What? New York has revised its Power of Attorney statute to develop a new statutory short form “POA” with an optional “statutory major gifts rider” (“SMGR”). The revised statute: (1) adds new disclosures to the form which are intended to alert the principal to the extent of the power granted to the agent; (2) sets forth the fiduciary obligations of the agent; and (3) limits the authority of certain agents to make gifts to themselves or third parties. The new rules go into effect September 1, 2009. (L. 2008, Ch. 644, revised by L. 2009, Ch.4, which extended the effective date from March 1 to September 1, 2009. Codified in NY General Obligations Law §§ 5-1501 et seq. Unless otherwise stated, citations shown below are to this statute.)
“Financial institutions,” referred to as “FIs,” include depository institutions such as banks and credit unions; securities brokers, dealers and firms; insurance companies; and retirement systems. FIs are generally required to accept the statutory short form when properly executed. The FI may refuse to accept a statutory short form POA where the FI has reasonable cause to believe it is invalid. Examples of “reasonable cause” include: the FI’s good faith referral of the principal and the agent to a local adult protective services unit; actual knowledge of the principal’s death; or actual knowledge that a report has been filed alleging physical or financial abuse of the principal by the agent.
FIs are typically presented with a POA in connection with business transactions such as: opening of a deposit or financial account; transferring assets to or from an existing account; submission of claims under an insurance policy; reliance on a POA where the agent signs certain contracts or loan documents on behalf of the principal as in the execution of a deed or note or security instrument. The following is a summary of some of the key provisions of the new law.
Why the Change? The New York State Law Revision Commission sought to revise the POA statute to address the issues that may arise when the POA is used for long term financial or estate planning purposes. The “old” statute did not address the agent’s fiduciary obligations to the principal and there has been concern that some agents have exercised the “power” in a fashion not anticipated by the principal including by the making of gifts to third parties and to the agent. The new statute sets forth the agent’s fiduciary obligations and allows for the appointment of “monitors” to review the actions of the agent; places limitations on the authority of the agent to make gifts to third parties and to the agent; provides a method by which the power can be revoked by the principal; and sets forth the circumstances under which a third party can reasonably refuse to accept a POA. The statute also authorizes the parties who have some dispute concerning the effectiveness of a POA or the actions of the agent to commence a special proceeding in court to resolve the matter.
Gifts. If the principal wants to authorize the agent to make major gift transactions and other transfers, the Statutory Major Gifts Rider or “SMGR” must be completed at the same time as the POA and attached to it. A major gift may include gifts to the principal’s spouse, children (and certain remote descendants), and parents up to the annual federal gift tax exclusion amount set by the Internal Revenue Code (IRC). The principal may also authorize the agent to make gifts or transfers to any person; to open, modify, or terminate bank accounts, including joint accounts and ‘in trust for accounts’ (ITFs); to change beneficiaries on life insurance policies; to designate or change beneficiaries on any retirement plan; and to create, amend, or revoke an inter vivos trust. The revised statute also provides that a gift or transfer may be made outright, to a trust, to a Uniform Transfers to Minors Act account, or to a tuition savings account or plan (e.g., IRC 529 plan).
No SMGR? Without a SMGR the agent is authorized to make small gifts of $500 or less in a calendar year ($500 or less per gift) to individuals and charities, provided that such gift giving is a continuation of a custom of the principal. Being able to make a “gift” includes being able to “change” the owners of an existing joint account in which the principal is an account owner or to change the beneficiaries in an “in trust for or ITF” account established by the principal. For example, if the POA authorizes the agent to conduct “banking transactions,” unless there is a SMGR attached to the POA, the agent can open a new account in the name of the principal only (no longer can the agent open the account in the agent’s name); make deposits and withdrawals to and from an existing account (including joint and ITF accounts) and terminate an account. However, with respect to joint and ITF accounts existing at the time the POA became effective, the agent lacks the authority to change the names on the joint account or to change the beneficiaries on the ITF unless there is a SMGR.
What about Incapacity? A POA is durable unless it expressly provides that it is terminated by the incapacity of the principal. (Under the “old” statute there are separate statutory short forms for durable and nondurable POAs.)
New Standard of Care for Agents. The new form adds a section describing the agent’s fiduciary obligation to the principal and requires the agent, by signing the POA, to “accept” this standard of care or fiduciary obligation. See model form in § 5-1513(1)(n).
