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Enhanced Enforceability is Available for Durable Powers of Attorney Signed After October 1, 1995

October 9, 1995

A power of attorney is an instrument by which you designate another person (your attorney-in-fact) to perform a broad variety of acts on your behalf. A power of attorney is "durable" if it specifically provides that the authority of the attorney-in-fact continues after you become disabled or incompetent.

A durable power of attorney is an important part of your estate plan, especially if you have not put your assets in a revocable trust. If you become seriously ill or incapacitated, your attorney-in-fact can manage your assets and pay your bills without the need for a court-appointed guardian of your property. You may also authorize your attorney-in-fact to make health care decisions for you, although we believe it is preferable to use a more comprehensive document called a health care advance directive for this purpose. Your attorney-in-fact may make gifts on your behalf if you specifically authorize it in the power of attorney.

The practical problem in Florida (and many other states) has been getting a banker or broker or other third party to honor the power of attorney. Third parties are often reluctant to do so, believing it can only create problems for them if it turns out that the attorney-in-fact is acting improperly or without authority. As a result, durable powers of attorney have been of somewhat limited value in the real world.

The Florida legislature has gone a long way to solving this problem, in addition to cleaning up a number of other deficiencies in the existing law. A new statute encourages the use of durable powers of attorney by giving protection to third parties who act in reliance on it. Third parties cannot be held liable if they act in good faith upon the representations of the attorney-in-fact. A third party may ask the attorney-in-fact to provide an affidavit stating that, as far as the attorney-in-fact knows, the power of attorney has not been revoked or suspended, but the third party is protected without the affidavit.

In addition to giving the incentive of enhanced protection, the statute provides the persuasive force of legal sanctions against uncooperative third parties. A third party who unreasonably refuses to recognize the authority of the attorney-in-fact is liable for damages and costs, including attorneys' fees. This should compel third parties to work with your attorney-in-fact.

The new law applies only to powers of attorney executed on or after October 1, 1995. We have modified our forms consistent with the changes in the law, and encourage you to take advantage of this positive development.

Beneficiaries of Trusts With Powers of Withdrawal (Typically Life Insurance Trusts) Must Receive Contemporaneous Notice of Each Addition

Many people have created irrevocable trusts to receive annual gifts to children or grandchildren within the limits of the annual gift tax exclusion ($10,000 per descendant or $20,000 for a married couple).

In general, to qualify for the annual gift tax exclusion, the gift must give the beneficiary a "present interest" in the property given. Under current tax law, one of the ways that gifts to trusts can qualify for the annual exclusion is by giving the trust beneficiaries the right to withdraw their share of any additions to the trust for a short period of time. Nearly all life insurance trusts and many other trusts for children, grandchildren, etc., give the beneficiaries such rights of withdrawal, which are commonly known as "Crummey powers" (named for the court case authorizing them). Crummey powers are effective only if the beneficiary has knowledge of his right to make the withdrawal. Until now, it was generally thought that this requirement could be satisfied by giving each beneficiary notice of the first transfer to the trust and obtaining the beneficiary's waiver of the right to notices of future additions.

However, the Internal Revenue Service has recently taken the position in a private letter ruling that without contemporaneous notice of each addition to the trust (which would include the direct payment of premiums with respect to any insurance policy owned by the trust), the Crummey powers will not be effective to qualify those additions for the annual exclusion. The government's theory is that without current notice, the beneficiary does not know of his rights in the property and therefore has no present interest.

This private ruling is not binding precedent. But it is an indication of the IRS' current attitude and the position it might take in a future dispute. Thus, we think the prudent approach is to give notice to each beneficiary with a right of withdrawal every time property is transferred (or deemed transferred, such as by making a premium payment directly to the insurer) to the trust. We can provide you with a form letter for this purpose if you require one.

This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.