USE OF DURABLE POWERS OF ATTORNEY IN A LONG TERM CARE PLAN
by NEIL A. HARRIS, Certified Elder Law Attorney
Estate & Long Term Care Planning Center
Many people often confuse Estate Planning and Long Term Care Planning. Although Long Term Care Planning may involve the same planning documents (Will, Trust, Durable Powers, etc.) as found in an Estate Plan, the powers and authorities provided and/or retained in those documents can be quite different.
For example, a Trust may be very effective in eliminating or reducing the need for a probate but that same Trust offers little or no protection of assets should the Settlor (owner of the Trust) require Medi-Cal assistance. Another common example of where an instrument created for Estate Planning purposes is insufficient when used as a Long Term Care Planning tool is the traditional Durable Power of Attorney. The usual Durable Power of Attorney for Financial Management used in an Estate Plan normally provides the agent with sufficient authority with which to conduct business on behalf of the principal. The agent is often authorized to deposit into and/or withdraw from the principal’s accounts, pay bills on behalf of the principal, sell or purchase assets on behalf of the principal and, in some cases, file and pay the principal’s taxes. The agent is the principal’s fiduciary and must act in the best interest of that principal. If, however, the principal winds up receiving Medi-Cal assistance, the agent cannot, without the express consent of the principal, transfer assets out of the principal’s name. Such inaction could result in the loss of the principal’s residence at the principal’s death.
In this article, we will explore some of the basic tools used in Long Term Care Planning. Many of the instruments discussed may be familiar but we will examine particular uses and shortcomings of that instrument where long term care and/or Medi-Cal is involved.
Long Term Care Planning: A primary purpose in designing a good Estate Plan is to insure that a person’s directions and instructions are carried out subsequent to that person’s death. A good Long Term Care Plan should, in addition to that same objective, insure that the person’s directions and instructions are carried out subsequent to that person’s incapacity but prior to his/her death.
Medical Decision Planning: Perhaps the most common tool used in Long Term Care Planning is a current and valid Advanced Medical Directive (formerly referred to as a Durable Power of Attorney for Health Care (DPAHC)). Advanced Medical Directives enable you to express and insure that your wishes concerning medical treatment and care are enforced should you become unable to act on your own. Under California’s newly enacted Health Care Decisions Law, you can express your medical treatment instructions (referred to as an Individual Health Care Instruction) in writing or make those statements orally to your treating physician. In addition, you can use a written Durable Power of Attorney for Health Care to appoint an agent to make or enforce your health care decisions should you later become unable to act on your own.
As should be obvious, the use of an Advanced Medical Directive, whether in the form of a written Individual Health Care Instruction and/or a Durable Power of Attorney for Health Care is a must for any good Long Term Care Plan and for anyone over the age of majority.
Durable General Powers of Attorney: While many people are familiar with Durable Powers of Attorney for Health Care, most people do not know about or are unwilling to use a Durable General Power of Attorney.
A Durable General Power of Attorney (DPA) allows a person (principal) to appoint another (agent) to act on behalf of the principal in matters related to finances and assets. Care must be exercised when creating and using a DPA.
First, not all Powers of Attorney are durable. Unless your Power of Attorney provides that the instrument shall not be affected by your incapacity, your agent’s authority is not durable and ends upon your inability to act. Simply stated, if your Power of Attorney does not expressly provide that the instrument is not affected by your incapacity, your agent cannot act if you become incapacitated.
Second, not all Powers of Attorney are general. A Power of Attorney can be used for nearly anything that a principal can do his/herself. The Power can be restricted to one specific act or limited in time. Unless restricted, however, a Power of Attorney is considered general and the agent is authorized to perform all acts allowed under current law. There are, as we will examine later, limits to the authority of the agent.
Third, not all Powers of Attorney are immediately effective. Unless otherwise provided in your Durable Power of Attorney, your agent’s authority to act begins upon your signing of the document. If, however, you want your agent to act on your behalf but only when you become unable to act yourself, you should consider a Springing Durable General Power of Attorney.
