Quarterly Newsletters

September 2012: Do I Need a Power of Attorney?

What is the difference between a power of attorney and a guardianship? In one form or another, I find myself answering this question several times a week.

First of all, you have to start with the premise that all individuals over the age of eighteen are presumed to be capable of making their own decisions. Even children who are profoundly disabled and clearly incapable of making informed decisions for themselves are presumed to be capable of making their own decisions upon attaining the age of eighteen.

Secondly, no one else can make financial decisions for another person who has attained the age of eighteen unless they are the person's guardian or power of attorney agent. A wife cannot make financial decisions for her husband unless the wife is the husband's guardian or power of attorney agent. A mother cannot make financial decisions for her son unless the mother is the son's guardian or power of attorney agent.

A power of attorney and guardianship have both similarities and differences. In total, there are more differences than similarities.

A power of attorney is a document that one person, called the "principal," signs in favor of another person, called the "agent," that permits the agent to make financial decisions for the principal. An agent can only make those financial decisions that are stated in the power of attorney document.

For instance, if the power of attorney only permits the agent to access the principal's bank accounts, then that is all the agent can do. If the power of attorney is very comprehensive and permits the agent to make any financial decision that the principal could make, then the agent can make all of those financial decisions for the agent.

A power of attorney is a voluntarily document. A person does not have to sign a power of attorney. A principal can revoke the power of attorney any time he wants, and the principal must have sufficient mental capacity to sign the power of attorney.

In order to sign a power of attorney, the principal must understand the nature and consequences of his actions. He must understand who he is appointing as his agent, and he must understand the authority he is giving to the agent.

If a person cannot understand these things, then he cannot sign a power of attorney. I frequently have people come to me who cannot comprehend the nature of their actions in signing a power of attorney, so I cannot draft a power of attorney for them.

For individuals who lack mental capacity, a guardianship is the only solution that will permit another person, called the "guardian," to make decisions for them. Unlike a power of attorney, a guardianship is an involuntary action. The potential guardian files an action in court to have another person, called the "ward," declared mentally incapacitated.

A guardian makes financial decisions for his ward; however, a guardian also makes healthcare and residential decisions for the ward. Unlike a power of attorney, the ward cannot revoke the guardianship.

A guardian must account to the court and the interested parties (family members typically) on a regular basis. In most instances, a power of attorney agent does not have to account to the principal, unless the principal specifically requests an accounting.

A guardian frequently has to go back to court to ask the court's permission to engage in certain financial transactions, for instance, selling the ward's home. A power of attorney agent using a well-drafted power of attorney does not have to ask anyone's permission to engage in financial transactions.

Finally, a guardianship costs far more than a power of attorney. A well-drafted power of attorney might cost a person $200. A guardianship will cost the ward's estate anywhere from $4,000 to $7,000, depending upon the attorney the potential guardian hires to represent him. For this reason, and many others, I always recommend that a client sign a power of attorney.

LIVING TRUSTS OFFER INSURANCE

Over the years, numerous clients have asked me, "Do I need a living trust?" A living trust is often used as a Will-substitute, meaning that the trust is used as a substitute for a last will and testament. There are a great number of books that have been written on the subject of living trusts, and celebrity financial planners often tell their audiences that they should have a living trust as part of their estate plans.

These books and celebrity financial planners tell people that the primary benefit of having a living trust is the avoidance of probate. "Probate" is the process of proving the validity of a last will and testament, which is typically accomplished by submitting the Will to probate before the surrogate of the county in which the decedent died domiciled.

In New Jersey, the process of submitting a Will to probate is extremely simple and extremely inexpensive. The process takes about thirty minutes in New Jersey and costs about $150. The fact of the matter is, a living trust would cost you more than probate will cost your estate and takes a lot more time than it takes to set up a living trust properly.

This is not to say that I never use living trusts in my practice. I use living trusts quite frequently. When a client tells me that he owns real estate in another state, for instance, a condominium in Florida, I advise the client that he should have a living trust as part of his estate plan.

By titling the Florida property into the living trust, I will tell the client, his family will avoid the need to probate his Will in Florida. A person's Will must be probated in every state in which the decedent died owning real estate and in the state in which the decedent died domiciled. So, if Mr. Smith has his primary residence in New Jersey but owns a condo in Florida, his Will must be submitted to probate in New Jersey then Florida.

Probating a Will in two states can be very costly for your estate and very confusing for your executor, who may have to retain legal counsel in two states. Plus, probate in some states, such as Florida, is very expensive. Probate in Florida costs between 3% and 5% of the value of the probate property. If Mr. Smith's condo is worth $200,000, submitting his Will to probate in Florida may cost anywhere from $6,000 to $10,000. That is an expense worth avoiding, and a living trust can be an excellent tool for accomplishing this goal.

Recently, I learned of another benefit of living trusts-increasing the owner's FDIC insurance coverage for bank accounts. Many of my clients are concerned about putting too much money in any one bank because deposits that exceed $250,000 are not protected by FDIC insurance.

