How Recent Changes to Pennsylvania’s Power of Attorney Law May Impact You

November 10, 2014Alerts Taxation and Wealth Planning Alert

A Pennsylvania Supreme Court case involving a severely injured woman’s hastily executed power of attorney used to select retirement benefits has led to a new state law intended to protect older residents, while also protecting those accepting the power. Most of the provisions take effect January 1, 2015, but certain provisions, including the protections for financial institutions and others asked to accept the power, are already in effect.

There are great benefits to having a financial power of attorney (POA) in place and easily accepted when needed. If you become incapacitated, it is much easier for your financial affairs to be handled using the power you (the principal) created. The alternative is to seek a guardian of the estate through the courts, which is time consuming and expensive and requires you to be declared incapacitated.

Under the new law, known as Act 95 of 2014, extensive provisions setting forth the agent’s duties require the agent to act in good faith, only within the authority the principal has given and generally in accordance with the principal’s reasonable expectations to the extent this is actually known by the agent. Otherwise, the agent is expected to act in the principal’s best interest. Other duties are set forth in the new law, but the principal can change those by direction in the POA.

Certain powers must be clearly given to the agent in the POA. These include making gifts beyond the limitations in the law and powers beyond existing law for the creation or amendment, revocation or termination of trusts created during the principal’s lifetime. They also cover creating or changing rights of survivorship or beneficiary designations or disclaiming property.

Beginning January 1, new signature requirements take effect, and the POA must be dated and signed, witnessed by two adults and acknowledged before a notary public. Neither the agent nor the notary can be a witness. The notice provision at the beginning of the power, which must be in capital letters, revises the existing form and adds language regarding the duties of the agent, as well as a warning that you may grant broad authority to your agent to give away all your property, or change its distribution at your death. Finally, you are advised to consult with an attorney. The agent’s acknowledgment, which must be signed (and attached) before using the power, notes the new requirements for agents.

Impact on Financial Institutions

For those with a POA for financial matters already in place, the POA form does not have to be changed because of the new law, but you do need to be aware of how the new law may affect its use. Banks and other financial providers will be looking for the new signature requirements, notices and acknowledgments after January 1, which may cause confusion about existing powers until everyone becomes comfortable with the new form requirements.

There are protections in the new law for financial institutions (and other third parties) that accept a POA and follow the agent’s instructions. If accepted in good faith (defined in the act as “honesty in fact”), without actual knowledge that the signatures are not genuine and valid, or the power is no longer in effect or the agent was acting outside the scope of his or her authority, a financial institution may rely upon the POA without liability.

Also new to the law is the level of protection for actions by employees of financial institutions. An employer is considered to be without actual knowledge of a fact relating to a power, the principal or the agent, unless its employee has knowledge of a fact. This means the employee has actual knowledge of the fact or is acting with conscious disregard or willful ignorance of the fact.

Effectively, the new law does not require financial institutions to investigate the facts about the creation or continuing validity of a POA, but it would require a different result if an employee has knowledge of a fact. The new act provides rules and time frames for financial institutions to accept powers that are presented to them or to require certain additional information. There are valid reasons why POAs may not be accepted, but if the reason is not permitted under the law, failure to accept the power may result in liability for monetary damages.

The Vine Case

These protections are a reaction to Vine v. Commonwealth, a Pennsylvania Supreme Court case, where a power was signed with an “X” by Mrs. Vine, who was an employee of the Commonwealth of Pennsylvania. The power was executed shortly after she was severely injured and paralyzed from a car accident, and subsequently suffered a stroke. Her husband was named as her agent. Within a month of the accident, she retired, and her husband selected a retirement option that provided a monthly payment but permitted him to withdraw certain additional amounts. The husband did not select the option that would have resulted in a larger monthly payment but no option to withdraw.

Several years later, the husband filed for divorce and Mrs. Vine discovered she was not receiving a disability retirement. She wrote to the State Employees’ Retirement System (SERS) to change her election. This request was denied. After an administrative hearing finding she was incapacitated when the power was executed, the SERS board took exception.

SERS did not challenge the finding of incapacity, but rather argued it was immune from liability (under prior law) because it acted in good faith reliance upon the POA and lacked reasonable cause to not follow her agent’s directions. Ultimately, the Pennsylvania Supreme Court found immunity from liability only applies if there is a valid POA in place. Since the power was invalid due to Mrs. Vine’s incapacity, no protection applied and SERS was required to adjust her benefits retroactively.

Consult a Lawyer

Even though the form of a power that a lawyer prepares may become relatively routine, the review and thought that goes into its completion for a particular client is not, and should be discussed with you so that, as the required notice now states, “ should seek the advice of an attorney at law to make sure you understand it.”

If you have any questions regarding this alert, please contact Linda Rhone Enion at 412.391.2428 or [email protected] or any member of the firm’s Taxation and Wealth Planning Practice.