Durable Powers of Attorney: Traps for the Unwary

Much of my practice involves assisting clients in settling the estate of a deceased loved one. I am sometimes hired to handle lawsuits involving estates, trusts, and claims of self-dealing by those in charge of a person=s estate assets. Even more of my time is spent advising clients in the planning of their estates and deciding who will receive their estate and equally as important, who they will choose to manage their affairs in their declining years. This is embodied in the decision by the elder granting someone, often an adult child, a power of attorney. As a holder of the elder=s power of attorney, that adult child of the elder becomes the elder’s agent (or, as I have referred to in this article, an agent-holder).

Powers of attorney are “durable” if the document states that it will not be affected by the future mental disability of the grantor. This means that the authority granted under the document a survives@ even if the grantor loses his or her mental faculties. Powers of attorney can take effect immediately, or can be a springing i.e. “spring” into effect upon the happening of a certain event. The “event” is often stated as the written opinion of one or more than one physician giving an opinion that the elder is no longer capable of handling their own financial affairs. Springing powers of attorney might seem more attractive in concept, since they lie dormant until needed, although there can be practical problems faced by an agent-holder when they seek to use such a document. This is because a bank or investment house might require varying degrees of additional documentation to prove that the “trigger” which allows the power of attorney to “spring” into effect, making the document useable.

Much has been written about the extent of the powers granted under a power of attorney. In a few states, holders of powers of attorney granted by elders are deemed automatically to grant certain “powers”, such as the authority of the agent to create a trust, make gifts and to pay themselves compensation. The general rule, however, in Massachusetts and most states is to the contrary. Unless specifically authorized in the document, the agent-holder of a power of attorney cannot assume they have implied authority or “power” to perform certain acts unless specifically stated in that document.

This was the case in Treat v. Executive Office of Health and Human Services, 76 Mass App 1121 (2010), where the Mass Appeals Court examined the use of a power of attorney to pay the agent-holder of a power of attorney for services claimed to be performed by the agent. The Court held that since the power of attorney document did not authorize compensation for the holder, then none could have been lawfully paid. The rule set out in Treat was consistent the long standing rule of law in Massachusetts that a power of attorney must be strictly construed and interpreted Wood v. Goodridge, 60 Mass. 117, 6 Cush. 117 (1850), Hoyt v. Jaques, 129 Mass. 286 (1880), and Williams v. Dugan, 217 Mass. 526 (1914). There is also a long-standing tax case ruling that a holder-agent of a power of attorney has no implied authority to make gifts of the grantor=s money to others (including himself) Estate of Casey v. Commissioner, 948 F.2d 895 (4th Cir. 1991). Similarly, in Goldstein v. Page, 78 Mass App 1113 (2010), the Appeals Court ruled that there was no language in the POA in that case expressly authorizing the making of gifts, and held the gifts made there were illegal transfers. Making gifts can often be a useful estate planning tool to reduce the size of an elder=s estate, which in turn reduces potential estate taxes when the elder dies. A properly drawn POA usually includes that power.

This long-standing legal principle puts the agent-holder of a power of attorney in a delicate and seemingly contradictory position. I have found that some clients over the years have the impression that the granting of a power of attorney to a relative, gives that relative expansive sometimes absolute rights and powers over the elder=s assets, while legally, the opposite may be the case.

The lesson, of course, is that it all depends upon how your power of attorney is worded. In most cases of course, the elder signing a power of attorney will want to give his/her holder-agent as much authority as possible in case the elder becomes seriously ill or loses their mental faculties.

Sadly, an inadvertent omission in a power of attorney document cannot be corrected if the elder becomes mentally incompetent. A legally incompetent person cannot create any legally binding documents, so from that point of view, it might be more prudent to make a power of attorney document as expansive as possible. Having said that, what about concerns that a power of attorney document may be too broad and the agent-holder may misuse their power?

