case of
a power over a residence in the California Bay Area, creation of a power
of appointment could in and of itself create a taxable estate, where the
agent had no property at all prior to receiving the power.
Avoiding Tax Problems
This problem has a number of solutions. The most obvious one is to name
someone other than a beneficiary to have a special power under the power
of attorney to make the gifts. Sample language appointing a special agent
with power to make gifts follows this article. If, for example, a mother
names her only child as her agent, and if the only child is to be the
beneficiary of any future transfer of assets, then an adult grandchild
could be named to hold power as special agent with power to make gifts.
This solution is the preferred solution to avoiding the creation of a
power of appointment.
In the alternative, one can seek shelter in IRC Reg. 20.2041-3(b), which
holds that "a power exercisable only upon the occurrence during the
[agent's] lifetime of an event or contingency that did not in fact take
place or occur during such time is not a power in existence on the date
of the [agent's] death." If the power to gift is couched in suitable
conditions subsequent, and if the conditions have not occurred by the
time of the death of the agent, the property over which the agent has
power would not be includable in the agent's estate.
Samples of gifting language in powers of attorney:
A. My attorney in fact shall have the right to transfer ownership
of assets held in my name only or held jointly in my name and the name
of any other entity or person to my sons, if making such gifts would allow
me to become eligible for support from California's Medi-Cal program,
or any such successor program, or the Medicaid program of any other state,
or to allow me to avoid recovery against my estate by any such program,
if my name is removed from any assets held solely or in part by me, under
the following conditions, all of which must be met. Until all these conditions
are met, and until all documents referred to herein have been conveyed
to my attorney, the power created under this Article 1.20 shall not be
deemed to exist:
- I am a patient in long term care and my treating physician states
in writing that I will remain a patient in long term care for at least
four months, based on my medical condition as determined by that physician;
- My attorney in fact has advised in writing my attorney, ______ of
the plan to make gifts to my family members, and of all other factors
relating to my situation, and my attorney has approved of this plan in
writing and has caused to be attached to this power of attorney a document
to that effect.
I specifically authorize my attorney in fact to make gifts to himself,
should either of my sons be serving as my attorney in fact.
B. 1.21. Gifts
My attorney in fact shall have the right to transfer ownership
of my home, located at ______ Pomona, California APN 8, to my daughter
______ under the following circumstances: If I am a patient in a skilled
nursing facility and my physician states in writing that I am likely to
have to stay in the facility three months or longer, and I am eligible
for support from California's Medi-Cal program, or any such successor
program. I convey this power to my attorney in fact specially appointed
to exercise this power in order to fulfill my estate plan, which is to
convey as much as possible of my assets to my daughter.
Sample language for appointment of special agent for gift making:
I, ______ of ______, County of Los Angeles, California, as principal,
(the Principal) have this day appointed my daughter ______, of ______,
California to serve as my attorney in fact for me and in my name, place
and stead and for my use and benefit and to exercise the powers set forth
in this document. If she shall be unable or unwilling to serve or
to continue to serve I appoint the following person to serve as substitute
or successor attorney in fact:
1st alternate: My grandson ______of ______, California. My attorney
in fact is to act in my capacity to do every act that I may legally do
through an attorney in fact for my use and benefit.
I appoint ______ to carry out the powers specified in Article 1, paragraph
21 of this General Durable Power of Attorney.
Peter S. Stern, Esq., is a private practice attorney in Palo Alto.
From the December 2000 Legal Network
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