Saturday, February 23, 2008

Powers of Attorney: What Do You Assume?

Any lawyer worth his salt gets somewhat upset watching Robert Shapiro hock his documents through LegalZoom.com. Anyone can draft up a document; but it isn’t the document that counts, as much as the knowledge as to how that document operates, along with attendant pitfalls, in the context in which is needed. Will the forms work? I’m not sure because I haven’t read them, but I suppose they will in a basic say. Will they tell you what you need to know about the how’s and why’s and wherefore’s? I don't think so.

One of the more disturbing documents I see listed as a pre-printed retail product is the Power of Attorney (POA). If I were to pick one document that is the single most powerful document that one can execute, it would be the Power of Attorney, aka a general Power of Attorney or a financial Power of Attorney. It gives someone else the authority to act in your place. It gives someone else the authority to sign your name on your behalf. You give somebody else complete control of your finances.

When I first started practicing, Powers of Attorney were relatively routine. I had a pre-set form that I would use myself. Push the button and generate the document. But over the past 10 years, with the passing of various privacy laws such HIPPA, various court rulings as to limitations as to how these things are used, the nationalization of our financial system with the digital age, and the tightening of state Medicaid standards, all of these have made the crafting and use of Powers of Attorney anything but routine. A mistake in drafting or a mis-assumption as to their usage can result in financial disaster to the unsuspecting user.

At the most basic level, there are several forms of POA’s. A limited POA is used for a specific purpose. These are often used to transfer automobiles or real estate when the owner lives far away from where the transaction is taking place. Then there are Health Care Powers of Attorney. These allow one person to make medical decisions for another when the second individual cannot make them for one’s self. These are important in their own right, and stand separate and apart from the type of Power of Attorney we are discussing here, although many people mistakenly assume that one can be substituted for the other. They are different animals.

A general Power of Attorney is the type most people want drafted, usually when there is a sick member of a household, in order to assist that individual with financial matters. If one is comatose in a hospital, one can’t pay the bills. For the most part, the people for whom I draft these things are good people with the best of intentions, but that is not always the case when feuding families try to use them to grab the Mom and Dad’s money, or to do “Medicaid” planning. Many people think that a Power of Attorney is absolute, right? Not really, and there is where you start to get into trouble.

Here are some basic misunderstandings about the use of a Power of Attorney:

1) The Power of Attorney does not survive the death of the Grantor. It dies with the Grantor, so it can’t be used to empty out the bank accounts or transfer the real estate after the Grantor’s death.

2) The Power of Attorney cannot be used to enrich oneself or one’s family. The Power of Attorney establishes a fiduciary relationship between the Grantor and Grantee, and it must only be used to act in the Grantor’s best interest. Giving the money to yourself is not in the Grantor’s best interest.

3) Unless properly drafted, the Power of Attorney is extinguished by the incompetence of the Grantor, which almost defeats its purpose. It must be drafted as a Durable Power of Attorney to account for that circumstance.

4) Unless properly drafted, Powers of Attorney are difficult, if not almost impossible, to use when dealing with brokerage accounts, annuities and insurance companies. Dated (old) Powers of Attorney are difficult to use even with local banks.

5) When using it for purposes of real estate transfers, the Power of Attorney must be recorded, and meet the statutory witness and notary requirements for the transfer of real estate. Recorded Powers of Attorney make an already powerful document even more powerful as it now public record. Any rescission must be recorded also.

6) Powers of Attorney are tricky when being used for Medicaid planning. That means that if the Aunt Tillie’s heir who also has a Power of Attorney tries to impoverish Aunt Tillie to qualify her for Medicaid, don’t be surprised if the state comes a’knockin’ at some point in the future.

7) While attempting to cure some of the issues listed above, a Power of Attorney may accidently become a Power of Appointment. That means that if Aunt Tillie gives Rodney her Power of Attorney with curative language to account for some of the above problems, and Rodney dies first, Aunt Tillie’s money may be implied as belonging to Rodney for estate tax purposes as relates to Rodney’s estate.

All of the above being said, proper drafting, attention to detail, and proper useage instruction can alleviate many of the problems associated with Powers of Attorney. A pre-printed form just doesn't cut it. They should only be drafted by a qualified attorney or estate planner as part of an overall estate plan or elder care plan. Yes, you can buy one through LegalZoom.com or through Office Max, but as a wise man once said, a little bit of knowledge is a dangerous thing. And as to the assumptions as to how these very powerful documents work, those assumptions can make an “ass” out of “u” and “me.”

