Basic Estate Planning and Drafting (Chapter 3 of Michigan Basic Practice Handbook)
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Chapter 3: Basic Estate Planning and Drafting
John H. Martin, Warner Norcross + Judd; Frank E. Henke, Warner Norcross + Judd
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CONTENTS
Overview
Selecting the Estate Plan
Drafting Wills and Testamentary Trusts
Drafting Inter Vivos Trusts
Health Care Directives
HIPAA and Confidential Medical Information

VI.   Durable Powers of Attorney

A. In General

§3.63   Estate planning tends to focus on the management of a person’s affairs after his or her death, through a will or trust, or during disability, through an agent with a power of attorney. Unfortunately, the power of attorney, as developed under common law, clearly terminates when the principal becomes incompetent as well as on the principal’s death. Thus, from an estate planning perspective, the ordinary power of attorney becomes useless just when it is most needed.

Michigan statutory law has slightly less stringent rules than the common law for terminating the authority of a power of attorney on the principal’s incompetence or disability. MCL 700.5504 provides that the authority is not terminated until the agent receives actual notice of the principal’s death, disability, or incompetence. Although this rule validates actions taken by an agent in good faith and without knowledge of an event that would otherwise terminate the authority, it still does little to provide a mechanism for managing the affairs of a disabled person.

Fortunately, Michigan, like many other states, has adopted the concept of a durable power of attorney, similar to that expressed in the Uniform Probate Code:

A durable power of attorney is a power of attorney by which a principal designates another as the principal’s attorney in fact in a writing that contains the words “This power of attorney is not affected by the principal’s subsequent disability or incapacity, or by the lapse of time”, or “This power of attorney is effective upon the disability or incapacity of the principal”, or similar words showing the principal’s intent that the authority conferred is exercisable notwithstanding the principal’s subsequent disability or incapacity and, unless the power states a termination time, notwithstanding the lapse of time since the execution of the instrument.

MCL 700.5501(1).

An act done by an attorney in fact under a durable power of attorney during a period of disability or incapacity of the principal has the same effect and inures to the benefit of and binds the principal and the principal’s successors in interest as if the principal were competent and not disabled. Unless the instrument states a termination time, the power is exercisable notwithstanding the lapse of time since the execution of the instrument. A durable power of attorney that authorizes the agent to convey or otherwise exercise power over real estate does not need to contain the real estate’s legal description.

MCL 700.5502.

This statutory revision of common law permits the authority of the agent to continue even when the principal is incompetent or otherwise disabled and the agent knows of that fact. Thus, the durable power provides a mechanism for managing the affairs of a living person who becomes incompetent. The durable power, however, terminates when the principal’s death becomes known to the agent.

B. Use of a Durable Power

§3.64   Before the advent of durable powers of attorney, only guardians and conservators managed the affairs of disabled persons. Those roles, however, are statutory in nature and require court appointment and supervision. This can mean delay, significant expense, and a public procedure that is often humiliating both for the disabled person and his or her family.

The durable power of attorney offers an alternative to judicial guardianship and conservatorship. A person can anticipate the possibility of incompetence or other disability and provide an efficient, private, out-of-court mechanism for dealing with his or her affairs. Advance planning, however, is crucial. Once disability has occurred, it is too late for the person to sign a durable power. Most people probably do not anticipate disability, nor do they realize that they can make arrangements to have their affairs handled during disability. Consequently, you, as the estate planner, have an opportunity to counsel clients about the problems attendant on a disability. This topic can and should be part of estate planning.

C. Effective on Execution or Disability

§3.65   The agent’s authority can either take effect (1) immediately after the written durable power is signed or (2) only on the principal’s disability. Form 3.7 provides alternative language to create either type of document. If the client is aged or infirm, immediate authority is usually advantageous. On the other hand, if the person (the principal) is preparing and signing a durable power only to plan for a potential event of disability, he or she may be reluctant to authorize another to act presently, wanting to retain full control over his or her affairs. If the power is effective immediately, the agent could act and bind the principal without the latter’s knowledge or consent. That danger exists no matter how apparently trustworthy the agent may be. Therefore, the client may prefer to sign a durable power that is effective only on disability.

Although there are dangers associated with a power that is effective immediately, there are also advantages. A primary advantage is that an immediately effective durable power eliminates the need to produce evidence that the agent’s authority has been triggered. When the power is to be effective only on disability, it is necessary to demonstrate that the disability has occurred for the agent to convince third parties that he or she may act. This step can take time and may be inconvenient as well. Because of this triggering mechanism, the power of attorney with delayed effectiveness often is called a springing power.

