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August 24, 2009

2009 Changes to Power of Attorney

Power of Attorney Changes in 2009

Effective September 1, 2009 New York State law requires the use of a new short form Power of Attorney by those interested in obtaining the benefits of this statute. A power of attorney is a legal document wherein a person appoints an agent to undertake legal transactions in his or her name. The person creating the power of attorney is known as the "Principal". The person being designated to act for the principal is known as the "Agent". Previous to September 1, 2009, the Power of Attorney document in New York State did not require the Agent to sign the document, or even be made aware of the appointment as Agent, however the new law requires that the Agent sign the document and that the Agent's signature be notarized.1 The law provides other important changes which will be discussed below.

Prior to the enactment of the new law, an Agent could make gifts of Principal's money to a statutorily defined group of individuals, including the Agent if he or she was a child of the principal.2 The principal could allow a gift in an unlimited amount by adding supplemental authority.3 It appears that this broad discretion as to gifting was recently narrowed when the State's highest court overturned a lower court ruling which had upheld an $800,000.00 transfer made by an agent to himself, purportedly while he was acting under the safety of a power of attorney, because the agent was not acting in the best interests of the principal.4 The gift giving power of the old legislation had persuaded the lower courts that any presumption of impropriety in giving someone else's money to one's self when acting as that person's agent had been overcome by the written authority set forth in power of attorney document itself.5

The new law contains many restrictions on gift giving by the Agent, and expressly sets forth that the Agent must always act in the best interests of the principal.6 It clarifies that there must be a special rider to the Power of Attorney if the Agent will be gifting in excess of $500.00.7 Furthermore, this rider must be witnessed by two disinterested persons8, much the same as one would do when making a will.

It seems that the legislation has the purpose of minimizing breaches of fiduciary duties by agents when they gift their principals' money to themselves by making it harder for the Agent to obtain the power and by bringing that authority to attention of the Principal when making out the Power of Attorney document. Clearly, if an Agent intends to defraud the Principal by bringing him or her to a friendly attorney for the execution of the document, then it will be more difficult for the agent to commit fraud when at least one more witness (assuming the attorney was the other witness) is needed. That the Principal has to sign a special rider should be a "red flag" that something more is going on. He will have to ask himself the question, "Do I really want to allow my agent to make gifts to himself"? Under the old legislation, the gift giving authority had been buried in the middle of the listed powers given to the agent9, thereby making it possible to be overlooked.

Among the other changes in the new law are provisions for compensation to the agent for his services10, if desired, for a monitor to review the actions of the agent11, and for modifications to the boilerplate powers.12

In conclusion, the major change is the codification of the Ferrara ruling regarding a "best interests of the principal" standard for conduct by the Agent, which, the court said, requires the "utmost good faith and undivided loyalty toward the principal".13 It remains to be seen whether the new form power of attorney, use of same being mandatory under the legislation, will curb abuses of fiduciary authority. I suspect that the very fact of the awareness of the additional gifting authority, and discussion of same by the drafter and the Principal at the time of the making of the power of attorney document, may result in more delegations of gifting authority by Principals to their Agents. If more delegations are made, then consequently there will be more abuses of the authority in raw numbers, although maybe less will be abused as a percentage of the overall number of powers of attorneys drafted. The resulting increase in fraud, defalcations, and criminal prosecutions could be the exact opposite result that the legislature intended. Perhaps the legislature, instead of placing the gifting authority in a separate rider, should have deleted it entirely.

1 General Obligations Law ("GOL") 5-1513(o).
2 GOL 5-1502(M).
3 GOL 5-1503.
4 Matter of Ferrara, 7 NY3d 244 (2006).
5 Id. at page 251.
6 GOL 5-1514 (5).
7 GOL 5-1514. Statutory Major Gifts Rider (SMGR).
8 GOL 5-1514 (9)(b).
9 GOL 5- 1502(M).
10 GOL 5- 1506.
11 GOL 5-1509.
12 GOL 5-1503.
13 Matter of Ferrara, supra, at page 254.