Why Powers of Attorney Need to be Reviewed and Updated

    Why Powers of Attorney Need to be Reviewed and Updated….

Why is it so important to have a Power of Attorney for Finances?

Consider the following story: Bill, a widower, and his son Tom, were in Jack’s office (their attorney) last year. Bill had a house with a potential capital gain of $250,000 (difference between cost of purchase and the projected net sale price). Bill was a veteran of WW II. Bill was in need of assisted living and was ready to move into an Assisted Living Facility and apply for the VA Aid & Attendance benefit.. The pension (technically known as the non service connected improved pension benefit would pay Bill approximately $1600 per month tax free) would help with paying the Facility costs.

But there was a problem; isn’t there always something? Bill couldn’t apply for the pension until the home sold, since the proceeds of the sale would disqualify him. It was estimated that to obtain the price he wanted, marketing time would be approximately 10 months. Bill didn’t want to wait for his aid & attendance benefit until the home sold as that would have cost him approximately $16,000 in lost benefits. And he also didn’t want to pay the capital gain tax of approximately $62,500 (State and Federal combined) which would have been the result if he transferred the house to Tom.

So he decided that a special type of Trust, called a QVap Trust, was the answer. It would preserve his right to exclude up to $250,000 of capital gain upon the sale of the house but would not be considered as owned by him by the VA. He would be eligible almost immediately. A perfect answer, everyone agreed. The attorney then suggested that he could also prepare a Power of Attorney for Bill authorizing Tom to create the QVap Trust if something should happen to Bill during the interim. In other words, it would take a few weeks to get everything in place for the QVap Trust but the Power of Attorney could be ready in two days. Bill and Tom laughed. What would happen in a few weeks. It was too much effort to get just one more legal document signed. So they declined to have a Power of Attorney created.

Unfortunately, two days later, Bill had a stroke that rendered him incapable of handling his financial affairs. He was mentally incompetent and unable to communicate. Had he signed a Power of Attorney with the appropriate powers, his son, Tom, could have signed the documents for him and placed the house in the QVap Trust. An application for the Pension would have been filed shortly after the QVap Trust was created, Bill would have received the pension retroactively to approximately the time of filing (instead of waiting until the house sold 10 months later), and Bill would have avoided the $62,500 capital gain tax.

But there had been no power of attorney created. Bill’s house sold almost exactly 10 months later and it wasn’t until after that that the application for the VA pension could be filed. The family lost $16,000 in benefits because they just didn’t want to go to the extra effort of making an extra trip to Jack’s office to sign the Power of Attorney.

Many people have what is called a statutory power of attorney, a form set forth word for word in the California statutes. Some lawyers even draft their own documents based exactly on this statutory form. Rarely with these forms is there any custom language to allow Tom to do what needed to be done for his Dad in our example above. That can be a real problem.

The Bill and Tom story is a sad one. But we see similar situations every month. The parent has a power of attorney but it is inadequate for VA purposes or for Medi-Cal purposes. And even if it was adequate for VA or Medi-Cal when it was signed, laws change (as do circumstances). Sometimes these changes take place just a few years later. It may have to do with Medi-Cal, VA, or death taxes.

This is why we urge all of our clients to come in for a review every two years. For example, Medi-Cal law has been significantly changed twice since the late 80’s and will be changed again in California very shortly. (The death tax law was changed just last December.) The power of attorney we prepared before the pending change was on the horizon (just a few short years ago) needs to be updated. And no, it is not ok to wait until the change actually takes place because if you have a stroke like Bill, it is too late to make any changes; what you have is what you are stuck with!