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!