Form Requirements for All POAs (statutory short form and others). To be effective the statutory short form of POA or an alternative POA (it is still permissible to use a non-statutory form provided that the form meets these format requirements) that is executed in New York must be: typed or printed using letters that are legible or of clear type no less than 12 point. If the form is written, the written form must meet equivalent standards for legibility and clarity. It must be signed by the principal and the agent, and each signature must be acknowledged in the same manner as is required for a real property conveyance (e.g., a mortgage or deed). It must contain the “exact wording” of the caution to the principal (§ 5-1513(1)(a)) and the “important information for the agent” (§ 5-1513(1)(n)). [Note: As these format requirements seemingly apply to all POAs, it isn’t clear how they will affect the attorney in fact or limited POA provisions often contained in credit documents that authorize the creditor to endorse the borrower’s name to settlement checks from insurance companies due to damage to collateral securing a loan or authorizing the creditor to act in the name of the borrower in actions impacting the collateral such as receipt of a claim of eminent domain on real property securing a loan. The “old” POA law only imposed format requirements on the statutory short form POA. The “new” law seems to require formatting and disclosures for all forms of POAs and the limited POA provisions in most loan documents would not be in compliance with these requirements.]
In addition, in order to authorize the agent to make a major gift or transfer on behalf of the principal the statutory short form must be initialed by the principal granting the agent the authority to make “gifts” and the SMGR rider must be completed and attached. The SMGR must be executed according to the requirements of § 5-1514(9)(b) whether the statutory form or a non-statutory form of gift rider is used. (The gift rider must be signed by the principal and acknowledged in the form required by Real Property Law to record a conveyance and signed by two witnesses who are not intended to be recipients of any gifts or other transfers, in the same manner as a will.) A model form of SMGR is found in § 5-1514 (10).
How is the New Statutory Short Form Different from the Prior Statutory Short Form? (See §§ 5-1513 and 5-1514(10) for model forms.)
1. Execution. It must be signed by both the principal and the agent. Each signature is to be acknowledged in the manner required for a real property conveyance (e.g., on a deed or mortgage). The principal and the agent need not execute the document on the same date.
2. Effective. It becomes effective on the date on which the agent’s signature is acknowledged. (If there is more than one agent, the effective date is the date that the last agent’s signature was acknowledged.)
3. Agent Compensation. The principal may provide in the POA that the agent receive reasonable compensation for the agent’s services. Unless the form contains such a provision the agent is not entitled to any compensation.
4. Revised “Bill of Rights”. The revised form contains a new “CAUTION” statement designed to make the principal aware that an agent has the “authority to spend your money and sell or dispose of your property during your lifetime without telling you.” The revised form also reminds the principal that he or she is still “in charge”, advising that the principal can obtain information from the agent at any time; that the principal has the authority to terminate the power at any time for any reason – as long as the principal is of sound mind; that this form is not a health care proxy; and informing the principal of where to go to get a copy of the statute. The statement directs the principal to the fact that the agent is required by law to act in the best interests of the principal and that the section in the form entitled “Important Information for the Agent” describes the agent’s responsibilities.
5. Priors Revoked. It adds a clause whereby the principal revokes all prior powers of attorney or is instructed to complete the “Modification” section if modifying the terms of a previously executed POA.
6. Modifications. Completion of the “Modification” section is optional. It can be used to add additional instructions or to make additional provisions such as those that limit or supplement the authority granted to the agent.
7. Authority to Make Major Gifts. If the principal wants to authorize the agent to make gifts, section “h” must be initialed by the principal and the SMGR must also be also completed and attached to the short form POA.
8. Termination. The POA terminates on the death of the principal. It may also terminate when the principal revokes the power; the agent dies or becomes incapacitated; the agent’s marriage to the principal is terminated – unless the POA expressly provides otherwise; a court order revokes the power; the authority of the agent terminates; or the purpose of the power is completed.
9. Monitors. The form can designate “monitors” appointed by the principal. If requested, the agent is required to provide a copy of the POA and a record of all transactions to the monitor. Third parties holding records of transactions performed under the POA are required to provide them to the monitor upon request.
10. Indemnification. The revised form contains a provision by which the principal agrees to indemnify any third party for any claims that may arise out of the third party’s reliance on the POA. The form also advises the principal that termination of the power is not effective on any third party until the third party has actual notice of the termination or revocation of the power.