Saturday, February 9, 2008

How to Pass Real Estate Outside of Probate


Okay, so you and your spouse have two names on the deed to your house. That means when one of you dies, the other inherits the house…right? Not necessarily. In fact, if your deed is more than 10 years old, there is good chance that you are assuming wrong. There are several ways to pass real estate outside of probate in Ohio. Outside of probate means that the real estate passes automatically to the survivor without being subject either to your will or the jurisdiction of the Probate Court. Because the two most common ways of doing this are relatively new in Ohio, it is a good idea that you have a professional check the deed to your house when writing your will or doing any other estate planning activity.

Let’s pretend that Rodney and Rowena Smith have both names on the deed to their house. The deed reads “Rodney Smith and Rowena Smith, Husband and Wife,” and says nothing else. In Ohio, the assumption is that Rodney owns half of the house, and Rowena owns the other half. This is called Tenancy in Common. Draw an imaginary line down the center of the property, and the law assumes Rodney owns half and Rowena the other half. As is statistically indicated, Rodney falls over dead while cutting Rowena’s half of the grass. Rodney’s half of the real estate is subject to his will, and the title has to be cleared by the Probate Court. An estate has to be opened.

But if the deed reads “Rodney Smith and Rowena Smith, Husband and Wife, For Their Joint Lives, Remainder to the Survivor of Them,” the assumption changes. Rodney owns all of the real estate, and so does Rowena. It is all mixed up. When Rodney has his coronary while cutting the grass, Rowena already owns all of the real estate. It passes to her automatically. All she has to do is record an Affidavit of Death with a copy of the Death Certificate at the Recorder’s office, and the title is cleared without having to be processed the Probate Court. This is called Tenancy by the Entireties (Get it? They each own the “entire” property!), or more commonly, Joint and Survivorship Property. Note: THE DEED HAS TO HAVE THE MAGIC WORDS IN ORDER FOR IT TO WORK.

Joint and Survivorship real estate has only been around Ohio since the late 1970’s. Even then, most realtors and closing agents really didn’t pay close attention until the early 1990’s, and it was sketchy at best. Good estate planning practices demand that everyone check the title to their house, and verify that it is in Joint and Survivorship form if that is the intent of the owners. This is especially true if you purchased your house before 1990. If it is not, the problem is easily fixed by re-deeding the real estate to yourselves in the proper form. FOR MARRIED COUPLES, THIS IS PROBABLY THE SINGLE BIGGEST ITEM THEY CAN DO TO ALLEVIATE ESTATE ISSUES OUTSIDE OF A WILL.

While Joint and Survivorship deeds worked well for married couples, it becomes problematic when dealing with children. Let’s say Rodney dies, and Rowena now owns the property through a survivorship deed obtained through good estate planning. Upon her death, Rowena wants the property to go to her ne’er do well son, Rodwini. She decides to put her son’s name on the deed in joint and survivorship form. Good idea? Well….yes and no. When she dies, the property will go Rodwini, but it could cause her problems while she is alive.

The property could become subject to any claims that attach to Rodwini, whether they be bad debts or any other kind of judgment. The creditor may or not prevail, but why worry about it in the first place? Even scarier, Rowena can’t sell the real estate without Rodwini’s signature. And if he is married, Rowena would also have to get Rodwini’s wife’s signature. Yuk, especially if the these folks aren't kissin’ cousins, if you get my drift.

So to solve this conundrum, the legislature of the great State of Ohio, came up with something called a Transfer on Death Deed, and it works like a Transfer on Death bank account. Rowena can re-deed the property to herself as follows: Rowena Smith, Transfer on Death to Rodwini Smith. Rodwini now gets the property when she dies, but he has no interest in it while she alive. If he turns out to be a no good bum, she can change the title to the property at any time without his approval. She is free to do with it as she sees fit.

The downside to TOD deeds is that there is very little law as to how they are supposed to work. The legislation establishing the deed was grossly insufficient in defining just who could be the beneficiary of a TOD deed. For example, if Rowena had a son and a daughter, and put the property in TOD form naming both of her children as beneficiaries, and the daughter dies first, the daughter’s share would revert to the son upon Rowena’s death, and not to the daughter’s children. If it was the intent of Rowena that the daughter’s share should go to the daughter’s children, there would be a problem. The solution is to re-do the deed to account for the daughter’s death, specifically naming the daughter’s children as TOD beneficiares.

In summary, the two most common ways to pass real estate outside of the Probate Court, directly to the intended beneficiaries, are through either a Joint and Survivorship Deed, or a Transfer on Death Deed. Review your deed. Most importantly, consult with a professional to determine whether or not either of these forms of ownership would beneficial to you.