A Springing Durable Power of Attorney only “springs” into effect upon the occurrence of a predesignated event. In creating the Springing Durable, the principal defines the “springing” mechanism. The “spring” can be a date or event. For example, many people only want their Durable General Power of Attorney to become effective if and when they become incapacitated. In that case, the principal should include a provision in the Durable that the instrument shall only become effective upon the principal’s incapacity and remove the provision that the Power of Attorney shall not be effected by the principal’s incapacity.
While establishing a Springing Durable Power of Attorney is not difficult, documenting that the “spring” has been sprung is more problematic. Since the purpose of all Durable Powers is to enable your agent to act on your behalf, it is critical that third persons know when your Durable is in effect. For that reason, most people use a ‘spring” that is easy to document. If you want your agent to act only when you are unable to act yourself, the “spring” can be a declaration from your physician stating that you are not able to manage your own financial affairs. That declaration must be attached to your Durable in order to be in effect. Some people use the statements of loved ones attached to the Durable to demonstrate that the “spring” has been sprung.
In determining whether to use a Durable General Power of Attorney that is immediately in effect or one that “springs” to life upon the occurrence of a stated event, you should consider your health, independence and reliance on others. If your health (physical or mental) is quickly failing, an immediately effective Durable Power of Attorney may be more practical. If you are still healthy and independent, the use of a Springing Durable Power of Attorney may give you future assistance and present peace of mind.
And finally, not all Powers of Attorney are the same. Many clients ask if a stationary store Durable is adequate. The simple answer is, “it depends on what you want your agent to do.” If you expect your agent to pay your bills and conduct simple business on your behalf, a simple Durable General Power of Attorney may be sufficient. If you are concerned about protecting your Estate should you become incapacitated and require long term care, a simple Durable General Power of Attorney isn’t worth much.
Durable General Powers of Attorney can contain pages upon pages of granted authorities or merely provide all powers allowed by law. Neither guarantees that your agent will have sufficient authority with which to preserve your Estate if you need Medi-Cal.
Under California law, an agent is not automatically granted certain powers under a Power of Attorney. In order to act in those areas, the principal must provide written authorization within the Durable itself. Examples of actions that must be expressly provided for in a Durable Power include, but are not limited to: (1) Creating, modifying or revoking the principal’s trust; (2) Gifting or transferring the principal’s assets; (3) Disclaiming or refusing an inheritance of the principal; (4) creating or changing a survivorship interest in the principal’s property; (5) Designating or changing a beneficiary to receive the principal’s property at the principal’s death; and, (6) Making a loan to the agent.
While these powers are not normally included in a typical Durable Power of Attorney, they are often necessary in cases where the principal is incapacitated and on Medi-Cal. Let’s explore how some of the above powers can be used in a Long Term Care Plan. Before beginning that discussion, however, the following information is important to know and understand.
First, if the Principal is competent and capable, s/he should be personally involved in the planning process. The Agent should only become the decision maker if and when the Principal is unable to participate.
Second, a DPA designed for use in Long-Term Care planning is usually an extremely powerful document and often authorizes the Agent to make decisions on behalf of the Principal that may have the effect of impoverishing the Principal. For that reason, the creation of a DPA with Long-Term Care planning provisions must not be taken lightly and should only be used where the Principal is comfortable with the possible transfer of all of the Principal’s assets to another person(s).
Third, the use of a DPA does not in any way alter existing Medi-Cal law and, in fact, may even restrict certain actions available to the Principal acting alone. Simply stated, if the Principal is prohibited from acting in a certain manner, the Agent will be similarly restricted.
And finally, allowing the Agent to perform certain acts may be disadvantageous to the Agent. Where a Principal authorizes an Agent to act in the same manner as the Principal, that authorization may result in adverse tax consequences to the Agent should the Agent predecease the Principal. This issue will be discussed in greater detail under the gifting section below.
