Monday, July 10, 2006

Attorney-In-Fact Under POA can make Gifts - If Gifts are as Contemplated in Will (NY)

Category: Estate Planning, Probate and Estate Administration

What happens when a person creates a Will and a Power of Attorney, and the person named under the Power of Attorney uses the Power of Attorney to make gifts to himself, and those gifts effectively change the testamentary scheme set out in the Will? In New York, a new ruling by the Appeals Court (the highest court in New York State) says that those gifts won't stand, regardless of a broad gifting power granted in the Power of Attorney, unless those gifts (1) are in the principal's best interest, and (2) conform to the principal's overall estate plan. In the Matter of Ferrara (N.Y., No. 92, June 29, 2006).

In New Jersey and New York, you need to specifically give your attorney-in-fact the ability to make gifts to himself or herself. This is commonly done by adding a paragraph the the Power of Attorney as the attorney-in-fact is usually a family member who gifts might be made to in any event (ie: a spouse or child). In my form of document, I have for years had language that the attorney-in-facts gifts must conform with the principal's estate plan precisely to avoid the mis-use of the power of attorney described in In the Matter of Ferrara. My thought is that the use of gifting powers within the Power of Attorney is necessary and desireable, as it is impossible to judge now how you may want to distribute your assets in the future (look at the DRA changes in the Medicaid law in 2006). However, it is also reasonable to limit the gifting of assets to be in the context of the the estate plan that you already have in place, so as not to allow a person's goals at death to be defeated merely by giving flexibility to use your assets as you would during life.

In 1999, George Ferrara executed a will bequeathing his entire estate to The Salvation Army. In 2000, Mr. Ferrara, who was single and had no children, signed a durable power of attorney called the "New York Statutory Short Form" appointing his brother, John, and a nephew, Dominick Ferrara, as his attorneys-in-fact. Mr. Ferrara initialed a typewritten addition to the form that enabled the attorneys-in-fact to make gifts to themselves without limitation. Dominick claims that this provision furthered his uncle's wishes that Dominick have all his assets. Mr. Ferrara died three weeks after executing the power of attorney. During those three weeks, Dominick transferred about $820,000 of Mr. Ferrara's assets to himself.

After learning of Mr. Ferrara's will, The Salvation Army began proceedings against Dominick to recover the assets. The trial court dismissed the petition, ruling that the presumption of impropriety when an attorney-in-fact makes self-gifts had been eliminated by changes to New York's laws in 1997. General Obligations Law § 5-1502 and 1503. The new law directs that an attorney-in-fact is authorized to make annual gifts of $10,000 or less to specified beneficiaries, but may do so only for purposes reasonably deemed to be in the principal's "best interest." The law also allows for additional language to be added permitting unlimited gifts. The trial court held that the best interest limitation does not apply to this additional language. The Appellate Division affirmed and The Salvation Army appealed.

The Court of Appeals of New York, the state's highest court, reverses. The court finds that nothing in the law suggests that the best interest requirement is waived when additional language increases the gift amount or expands the potential beneficiaries. "The Legislature intended [the relevant section] to function as a means to customize the statutory short form power of attorney, not as an escape-hatch from the statute's protections," the court writes. The court goes on to rule that "best interest" does not include the kind of unqualified generosity to the holder of a power of attorney practiced by Dominick, "especially where the gift virtually impoverishes a donor whose estate plan, shown by a recent will, contradicts any desire to benefit the recipient of the gift."


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