12. Agent Terms of Acceptance. The form contains an explanation of the agent’s fiduciary duty and the legal limitations on the agent’s authority. By executing the POA the agent agrees to accept these fiduciary obligations. The statutory form lists these obligations and requires the agent to act according to the principal’s instructions or if there are no instructions then in the principal’s best interests. The agent is now required to keep a record of all transactions or to maintain copies of receipts, payments, and transactions conducted on behalf of the principal. § 5-1513(n). Also see § 5-1505 for the list of the fiduciary obligations of the agent.
The form also expressly prohibits the agent from using the principal’s assets to benefit the agent or anyone else unless the principal has granted the agent the authority to make gifts and informs the agent that he/she shall be held liable for any misuse of their authority.
Revocation. A principal may revoke a POA in accordance with the terms of the document itself or by delivering a written, signed and dated revocation which is delivered to the agent and to any third party that the principal believes has acted with reliance upon the POA. If the POA has been recorded under the requirements of Real Property Law § 224, so must the written revocation be recorded (RPL § 326). Even if the revocation is recorded the law requires that a third party needs actual notice of the revocation before being bound by it. § 5-1511(4).
A third party who has not received actual notice of the revocation and acts in good faith based upon a POA it believes to be in effect is binding on the principal and the principal’s successors in interest. An FI is deemed to have actual notice of a revocation “after it has had a reasonable opportunity to act on a written notice of revocation or termination following receipt of the same at its office where an account is located.” § 5-1511(5).
Out of State Power of Attorney Form. A POA form executed in another state/jurisdiction that is in compliance with the law of that other state /jurisdiction or which is in compliance with the New York requirements is valid within New York, regardless of whether the principal is a domiciliary of New York. § 5-1512.
Third Parties Acceptance of and Reliance on Statutory Form. The term “third parties” is defined to mean an FI or a person. § 5-1501(16). The “new” statute requires all third parties located in New York to accept a properly executed statutory short form POA, including a statutory short form that is supplemented by the gifts rider – SMGR – and including any statutory short form POA “properly executed in accordance with the laws in effect at the time of its execution.” § 5-1504. This provision is intended to prevent FIs and other persons from refusing to accept a statutory short form POA by requiring the principal to complete a form that the FI has created. An FI is authorized to accept the original or a photostatic copy; a copy certified by an attorney or a copy certified by a court or other government entity. § 5-1504(1), (3).
An FI that relies on a properly executed statutory short form POA, including a form supplemented by a SMGR executed in accordance with the laws in effect at the time of its execution, shall not incur any liability, nor shall any employee or officer of the FI incur any liability unless the third party has actual notice of the revocation or termination of the POA.
If the principal has an account at an FI, it will not be deemed to have actual notice of a revocation/termination until it has had reasonable opportunity to act on a written notice following its receipt at its offices where the principal’s account is located.
Reasonable Cause to Refuse a Statutory Short Form POA. The “new” law (§ 5-1504(1)(a)) makes it unlawful for any FI or person to “unreasonably” refuse to honor a statutory short form POA – including one with a gift rider. The “new” statute attempts to define what circumstances constitute reasonable cause for a third party to refuse to accept a properly executed statutory short form POA.
(a) Reasonable cause under this subdivision shall include, but not be limited to:
(1) the refusal by the agent to provide an original power of attorney or a copy certified by an attorney pursuant to rule twenty-one hundred five of the civil practice law and rules, or by a court or other government entity;
(2) the third party’s good faith referral of the principal and the agent to the local adult protective services unit;
(3) actual knowledge of a report having been made by any person to the local adult protective services unit alleging physical or financial abuse, neglect, exploitation or abandonment of the principal by the agent;
(4) actual knowledge of the principal’s death or a reasonable basis for believing the principal has died;
(5) actual knowledge of the incapacity of the principal or a reasonable basis for believing that the principal is incapacitated where the power of attorney tendered is a nondurable power of attorney;
(6) actual knowledge or a reasonable basis for believing that the principal was incapacitated at the time the power of attorney was executed;
(7) actual knowledge or a reasonable basis for believing that the power of attorney was procured through fraud, duress or undue influence;
(8) actual notice, pursuant to subdivision three of this section, of the termination or revocation of the power of attorney; or
(9) the refusal by a title insurance company to underwrite title insurance for a transfer of real property made pursuant to a major gifts rider or non-statutory power of attorney that does not contain express instructions or purposes of the principal.