With the above said, we will explore some of the common uses of a DPA in Long-Term Care Planning including: (1) Gifting or Transferring the Principal’s Assets; and (2) Creating, modifying or revoking the Principal’s Trust. Due to space limits, I will not discuss in great detail various Medi-Cal restrictions concerning each of the above actions but it should be noted that
Medi-Cal will penalize the transfer of a Medi-Cal non-exempt asset made within thirty (30) months of application.
Transferring/Gifting Principal’s Assets: In creating a Durable General Power of Attorney, most Principals expect their Agent to pay the Principal’s bills, deposit funds in the Principal’s accounts and, in general, conduct the Principal’s business. Unfortunately, if the Principal requires long-term care in a skilled nursing facility and/or requires Medi-Cal assistance, conducting the Principal’s business will not protect or preserve the Principal’s assets. Simply put, in order to protect or preserve a Medi-Cal recipient’s assets, the Medi-Cal recipient cannot own the assets. This applies to all assets of the Medi-Cal recipient including those classified as Medi-Cal exempt. For this reason, the Agent’s ability to gift or transfer the Principal’s assets should the Principal require Medi-Cal assistance and be unable to complete the transfers him/herself is critical.
Since an Agent cannot transfer or gift on behalf of the Principal unless expressly authorized in the DPA, the Principal, if s/he wishes to protect his/her assets once on Medi-Cal, must provide such authorization in the document. Such authorization, however, may expose both the Principal and Agent to potential problems.
If the Principal unrestrictedly allows the transfer of his/her assets by the Agent, the Agent may impoverish the Principal prematurely or unnecessarily, the Agent’s creditors could seek satisfaction from the Principal’s assets once in the hands of the Agent, the Agent may use the Principal’s assets to pay for the Agent’s own needs and debts and/or the Agent could alter the Principal’s testamentary wishes by transferring or refusing to transfer assets to certain beneficiaries of the Principal.
The Agent may also face serious problems if s/he is allowed unlimited authorization in the DPA. In allowing an Agent to gift or transfer assets to other persons including the Agent him/herself, the Principal creates a general power of appointment in the DPA. If the Agent predeceases the Principal, the assets over which the Agent has a general power of appointment may be included in the Agent’s Estate for federal and state estate tax purposes even though the Agent did not transfer the Principal assets. This could result in a substantial estate tax liability for the Agent’s Estate.
Further, the transfer of the Principal’s assets by the Agent may result in a substantial period of Medi-Cal ineligibility if the Agent violates existing Medi-Cal Transfer of Asset rules. If the transferred assets are not returned to the Principal, the Principal may not be able to pay the private rate during that ineligibility and may be forced to leave the facility.
The above problems can be limited somewhat by: (1) Including restrictive language in the DPA so that the Agent does not have the authority to transfer the Principal’s assets unless the occurrence of a specified event (the Principal is permanently placed in a skilled nursing facility); (2) Specifying to whom and in what proportions the Agent may transfer the Principal’s assets; (3) Not include the Agent in the class of persons who are to receive the Principal’s assets; and/or, (4) Use a third party to serve as the Agent for gifting purposes only while a family member or friend serves as general Agent for all other purposes.
Creating, Modifying or Revoking the Principal’s Trust: As previously stated, an agent under a Durable General Power of Attorney may not establish, modify or revoke a trust or any part of that trust on behalf of the principal unless the authority for such action is expressly provided in the Durable. While more common than a gifting provision, the authority to create, modify or revoke a trust is not automatically included in most Durables. Unfortunately, those powers may be necessary where the principal or his/her spouse enters a skilled nursing facility and/or qualifies for Medi-Cal long-term coverage.
