Beware or be blindsided: avoiding estate planning pitfalls.

AuthorVanderwarker, Keri L.
PositionNew York
  1. INTRODUCTION

    Together, a power of attorney (1) and a health care proxy (2) are two of the most basic and essential estate planning documents for people of any age. (3) Unlike other planning documents, the power of attorney and health care proxy are "utilized while the client is still alive." (4) Therefore, ensuring these documents provide properly for the client's wishes is "one of the most important functions of an attorney." (5) Through the execution of these two documents, clients provide an agent with the crucial powers needed to make the most personal healthcare and property decisions for a client, (6) seeking to guard against the uncertainties of life. (7)

    But, do these documents really protect against such uncertainties? At first blush, it would seem so since that is the documents' very purpose. However, recent case law has demonstrated that the operation of these estate planning documents may not be so certain. For example, even if your irrevocable trust prohibits amendments from being made, your attorney-in-fact may be able to make amendments to it. (8) If you are your mother's attorney-in-fact and health care agent, you still may not be able to decide in which nursing home she should live. (9) If your attorney-in-fact transfers your real property to himself (10) in accordance with your express wishes, this transfer may still be questioned. (11) In addition, despite a lawyer's best efforts to meet a client's estate planning goals by using these documents, case law shows that the plan can also be thwarted by a family member's dissatisfaction. To address these situations, the lawyer may now need to anticipate the unexpected to protect the client's estate plan from unfavorable interpretations and family challenges.

    Parts II and III of this note focus on the power of attorney and health care proxy and uses case illustrations to highlight how the operation of these documents has become uncertain. Further, Part IV explores the inherent uncertainty created by third party dissatisfaction and how it can thwart the goals of an estate plan. Part V then discusses implications of these uncertainties and how they can damage the client and the attorney. Finally, Part VI closes with some recommendations on how the estate planning practitioner can predict these potential pitfalls, and eliminate or at least minimize the associated effects.

  2. POWERS OF ATTORNEY

    1. Background

      Beginning as a common law principle of agency, the power of attorney was first codified in New York in 1948 with the advent of the statutory short form power of attorney. (12) By 1975, the statutory instrument was amended in the General Obligations Law to provide for its "durability," allowing the instrument to remain in effect despite the principal's incapacity. (13) In 1996, the General Obligations Law was further amended to allow the principal to bestow gifting powers upon his attorney-in-fact. (14) The evolution from a common law principle to a statutorily defined instrument reveals the changing role and importance of the document in modern society.

      It is precisely this growing importance that led to the 2009 revisions of the power of attorney law. In 2000, the New York State Law Revision Commission (15) conducted an extensive study to explore the weaknesses in the existing law. (16) Recognizing the enhanced powers the 1996 amendments bestowed on attorneys-in-fact, the Commission noted, "the breadth of the authority granted under a power of attorney has evolved over the years far beyond those originally envisioned." (17) These amendments allowed "an agent to create trusts, change beneficiaries to a life insurance policy, and establish joint bank accounts and totten trusts." (18) In addition, the amendments permitted an agent to gift the principal's assets to another or to self-gift assets to himself, including assets such as securities, real property, bank accounts, and life insurance contracts. (19) Essentially, by executing a very simple document, a principal was granting his agent expansive powers, especially in terms of gifting, without being expressly aware of doing so. (20) After executing the document, the principal might believe the agent could act for him in routine matters when the agent had in actuality been given a free pass to alter the estate and potentially gift away the principal's assets! (21)

      As a result of the study, the Law Revision Commission successfully urged that changes be made to the power of attorney law. (22) The 2009 changes to the power of attorney law heighten both the responsibility of the agent to the principal, and the awareness of the principal as to the breadth of powers he is giving to his agent. (23) One significant change in terms of the principal's awareness is the Statutory Gifts Rider, which requires the principal to execute a separate, supplemental document to the power of attorney so that the principal specifically considers the gifting powers to be given to the agent, including the ability to self-gift. (24) The statutory short form power of attorney also expanded upon the "Caution to the Principal" provision, providing a precise warning to the principal about the power of the document and the associated consequences. (25)