The answer is that an agent holding an elder=s power of attorney has “fiduciary” responsibilities. Fiduciaries, for example, cannot legally perform any act in that role that would favor themselves at the expense of the elder. In fact, if a fiduciary is accused of undue influence or self-dealing, they have a heightened legal burden of proving the absence of wrongdoing. They must thus “prove a negative”, which is a difficult, even if not an impossible task. In the cases I have litigated, this legal principle has been a formidable legal weapon against a dishonest fiduciary.

In all cases, the best way to avoid inter-family conflict and litigation involving a power of attorney is, of course, full disclosure of information by the agent-holder and periodic consultation among all interested parties, even if this is technically not legally required. Thoughtful estate planning can also curtail potential disputes before they boil over into a formal dispute. Of course, if hostilities are open, raging, and beyond healing by simple discussion, then it is time to seek the shelter of competent legal advice.

My law practice continues to grow in the areas of estate administration & settlement, estate planning, tax planning, and estate and “fiduciary” litigation. I also represent clients in all types of real estate transactions and contract matters, as well as criminal, personal injury, and business litigation. My office at 5 Militia Drive in Lexington is a bright, attractive, first floor location with plenty of free parking. I invite you to visit my firm’s updated web site at http://www.georgefootepc.com/; you can also contact me electronically at georgefoote@rcn.com. You might also enjoy reading my Law Information Blog at http://www.georgefootepcblog.com/. If you know someone in need of legal services, I hope you will recommend me to them. This letter is one of the few “advertisements” I use, as I rely primarily upon recommendations from clients. Thank you for the referrals you have provided in 2013 and I wish you and yours good health, good times, and peace in 2014.
—— George E. Foote, J.D., L.L.M. in Taxation

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Year-End Gift-Giving Considerations

I frequently recommend to clients that they can always reduce the size of their taxable estate by making gifts, as long as this would not reduce their family balance sheet to a point which makes paying for day-to-day living uncomfortable. The main advantage to this is that there is a current Federal gift tax exemption that exceeds the size of most estimated estates of citizens in this country. In addition, because there is no Massachusetts gift tax, every gift made will reduce the size of your potential Massachusetts estate, without any Federal consequences, if you fall into the majority of families whose combined estate is below the Federal lifetime exemption as set below.

The increase in the Federal lifetime gift and estate tax exemption was made possible by the American Taxpayer Relief Act of 2012 (“ATRA 2012”). For the first time in approximately 11 years, clients do not have to plan with imminent change on the horizon. Until as of about a year ago, for more than a decade clients and estate planners had to live with the uncertainty of whether the estate tax would ultimately be repealed. After the 2012 legislation, most commentators now believe that full repeal of the Federal Estate Tax is no longer anticipated.

Here is an outline of the new status quo with regard to estate and gift taxes:

• The estate and gift applicable exclusion amounts and the generation skipping transfer (GST) exemption amount (the “applicable exclusion amounts”) remains at $5,000,000, indexed for inflation.
• The applicable exclusion amount for 2013 is $5,250,000.
• The “portability” of a deceased spouse’s unused applicable exclusion amount for estate and gift tax purposes has also been made permanent. Note that portability does not apply to the applicable exclusion amount from GST tax.
• The maximum rate for estate, gift and GST taxes increased from 35% to 40%.
• Though unrelated to ATRA 2012, the amount of the annual gift tax exclusion increased from $13,000 per donee in 2012 to $14,000 per donee in 2013. Thus, a husband and wife together is able to gift $28,000 to each donee in 2013 (without filing a gift tax return). This is true even though the gift originates only from one spouse.

There is still several weeks left in 2013, so clients who are intending gifts should waste no time in completing gifts for New Years day.

There is no change in the Massachusetts estate tax. That is still triggered at a lower threshold ($1,000,000.00 starting in 2006 and beyond). This is why every gift made will reduce the size of a potential Massachusetts estate, without any Federal consequences. Happy holidays and enjoy the pleasure of making your year-end gifts.