Let’s first examine the single incapacitated principal who is currently in a skilled nursing facility receiving Medi-Cal benefits and who holds his/her home in a living Trust. As we have discussed in the past, the principal’s residence is exempt for Medi-Cal purposes provided that the principal maintains a subjective intent to return to that home if and when the principal is able. That exemption applies to the home whether held in a Trust or not. Unfortunately, the residence is exempt for eligibility purposes only and will not be considered exempt from recovery at the principal’s death. Simply stated, if the principal still owns his/her principal residence at the principal’s death, the State Department of Health Services Recovery Branch will, with few exceptions, seek recovery of all Medi-Cal benefits paid on behalf of the principal from the principal’s home. The placement of that residence in the Trust offers no protection from recovery. In order to protect the principal’s residence from recovery, the principal could transfer ownership of that home prior to his/her death. Even if the principal authorizes gifts under his/her existing Durable General Power of Attorney, the Agent may not be able to make the gift since the home is held in the principal’s Trust. Unless expressly authorized, an Agent under a Durable Power of Attorney does not have authority to access Trust assets. Inclusion of an express power to remove or revoke the Trust as to the home may solve the problem.
Another example of using the authority to create, modify or revoke the principal’s Trust in long-term care planning occurs when a married couple creates a living trust and thereafter places all or a majority of the couple’s assets in the Trust. Normally, the couple’s living trust provides that the Trust assets shall be held for the benefit of both spouses or the surviving partner. Further, most Family Trusts (husband and wife) require both spouses to execute any amendments or revocations. If one of the spouses is placed in a skilled nursing facility and thereafter qualifies for Medi-Cal long-term benefits, the Well or Community Spouse is required to remove the Ill or Institutional Spouse’s name from all of the couple’s non-exempt assets in excess of a total of $2,000.00 within 90 days of the Ill Spouse’s determination of eligibility. Again, the Agent for the Ill Spouse would benefit from the inclusion of the power to revoke or amend the Trust on behalf of the incapacitated Principal.
Perhaps the most dramatic use of the express authority to create, amend or revoke a Trust on behalf of an incompetent principal occurs when the principal intended to provide for a loved one who has since been placed in a skilled nursing facility and/or is receiving Medi-Cal benefits. As passing assets to a person receiving Medi-Cal may serve to make the recipient ineligible for continued benefits or may result in subjecting the inherited asset to recovery at the death of the recipient, the principal, if s/he were competent, would, in all likelihood, elect to bypass the institutionalized beneficiary. Using a Durable Power of Attorney with express authority to amend the Trust on behalf of the incapacitated principal solves the problem.
The inclusion of the authority to establish, alter, modify or revoke a Trust in a Durable General Power of Attorney should not be done as a routine matter. The Agent can use the power to completely alter or change the incapacitated principal’s established estate plan in such a way as to benefit the agent at the expense of the principal’s existing beneficiaries. A more subtle but equally disastrous problem involves a very obscure Medi-Cal interpretation. It is not uncommon for Medi-Cal to link the authority to gift with the power to create a trust in a Durable Power of Attorney thus allowing Medi-Cal to impute the principal’s gifted assets placed in the Agent’s own Trust back to the principal and thereby undoing any prior gifting for eligibility purposes.
While there are many reasons and advantages for using Durable Powers of Attorney in a Long Term Care Plan, they are not to be used lightly. Unlike Estate Planning documents, Durable Powers of Attorney in a Long Term Care setting may expose the principal to abuse. Given the complexity of such instruments, you should always work with a qualified elder law attorney in designing and implementing a Long Term Care Plan.
About the Author: Neil A. Harris is the directing attorney for The Center for Estate and Long Term Care Planning (LTC Center) in Chico, California. The LTC Center, staffed by Attorneys Neil A. Harris and Nicole R. Plottel, provides a wide range of legal services designed specifically for the elderly and those with special needs. Mr. Harris is the only Certified Elder Law Attorney (CELA) north of Sacramento and has over twenty-five (25) years of experience in Estate Planning and Long Term Care Planning in the North State. For more information, please call The Center at (530) 893-2882.