      The 2009 changes also affect the agent and interested third parties. The "Important Information for the Agent" explains to the agent his role as the principal's fiduciary and the limitations on his authority as agent. (26) An expanded definition of "financial institution[s]" is enumerated in the updated law, and requires such institutions to accept a validly executed power of attorney. (27)

      Essentially, these revisions to the power of attorney law sought to fill in where the prior law was silent or ambiguous in order to clarify the document's powers. (28) These extensive clarifications "reflect [] the evolution of the power of attorney into an instrument to accomplish complex financial and estate planning" (29) and thus provide a clear picture to the principal, agent, and (if involved) attorney of what is and is not allowed under the document. Such clarity in the operation of the document is of paramount importance, (30) especially given the popularity and wide use of the document. (31) This is especially true for the drafting attorney, who is charged with ensuring that a client's power of attorney provides the client's agent with the powers the client desires, while also ensuring that the agent is not given powers the client does not want the agent to have. (32)

      Unfortunately, despite these efforts at clarity, a recent case has demonstrated that some ambiguity remains. This 2012 case, Perosi u. LiGreci, (33) illustrates not only that the actual powers an attorney-in-fact may have under the power of attorney are still not clear, but also that there is not a clear consensus among the courts about the extent of these powers. (34) The practical result is that the attorney must now anticipate and guard against such uncertainties. (35)

    2. Case Illustration: Perosi v. LiGreci

      "Nicholas LiGreci created an irrevocable trust in 1991." (36) The trust agreement explicitly stated that the trust "shall be irrevocable and shall not be subject to any alteration or amendment." (37) The respondent and brother of the settlor, John T. LiGreci, was named trustee and the settlor's accountant, Jack A. DeSantis, was named successor trustee. (38) Upon Nicholas LiGreci's death, the trust proceeds were to be evenly distributed to his three children. (39)

      In April 2010, Nicholas LiGreci executed a New York Statutory Short Form Power of Attorney naming Linda Perosi, his daughter, as agent and naming her son and his grandson, Nicholas A. Perosi, as successor agent. (40) The document provided Linda full authority to act on his behalf. (41) Nicholas LiGreci executed a Statutory Gifts Rider, enabling his agent to make major gifts and to self-gift. (42)

      Fifteen days before the death of Nicholas LiGreci, Linda Perosi executed an amendment to Nicholas LiGreci's irrevocable trust as Mr. LiGreci's attorney-in-fact. (43) The amendment removed John T. LiGreci and Jack A. DeSantis from their respective roles as trustees and in their place appointed Linda's son, Nicholas A. LiGreci, as trustee and Ericalee Burns as successor trustee. (44) Though all three beneficiaries (Linda and her two brothers) consented to the amendment to the trust, Nicholas LiGreci himself never executed it. (45)

      The former trustees objected to Linda's action, and moved to set aside the amendment. (46) Linda argued that under New York's Estates, Powers and Trusts Law ("EPTL") section 7-1.9(a), (47) she could amend the trust as the settlor's agent under the power of attorney. (48) The trial court found otherwise, noting that the right to revoke an otherwise irrevocable trust is a personal right unless trust language provides for the contrary and, since Nicholas LiGreci did not reserve the right to amend or revoke his irrevocable trust, he clearly intended it to be irrevocable. (49) Using strong language, the court asserted, "the petitioner has not cited any New York law or precedent which would support [her] proposition that an agent may use a power of attorney to modify an irrevocable trust instrument executed by her principal utilizing EPTL 7-1.9." (50)

      However, on appeal, the Appellate Division, Second Department, came to the opposite conclusion. (51) In its decision, the Second Department noted that the supreme court's reasoning hinged on the power of attorney granting "forward looking powers" and was therefore "silent as to the restructuring of past estate planning devices." (52) While the court acknowledged that neither the power of attorney nor the General Obligations Law specifically authorized the agent to amend a trust, the court relied on the absence of a prohibition for the agent to amend the trust. (53) Noting "[a]n attorney in fact is essentially an alter ego of the principal," (54) the court held that the General...

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