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Difficult Year-End Tax Decisions for 2012

I again take this opportunity to send holiday greetings and to offer estate planning information. These days everyone is discussing the “fiscal cliff” and the apparent inability of the U.S. Congress to prevent a wholesale slew of budget cuts and tax increases that some experts say could jolt the economy into another recession. In Congressional history, very few logjams have actually created the disaster feared. Congress has almost always found a way to reach a compromise, however uninspiring, which saves us from potential economic disaster.
Some of the concern surrounds the Federal Estate Tax and its scheduled reversion to a $1 million taxable threshold on January 1, 2013, if Congress fails to act. Many estate planners believe, me included, that Congress will save us from a jarring increase in the Federal Estate Tax. Even the President’s plan recommends no less than a $3.5 million taxable threshold. His willingness to negotiate the threshold is seen in the last major estate tax legislation on December 17, 2010, when the threshold rose from $3.5 million to $5 million. The Federal estate tax simply does not produce that much revenue, having been gutted by more than thirty years of successive changes which weakened its tax bite. It is possible that Congress may wait beyond the January 1, 2013 date to enact new changes, if only so that the new Congress can boast to its constituents that they have been effective in “lowering taxes” (a boast made possible solely by their inaction in 2012). Since any Federal Estate tax return would be due only as of nine (9) months following the date of death, it is entirely possible that Congress could wait as long as until August 31, 2013 to make any final changes to this!
Apart from possible tax increases arising out of the eventual resolution of the “fiscal cliff”, taxpayers earning more than $200,000 (i.e. adjusted gross income –“MAGI”), and married couples filing jointly with more than $250,000 will be subject to the Obama Care surtax, effective as of 2013. The 3.8 percent tax applies investment income (dividends and capital gains), but only to the extent it would exceed the $200,000 ($250,000) MAGI level.
Conventional end-of-year tax wisdom has always been to offset any gains by selling investments that would produce a capital loss. This way, net gains are reduced, and capital gains taxes would be lower. Second, consider gifting investments that gone up in value to charity, including your religious congregation, if you have one. You get a deduction for the full amount of the stock, even though you have never “cashed-in” by selling the stock first.
But do the Obama Care surtax and the possibility of “fiscal cliff” tax increases turn that strategy on its head? In other words, might it be better to “save” your tax-savings strategies for use in 2013, when tax rates will be higher and there will be a surtax to contend with (if you earn over the threshold)? If you are a pessimist and “save” your strategies for 2013, you may wish you hadn’t, if Congress sets a higher rate threshold at a point lower than what you will make in 2013. I regret to say my crystal ball does not say which way the tax winds will blow.

My law practice continues to grow in the areas of estate administration and settlement, estate planning, taxation, and estate litigation. I also represent clients in all types of real estate transactions, mortgage financing and contract matters, as well as criminal, personal injury, and business litigation. My 5 Militia Drive office in Lexington is a bright, 1st floor location with plenty of free parking. Please visit my firm’s web site at http://www.georgefootepc.com; you will find useful information there, such as my “Estate Information Check List” which I recommend all clients use to inventory their investments to get a better picture of what their estate is worth. You can also contact me at georgefoote@rcn.com. This is one of the few “advertisements” I use, as I rely primarily upon recommendations from clients. Thank you for the referrals you have provided in 2012 and I wish you good health, good times, and peace in 2013.

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January 2, 2012 the new Massachusetts Uniform Probate Code (MUPC) takes effect

Season’s Greetings from the Law Office of George E. Foote, P.C.

I again take this opportunity to send holiday greetings and to offer estate planning information. Most estate planners adhere to the prevailing wisdom that it is generally a good idea to “avoid probate”, and trusts are often the tool utilized to accomplish this goal. Despite this advice, this goal cannot always be accomplished. Assets are often forgotten or omitted from trusts and left in a person’s sole name. Clients with modest estates often hold their property in joint names because the survivor receives full control of joint property when the first joint owner dies. But jointly held property is subject to probate upon the death of the last joint owner. Heavy reliance upon joint ownership for an estate plan will thus make it more likely that probating an estate through the Probate & Family Court will be required.