If you prepare a springing power for your client, you will need to anticipate the problem of showing that the principal is disabled and create a method to clearly demonstrate that the agent is authorized to act. For example, the power of attorney could state that the principal would be considered disabled on a court determination or the written certification of a licensed physician. See the second alternative for paragraph 7 of form 3.7. Written certificates are the preferred route because a primary objective of a durable power is to avoid the expense and delay of court proceedings. Third parties generally will recognize the agent’s authority when it is established by a doctor’s written certificate. With a workable method for demonstrating incapacity, a power of attorney that becomes effective at a later time may be an attractive alternative to a power of attorney that is effective at execution.

As an additional alternative to the traditional “effective immediately” and “effective only upon disability” variations, in appropriate circumstances, consider a hybrid authorization in which the primary agent is authorized to act effective immediately, but one or more successor agents are authorized to act only after the principal’s disability. The alternate versions of section 1 in form 3.7 can be modified to accomplish this result. The hybrid arrangement is particularly suitable when the principal has complete confidence in, and is willing to have financial information disclosed to, the primary agent (perhaps a spouse of many years), but a lesser degree of comfort or experience with the successor agents (perhaps children or siblings who have had limited involvement with the principal’s finances).

D. Selecting the Agent

§3.66   Any competent adult may act as an agent for another person. Institutions may also act as agents. Most banks with fiduciary powers will agree to act as agents under a durable power. Choosing an agent, like choosing a personal representative or trustee, involves practical considerations. One consideration is the agent’s proximity to the principal. The agent may need to make bank deposits, pay bills, arrange for the physical care of both the principal and the principal’s property, and engage in other transactions that make the agent’s physical presence extremely desirable. In many instances, the need for close proximity leads a principal to name a financial institution as agent because family members are geographically distant and scattered.

Another consideration is the extent of the agent’s authority. The agent can be authorized to conduct virtually all of the principal’s affairs. If such broad authority is contemplated, the agent should be a person or an institution in which the principal has the utmost confidence and trust. Theoretically, if a limited authorization is to be used, a lesser degree of trust and confidence might be permissible.

Because a disability may prevent a named agent from being able to serve and because the named agent’s medical information is protected under HIPAA, an individual named as agent should provide an authorization permitting the disclosure of health care information for the limited purpose of determining the agent’s ability to serve. An example of this type of authorization is included as form 3.4. For further discussion of estate planning issues related to HIPAA, see §§3.70–3.72.

E. The Agent’s Powers

1. Nature of Authority

§3.67   The agent is subject to the principal’s control and supervision. Although the principal-agent relationship is primarily contractual in nature, in the context of planning for the management of a person’s affairs during disability, the fiduciary relationship is as important as the contractual one. EPIC authorizes the conservator to revoke or amend the power of attorney. The statute also states that the agent “is accountable to the fiduciary as well as to the principal.” MCL 700.5503(1). This reference suggests that the legislature intended the relationship under a durable power to be a fiduciary one. The power of attorney, however, should state explicitly that the agent is to act as a fiduciary and solely in the principal’s best interest.

As a result of 2012 PA 141, MCL 700.5501 has been expanded to provide additional guidance regarding the required formalities for executing a durable power of attorney, the duties of the agent, the standard of care to which the agent will be held, and certain acts of the agent that are prohibited unless specifically authorized in the durable power of attorney. These changes apply to most durable powers of attorney executed after September 30, 2012. Unless one of the enumerated exceptions apply, MCL 700.5501(2) will require that a durable power of attorney be (1) signed by two witnesses (neither of whom is the agent) who were present when the principal signed the document or (2) acknowledged by a notary public. Similarly, the revised statute will prohibit the agent from making gifts of the principal’s assets or from creating joint accounts or joint tenancies between the principal and the agent unless specifically authorized in the durable power of attorney or by judicial order. MCL 700.5501(3). Finally, newly added MCL 700.5501(4) describes the form and content of an acceptance that the agent will be required to sign before acting.

In general, the authority of an agent is strictly construed. Therefore, you should anticipate the various types of specific authority that the agent might require. If the agent selected is trustworthy and someone in whom the principal has full confidence, it might be appropriate to give the agent the broadest possible authority. In essence, the principal can state that the agent has “full authority to deal with my property and affairs as fully as I might or could if personally present.” Third parties, however, usually have difficulty visualizing all of the powers that this statement encompasses and will often want to see that a particular transaction is authorized specifically. Therefore, you should also give a comprehensive list of the common types of transactions that fall within the scope of authority as well as a general grant of broad authority. The following are some specific powers found in form 3.7, which may be modified or omitted, depending on the circumstances and the client’s preferences.