A living trust can increase the FDIC insurance coverage of an account. For instance, assume that Mr. Smith has $1,250,000 and four children. Mr. Smith wants to purchase a CD at High Interest Bank. High Interest Bank has a jumbo CD product that offers 2% interest, which by today's standards is pretty good. Mr. Smith wants to invest his entire $1,250,000 in a CD at High Interest Bank, but he is concerned about the CD exceeding the FDIC coverage limit.

Mr. Smith informs me of his desire, and I draft a revocable living trust for him that states he is the lifetime beneficiary of the trust and his four children will receive the monies remaining in his trust upon his death. In other words, I draft a living trust for Mr. Smith that is really just a Will-substitute.

Mr. Smith takes the living trust to High Interest Bank and opens a CD account in the name of the trust using his Social Security number as the tax identification number for the trust. Since he is the owner of the trust and there are four beneficiaries, the trust's deposits are insured up to $1,250,000-$250,000 for each of the five people (the owner, Mr. Smith, and the four beneficiaries) named in the trust.

Mr. Smith gets what he perceives to be a great interest rate, and his entire deposit is backed by the FDIC.

ANOTHER WIN FOR THE DISABLED

Recently, the United States Court of Appeal for the Third Circuit decided a very interesting and very helpful case involving what are commonly known as "special needs trusts." The case is entitled Lewis v. Alexander.

A special needs trust is one of two trusts that the federal Medicaid Act created. A special needs trust or "SNT" is a trust that permits a disabled person to continue to receive Medicaid benefits and have money in the SNT for his benefit.

A disabled person might want to create a special needs trust after he receives an award in a lawsuit. For instance, a person might be disabled because he was in a car accident. After the accident, he may sue the person who caused the accident and receive money as a result of that lawsuit. The damages award might be a few thousand dollars or a few million dollars.

Typically, if a person is the beneficiary of a trust, the assets in the trust would disqualify him from Medicaid benefits. So, without some exception to this general rule, a person cannot be the beneficiary of a trust with any significant amount of money in it and continue to receive Medicaid benefits.

Under the federal Medicaid Act, an SNT must be established for a disabled person. The SNT must be for the disabled person's sole benefit, meaning that no person other than the disabled person can receive money from the trust. To be for the sole benefit of the disabled person, the trust must also name certain entities as remainder beneficiaries.

A remainder beneficiary is the person or entity who will receive the money remaining in the trust when the disabled trust beneficiary dies. When a disabled Medicaid beneficiary dies, Medicaid wants what's left in the trust.

There are two types of special needs trusts. One trust is called a d4(A) trust and is the most common type of special needs trust. The other special needs trust is called a d(4)(C) trust or pooled special needs trust. The odd alphanumeric names come from the sections of the federal Medicaid Act that create these trusts.

A d(4)(A) trust is a trust that an individual establishes for himself. The disabled person contacts his own attorney, and his attorney drafts a d(4)(A) special needs trust just for him. A d(4)(C) trust, or pooled trust, is a trust that exists for numerous beneficiaries and is managed by a non-profit organization. The money of all the beneficiaries is pooled together for investment purposes but separate accounts are maintained for each beneficiary.

A d(4)(A) trust must name the state of New Jersey as first remainder beneficiary for all money remaining in the trust when the disabled person dies. A d(4)(C) trust must name the state of New Jersey as first remainder beneficiary but only to the extent that the money is not retained by the non-profit organization that managed the funds. In other words, the non-profit that ran the trust can retain the money and only to the extent that it does not retain the money does the money go to the state.

The Lewis case involves a Pennsylvania law that said the managing non-profit could only retain 50% of the money and the remainder had to go to the state. What the court in Lewis said was that federal law trumps state law, that the provisions of the federal law are mandatory, not permissive, and that the Pennsylvania law conflicted with and contradicted the federal law. As such, the Pennsylvania law was held to be in violation of the federal Medicaid Act.

The Lewis case is another win for the disabled. The disabled can rest assured that with proper planning they can continue to receive Medicaid benefits.

COURT OVERTURNS BAD DECISION

Recently, the United States Court of Appeals for the Tenth Circuit decided a very interesting case, entitled Morris v. Oklahoma Department of Human Services. The Morris case is interesting because it reversed the decision of an Oklahoma federal district court that the Tenth Circuit believed got an issue involving the Medicaid Act completely wrong.

It's always scary when a court gets an issue about the Medicaid Act incorrect because that incorrect decision can catch on with the various state agencies that administer Medicaid, and those state agencies can use the incorrectly-decided case as a weapon against people applying for benefits.

For instance, the decision of the district court in the Morris case recently resulted in a federal district court in Ohio deciding the same issue in the same incorrect manner. The bad ripples from the case were beginning to have an effect on distant shores and may have reached New Jersey if not stopped.

The issue in Morris involved the purchase of an annuity by the spouse of an applicant for Medicaid benefits. Mrs. Morris resided in a nursing home. Mr. Morris resided at home. The Morrises applied for Medicaid. After applying for Medicaid, Mr. Morris used assets that were in his wife's name to purchase an annuity in his name.