January 2, 2012 will usher in significant changes in the procedures required to probate an estate in Massachusetts. This is the date the new Massachusetts Uniform Probate Code (MUPC) takes effect. The new system notably makes it easier to close an estate. Thus, a formal “Final Account” is required to exempt the executor from future liability. Under current law, without a “Final Account”, an executor is vulnerable to allegations from heirs that his/her estate obligations have been handled improperly or are incomplete. Under the MUPC, an estate can now be closed “informally”, which does not require a detailed specification of all assets, income and expenses. Sometimes requiring an executor to provide such detail might be a good idea, but with many estates, families are in complete cooperation and there is no controversy. For these estates, the option to close an estate informally will be welcome.

Of course, even though many of these new rules are designed to streamline the probate process, some experts are already disagreeing how the new rules will be applied. In addition, estates commenced under the old system, if not closed prior to June 30, 2012, must be re-filed in some fashion using the new MUPC forms. The resulting confusion, at least during the first several years of the new MUPC should cause clients to at least consider holding all their property in Trust, if only to avoid this confusion. Creating a trust was once thought of a process only sought by “rich people”. In the 21st century, however, even people of modest means would benefit from using a trust as the foundation of their estate plan. For example, whether under the new MUPC system or the former system, having a will, but no trust, requires probating an estate. This makes a client’s private assets public. Holding a whole estate in trust can ensure that a family’s net worth will be kept private and not put on public display. In addition to being open to public inspection, the probate process requires formal notice to all next of kin, whether or not they are named beneficiaries under a Will. When an excluded heir is notified about the probate of an estate, a forum is provided to relatives to air their grievances. A democratic society, of course, benefits from such “sunshine”. On the other hand, disgruntled heirs do not always have something productive or helpful to say, and the probate system, whether under existing law or new MUPC, can be manipulated to frustrate the wishes of the decedent.

Creating a trust, drafted with thoughtful statements concerning a decedent’s intentions, can address anticipated objections of obstreperous heirs, but not require a legal forum where the administration of an estate can be brought to a gridlock. Legal remedies always exist to prevent abuses, but the forum is not automatic, as it is when a Will is submitted to probate. Avoiding probate by using a trust is a preferable option.

My law practice continues to grow in the areas of estate administration and settlement, estate planning, taxation, and estate litigation. I also represent clients in all types of real estate transactions, mortgage financing and contract matters, as well as criminal, personal injury, and business litigation. My 5 Militia Drive office in Lexington is a bright, 1st floor location with plenty of free parking. Please visit my firm’s web site at http://www.georgefootepc.com; you can also contact me at georgefoote@rcn.com. This is one of the few “advertisements” I use, as I rely primarily upon recommendations from clients. Thank you for the referrals you have provided in 2011 and I wish you good health, good times, and peace in 2012.
—— George E. Foote, J.D., L.L.M. in Taxation

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Meet Guest Blogger, Don Lovering, Licensed Home Inspector