  • The agent may delegate authority to another. Very often such flexibility is desirable.
  • The agent may transfer assets to the trustee of a trust the principal established for the principal’s own benefit. If separately owned property may be added to a trust, the trust might be a better vehicle for ongoing management. Such a transfer also will avoid the need for probate proceedings when the principal dies.
  • The agent may file the principal’s tax returns and represent the principal in dealings with the IRS.
  • The agent may initiate and conduct litigation on the principal’s behalf.
  • The agent may make gifts. This power, as drafted in form 3.7, is restricted by the requirement that there is a court finding that the gifts are consistent with the principal’s desires and will not jeopardize the principal’s security. Some clients may be comfortable permitting an agent to make gifts within the annual exclusion amount of IRC 2503(b) to a specified class of recipients without a court order. A durable power of attorney could also permit the agent to make direct payment of tuition and medical expenses as contemplated by IRC 2503(e).

You will also encounter situations in which the agent’s authority should be tailored to fit a unique need. An example is a client who owns and operates a business as a proprietor or general partner. Powers of attorney might grant the authority to continue the business, to borrow funds, to dispose of assets, or to incorporate the business. The planning in these instances may need to be as comprehensive as the planning for the testamentary disposition of property.

The actions of an agent under a durable power of attorney are not revoked by the death of the principal when the agent has completed all actions necessary for the transaction before the principal’s death and all that remains is completion of the transfer by a third party. Capuzzi v Fisher, 470 Mich 399, 684 NW2d 677 (2004).

2. Limitations on Authority

§3.68   Although it is advantageous to grant broad authority to the agent, you might want to impose some limitations on his or her authority. For example, it seems appropriate to forbid the agent to make a will, codicil, or any will substitute for the principal. Likewise, the agent might be forbidden to make any changes in the designation of beneficiaries under life insurance policies. In addition, if you do not want the agent to have the ability to make gifts, an explicit restriction on making gifts would remove the danger of an incorrect interpretation of the agent’s authority (but note the specific prohibition of MCL 700.5501(3)(d), which may make such an explicit restriction in the document unnecessary).

The broad authority granted to an agent could be construed as a general power of appointment and could lead to tax problems for the agent during his or her lifetime or for the agent’s estate at death. For example, unrestricted power over income could result in the agent being taxed under IRC 678. The agent’s ability to make transfers of assets could be construed as the ability to give the property to himself or herself under a general power of appointment. As a result, all of the principal’s assets could be included in a deceased agent’s gross estate. Such an attenuated result should be negated by a clear statement in the durable power that the agent is serving only in a fiduciary capacity. If additional protection is desired, the durable power could include language restricting the agent’s ability to appoint to himself or herself.

F. Facilitating Transactions with Third Parties

§3.69   Unless third parties accept the durable power and follow the agent’s instructions, the power of attorney is ineffectual. If third parties can be convinced that there is little or no risk in dealing with the agent, the agent will probably be able to transact the necessary business. For that reason, the durable power should include language directing third parties to rely on all representations of the agent. The provision might stipulate further that reliance on the agent’s representations will cause third parties no liability and that if any such liability does arise, it will be discharged by the principal.

The agent may wish to be protected by an indemnification provision in the power of attorney. Often, the agent will be acting without compensation and will want to know that no liability will ensue if he or she has acted in good faith and with as much care and reasonableness as possible. Therefore, you might include an indemnification provision in the power of attorney.

Two other steps can facilitate transactions by the agent. The first is to have the power of attorney executed in recordable form because transactions involving real estate must become a matter of public record. The authority of the agent may not be recorded unless the execution by the principal is acknowledged by a notary public and otherwise complies with the statutory recording requirements. See MCL 565.201. The second is to state that reproductions of the original power of attorney are as acceptable as an original power of attorney. It is usually difficult for principals, who might be aged or disabled, to sign a sufficient number of originals. Therefore, reproductions must be acceptable to third parties. Stating that the reproductions are as acceptable as the original may help persuade the recipient that they are, indeed, valid.

Forms and Exhibits

Form 3.01 Estate Planning Client Information Record (Married Couple)
Form 3.02 Revocable Trust for Married Individual
Form 3.03 Simple Will (with Alternate Pourover Provisions)
Form 3.04 Authorization to Release Medical Information Protected by HIPAA (Fiduciary)
Form 3.05 Certificate of Trust Existence and Authority Signed by Settlor
Form 3.06 Designation of Patient Advocate -- Short Form Including General Living Will Guidelines
Form 3.07 Durable Power of Attorney Regarding Property and Financial Matters (Effective Immediately or on Disability)
Form 3.08 Authorization to Release Medical Information Protected by HIPAA (Client)

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