What Is Unreasonable Refusal? The new statute provides the following examples in § 5-1504(1)(b):
It shall be deemed unreasonable for a third party to refuse to honor a statutory short form power of attorney, including a statutory short form power of attorney which is supplemented by a statutory major gifts rider, or a statutory short form power of attorney properly executed in accordance with the laws in effect at the time of its execution, if the only reason for the refusal is any of the following:
(1) the power of attorney is not on a form prescribed by the third party to whom the power of attorney is presented.
(2) there has been a lapse of time since the execution of the power of attorney.
(3) on the face of the statutory form power of attorney, there is a lapse of time between the date of acknowledgment of the signature of the principal and the date of acknowledgment of the signature of any agent.
Must a Third Party Accept Any Power of Attorney? No, only a statutory short form. § 5-1504(6).
What Can an FI Do to Make Sure the POA Has Not Been Revoked or Terminated? The “new” law authorizes the third party to require the agent presenting the POA form to execute an acknowledged affidavit stating in effect that the power is in full force and effect. The affidavit is “conclusive proof” to the third party that the power is valid and effective and has not been terminated or revoked – except to any third party that has actual knowledge that the power has been revoked or terminated. The statute provides (at § 5-1504(5)) that the agent’s affidavit shall state that:
(a) the agent does not have, at the time of the transaction, actual notice of the termination or revocation of the power of attorney, or notice of any facts indicating that the power of attorney has been terminated or revoked;
(b) the agent does not have, at the time of the transaction, actual notice that the power of attorney has been modified in any way that would affect the ability of the agent to authorize or engage in the transaction, or notice of any facts indicating that the power of attorney has been so modified; and
(c) if the agent was named as a successor agent, the prior agent is no longer able or willing to serve.
Enforcement of Rights under the Statute. The statute provides that a “ special proceeding” in a court of law may be commenced in certain circumstances including: to hold the agent accountable for his or her actions, to confirm the validity of the power or the actions of the agent, or to compel a third party such as an FI to accept the POA form. For example, if the power designates a “monitor,” that monitor may ask the agent to submit copies of certain transaction records within 15 days of the request. Other interested parties may also request records (e.g., a co-agent, a government entity, a personal representative of the estate of the principal, etc.). If the agent fails to produce the records in a timely manner the monitor or other party may commence a special proceeding to obtain the records. § 5-1505(3). A special proceeding may also be commenced for other reasons including: to determine whether the principal had the requisite “capacity” when the POA was executed; to determine whether the agent is entitled to compensation; and to obtain court approval of an agent’s resignation if the agent requests such approval. A special proceeding in a court can also be commenced to compel a third party to accept the POA. The proceeding can be commenced by a third party who is asked to accept a power of attorney, by the agent, or by the spouse or family member of the principal, a monitor, or any other appropriate party who has reason to question the validity of the power or the actions of the agent. See, §§ 5-1505(2)(a)(3), 5-1510.
What About Powers of Attorney that are Currently in Effect? The statute expressly provides that when the new law becomes effective—September 1, 2009—it will not affect the validity of any existing power of attorney or the authority that an agent has under a prior law. Existing powers of attorney executed prior to September 1, 2009—which were valid at the time of execution—remain valid and in effect, according to their terms. The terms of the “new” statute only apply to powers of attorney executed on and after September 1, 2009. Exception: The following provisions of the “new” statute apply to all powers of attorney no matter when executed: Section 11 [the expanded definition conferring the agent with authority with respect to benefits form governmental programs or civil or military programs in “new” § 5-1502J]; Section 12 [the revised definition of records to include health care billing and payment records per “new” § 5-1502K]; Section 18 [acceptance of the statutory short form power of attorney and what constitutes reasonable and unreasonable cause to refuse to accept a statutory short form per “new” § 5-1504]; Section 5-1505 [new standard of care for agents]; and Section 5-1510- [rules concerning the commencement of a special proceeding to resolve disputes concerning a power of attorney]. L.2008, Ch.644 § 21.
Grace Sterrett is a partner in the New York office of Hudson Cook, LLP. Basis Points readers can reach Grace at 518-383-9440 or by email at gsterrett@hudco.com.