When a couple applies for Medicaid, all of the assets that the couple owns are pooled. Whether an asset is owned by the husband or the wife, the assets are pooled and count against the spouse who is seeking Medicaid benefits. The community spouse is then permitted to retain a certain amount of the assets.

Income is treated differently than assets. Unlike assets, income is not pooled. The husband's income is his income. The wife's income is her income.

Individuals applying for Medicaid frequently use Medicaid-complaint annuities to convert excess assets into income. Annuities, a type of investment vehicle, if structured correctly, convert assets into income.

The state agencies that administer the Medicaid program don't like this fact. The states fight this fact tooth-and-nail in the hopes of stopping the practice of individuals converting excess resources into a stream of income that belongs to the community spouse.

The Morris case involves one attempt that a state made to try and stop the use of annuities. When Mr. Morris used assets that were in his wife's name to purchase an annuity in his name, the state of Oklahoma cried foul. The state used a provision of the Medicaid Act that appears to contradict another provision of the Medicaid and denied benefits to Mrs. Morris.

The Medicaid Act permits spouses to transfer unlimited assets to one another without punishment. The reason for this is simple, since assets of a couple are pooled for purposes of determining eligibility, it is irrelevant if one spouse transfers her assets to the other spouse because that transfer has no affect on eligibility.

Yet, there is another provision of the Medicaid Act that to the uninitiated, or perhaps the over-initiated, appears to contradict the clear meaning of this rule. This provision says that the spouse applying for Medicaid benefits can only transfer those assets that the Medicaid Act permits him to retain after eligibility has been established for his wife. Significantly, the provision states that it applies to transfer that occur after the date eligibility is determined.

In Morris, the district court ignored the language limiting the section to transfers that occur after eligibility is determined. The Tenth Circuit, however, thought that language was quite important. Essentially, what the court said is that Mrs. Morris was free to transfer assets to Mr. Morris before her eligibility was determined and that Mr. Morris was free to use that money to purchase an annuity in his name.

DO YOU HAVE TO SIGN YOUR WILL?

Last week, the Superior Court of New Jersey, Appellate Division, decided a case that pushes the boundaries of what constitutes a person's last will and testament a bit further. The case involves the purported last will and testament of an estate planning attorney, Richard D. Ehrlich, who died in 2009.

Mr. Ehrlich drafted his own "Will." His Will is fourteen pages long and is typed on the legal paper of his law office. On each page of the Will, in the margin, is the name of his law practice.

Mr. Ehrlich mailed the Will to the person he named as executor of the Will and spoke about the terms of the Will with various people on several different occasions before his death. He did not, however, sign the Will.

Under our statutes, a person's last will and testament must be signed with a certain amount of formality. To be a "self-proving Will," the Will must be signed by the "testator," the person making the Will, in the presence of two witnesses and a notary. All of these individuals must sign the Will, and the Will must contain specific language that the testator was of sound mind and signed the Will without being influenced.

The benefit of dying with a self-proving Will is that your family does not have to prove the validity of the Will. They don't have to prove that the signature on the Will is yours. The Will can be admitted to probate without any evidence at all. Your executor can simply go to the surrogate's office with the original Will and an original death certificate and have your Will admitted to probate in a matter of minutes.

Even a Will that fails to meet the formal requirements of a self-proving Will can be a Will. A typed-Will that the testator has signed in the presence of two witnesses still meets the formal requirement of being a Will and can be admitted to probate if one of the witnesses attests to the validity of the signatures. If a witness cannot be located, then any individual with knowledge of the testator's and witness' signatures can attest to the validity of the signatures.

And even if a Will isn't witnessed by any person, it can still be a holographic Will. To be a holographic Will, the testator must sign the Will and the material parts of the Will must be in the testator's handwriting. In other words, a holographic Will cannot be typed. The material parts must be in the testator's handwriting, and a holographic Will must be signed by the testator.

The fact that the testator must have signed the Will might seem like commonsense to any of us. How could a document be considered a person's a Will if the person never took the time to even sign the document?

Well, in 2005, the New Jersey Legislature changed our probate code, the statutes governing what does and does not constitute a Will. Those changes added a section to the probate code that deals with writings intended to be a Will. A document can be a writing intended to be a Will even if the document fails to comply in many respects with the formalities of a Will.

In the Ehrlich matter, the Appellate Division held that the Will does not have to be signed in order to be a writing intended to be a Will and, therefore, admitted to probate as a Will. There were three judges on the Ehrlich panel, and one of those judges filed a dissenting opinion.

An appellate division judge filing a dissenting opinion is a bit rare. It gives the losing party to the litigation the right to appeal the matter to the Supreme Court of New Jersey. So, it is highly likely that the losing parties in the Ehrlich matter will appeal the case to the New Jersey Supreme Court and that in the coming years we will have a decision by our highest court on this issue.

In my opinion, it is a bit scary when we admit unsigned documents to probate as a person's last will and testament. Wills have the potential of controlling who receives a lot of money, sometimes millions of dollars. Absent very strong evidence, I think a person should, at a minimum, be required to take the time to sign the document that is supposedly his Will.