I am pleased this week to host a guest blogger at my Law Information blog. Don Lovering is a licensed building inspector in Massachusetts, is a past president of ASHI, the American Society of Home Inspectors, and is also currently an adjunct professor at Salem State College in Massachusetts. Don and I have worked together in many real estate transactions, where he has performed inspections of homes my clients have contracted to purchase, and almost always has saved them a lot of money and aggravation. I hope you all find Don’s article interesting and helpful:
Have a wet basement?
Consider the recently published story of homeowner Lee Johndrow, a NH clergyman. About 3 years ago, he and his wife decided to update their home to accommodate visits by their children and grandchildren. During the course of the work, the general contractor made a significant error causing the home to flood. For three months, Lee and his wife pumped water out of the basement of their house. It was a seemingly never ending replenished supply of outside water seepage. They lost furniture, photographs and other memorabilia. Their final indignation was a now never ending supply of mold growing in what has become a skeleton of what was once their home.
Lawyers were employed and 3 insurance companies were summoned. Finally, the Johndrows moved to an outdated RV attempting to “get on with life”. They do not have the company of their children or grandchildren in their home as was their original plan. When this winter arrives, they will be once again looking for heated shelter from the elements.
So what went wrong? The contractor apparently lacked the experience to complete the work in a workmanlike manner. The Johndrows never employed an independent inspector to protect their interests.
Whoa! You say. We pay Town Building Inspectors to do that work, don’t we? Unfortunately, capping a growing trend which has been underway for many years, almost every town building inspector I have met is grossly overworked and underpaid. Even in the smallest of communities, a range of between 60 and 100 permits are open on a daily basis. Two municipal inspectors working at lightning speed could not effectively review 60 projects requiring at least 5 visits before the project is complete plus do all the paperwork, answer the phone inquiries, as well as attend building committee meetings.
This makes hiring an independent home inspector almost a necessity when undertaking a home building project. Budgeting for the cost of your own inspector, as well as an attorney to review and were advisable, to negotiate terms of your construction could save you possibly thousands of dollars, and years of grief.
Here are just a few examples of my experiences where hiring a private building inspector earlier might have saved my clients money and aggravation:

o Mrs.”Smith” had the electrician over to repair the dimming lights 4 times and paid out $3700.00 in repairs. The problem was the power transformer at the street, the utility company replaced it and the flickering lights went away. Come to think of it, the electrician did the same. The test was a simple one which I had performed and had it been done early on Mr. and Mrs. ”Smith” would have been $3700.00 richer.

o Mr. and Mrs. “Jones”, both young busy professionals, needed their deck “spruced up” for company. They hired a pressure washing contractor who started the work while the “Jones” were both at work. He called them at work and said that there was “a lot of rot” and that the “deck was unsafe”. The contractor told them he could replace the rotted wood starting today, “if they wanted”. Mr. “Jones” said “fine; just get it done”. While having lunch Mr. “Jones” called Mrs. “Jones” to relate the deck developments. Mrs. “Jones” reminded him that their deck had replaced 5 years ago, and why was it rotted? I got a call from them both asking if I could stop buy early the next day to have a look. I looked at the entire deck, top bottom in and out. I discovered that only a piece of trim had been replaced by the pressure washing contractor. I noticed that one board was rotted. As I was leaving, the contractor arrived and asked who was I? I said, “Just a friend”. He eyed me suspiciously. Coincidentally, because he called Mr. “Jones” at work asked for his credit card number to pay an invoice of $1756.00 for deck repairs. The deck “repair” invoice was not paid and the contractor is most likely still looking over his shoulder every day for Mr. “Jones”.

o Mrs. “Emery” wanted to move closer to her family. Her daughter had moved to North Carolina with the 3 grandchildren and Mrs. “Emery” was lonely, since her husband had passed on. Mrs. “Emery” was meticulous about her house and its upkeep. While gardening, she saw 3 loose bricks on the chimney. She asked her handyman to fix them and he said he was just too busy. Mrs. Emery found a mason on a well known listing service for contractors. The mason came out chatted with her about her flowers and her garden. He told her the repair would require a masonry building permit which was quite expensive. He also claimed that the chimney was “unsafe” and she could risk her life by turning on the heat. Mrs. “Emery” hired him on the spot. But the mason never did get any masonry permit yet still charged her $5000.00, cashed her check and disappeared. I saw the mason’s final work product. Perhaps if it was a hot day. It took him 1 hour to repair the 3 loose bricks. When the gentleman is tracked down, I will give my testimony on the time and skill level required to perform the repair.

The moral of the story, as I see it, is clear: a private building inspector is a valuable and worthwhile asset to have on your side. The cost involved is likely much less than you would think, and much less than the disasters that can be prevented. I hope I can be of assistance to George’s clients and potential clients in the future. Those interested should feel free to contact me at 617-928-1942 or at lovering@earthlink.net

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