The “New” New York Power of Attorney Law: The Intended Effects and Unintended Consequences

New York has made sweeping changes to its power of attorney statute for powers of attorney executed on or after September 1, 2009. Like existing law, the new law provides for a statutory form, known as a New York statutory short form power of attorney (“Statutory POA”), which if completed and executed properly, must be accepted by all financial institutions and other third parties. In addition to the Statutory POA, there is an additional form, known as a statutory major gifts rider (“SMGR”), which must be executed for a principal to authorize the agent to make annual gifts exceeding $500. Significantly under the new law, there are certain execution requirements (described below) that must be followed for all powers of attorney granted by an individual, whether statutory or non-statutory. These execution requirements would therefore apply to limited powers of attorney that a principal may sign to have an agent act under a bank or securities account or pursuant to a partnership or corporate agreement. While any power of attorney executed before September 1, 2009 is still valid, any new power of attorney must comply with this new law.

While the new law was obviously intended to apply to powers of attorney utilized routinely in connection with estate, gift and financial planning, there are no exceptions for business transactions that use powers of attorney. Thus, the new law has given rise to uncertainty among transactional business lawyers. While this Alert will primarily summarize the new law, it will also briefly describe the probable unintended consequences.

Execution Requirements. Whether a power of attorney is a Statutory POA or non-statutory, the law now requires compliance with certain execution requirements. These requirements are that the POA must: (a) be typed or printed using legible letters or clear type no less than twelve point in size; (b) be signed and dated by a principal with legal capacity with the principal’s signature acknowledged in the manner prescribed for the acknowledgment of a conveyance of real property; (c) be signed or dated by the agent with the agent’s signature acknowledged in the manner prescribed for the acknowledgment of a conveyance of real property (i.e., before a notary public); (d) contain cautionary language at the beginning of the form to inform the principal about the serious nature of the power of attorney document; and (e) contain cautionary language explaining the role of the agent. Interestingly, the requirements described in (d)-(e) above must contain the exact cautionary language expressed in the statute whether the document the principal is executing is a statutory or non-statutory POA. Further unlike the old law, as noted above, under the new Statutory POA, the agent must sign the document to acknowledge his or her acceptance.

An agent acting under a power of attorney can act immediately unless the power is drafted as a “springing” power of attorney in which case the power becomes effective upon a specified event, such as the principal’s incapacity. Similar to prior law, the Statutory POA allows a principal to initial boxes in the form for the various powers the principal authorizes the agent to act. This includes, among other items, real estate transactions, banking transactions, business operating transactions, insurance transactions, estate transactions, gifting, claims and litigation, health care billing and payment matters, retirement benefit transactions and tax matters.

Statutory Major Gifts Rider. The most significant revision made under the new law in the estate and gift arena deals with the authority of the agent to make gifts on behalf of the principal. This does not just include typical gift-giving but also changing beneficiary designations under life insurance policies or retirement plans and creating, amending or revoking trusts. Specifically, the Statutory POA cannot be used to make gifts in excess of $500 unless the SMGR is executed simultaneously with the Statutory POA. The principal must initial the Statutory POA expressly authorizing the agent to make major gifts and other transfers in accordance with the terms and conditions of the SMGR, which supplements and becomes part of the Statutory POA. The SMGR must be executed in the same formalities as a Will and therefore requires the signature of the principal duly notarized and two witnesses who are not named in the rider as recipients of gifts or other transfers. The Statutory POA also provides that the agent may not make major gifts to himself or anyone else unless authorized in the Statutory POA and SMGR.

As to life insurance, the new law provides that if life insurance contracts existed at creation of the agency, the authority of the agent to change beneficiary designations or terminate life insurance contracts is not authorized unless this power is expressly set forth in the SMGR. This same procedure applies with respect to changing or terminating the ownership of a joint bank account or changing the beneficiaries of a retirement plan. The gifting provisions of the power of attorney also allow gifting to a Section 529 account up to the annual gift exclusion amount. In addition, the agent is authorized to elect to split gifts between a principal and his or her spouse.

A principal can still use a non-statutory POA to authorize an agent to make gifts and other donative transfers. If one does so, however, the non-statutory form must be executed in the same formalities as the SMGR and meet the other execution requirements for a non-statutory POA described above.

Other Points. Financial institutions must honor a validly executed Statutory POA. This eliminates the situation before the new law became effective when a financial institution would oftentimes require its own third party form. For this purpose, a financial institution includes securities brokers, securities dealers, securities firms and insurance companies.

Some other significant provisions under the new power of attorney law are that a principal can appoint a monitor to compel the agent and third parties to provide records of the agent’s actions; the agent must keep the principal’s property separate from the agent’s; and the agent can examine, question and pay medical bills which is a significant provision that allows the agent access to the principal’s medical records, if necessary.

The new law allows the agent to receive reasonable compensation only if the principal initials the box on the form; without this authorization, the agent cannot receive compensation. The agent can, however, be entitled to reimbursement for reasonable expenses incurred on the principal’s behalf. An agent can resign by giving written notice to the principal and any co-agent, successor agent or monitor. By signing the document, the agent acknowledges that he or she may be liable under the law if the agent acts in violation of the law or acted outside the power of attorney. The law expressly provides that the agent must observe the standard of care that would be observed by a prudent person dealing with property of another.

In sum, the new Statutory POA is more complex than its old counterpart and must be carefully discussed with the principal and agent before its execution.

The Reach to Commercial Transactions. Agency relationships are routinely established in commercial contracts involving real estate, insurance and stock brokerage and in the remedial provisions of commercial loan agreements. Some examples are:

• • Stock powers to transfer stock appearing on the back side of stock certificates

• • Stock brokers acting as agents for customers and purchasing stock for customers on exchanges

• • Powers of attorney in loan agreements authorizing lenders to sell collateral in the event of default

• Authorizations of one person on behalf of others to file documents, sign ancillary documents and amendments, etc. in merger agreements, leases, limited liability company operating agreements and partnership agreements

As a matter of common practice, such commercial powers of attorney are not acknowledged before notaries public. Moreover, the statutory-prescribed cautionary language would not be appropriate in most cases. However, the term “power of attorney” in the new law would encompass such arrangements and no exceptions are provided in the statute. Thus, unless technical corrections legislation is adopted, the enforceability of common commercial attorney in fact provisions may be questionable.

Should you have any questions concerning your own situation, please contact Lawrence A. Goldman of our Corporate Department or Rita M. Danylchuk of our Trusts and Estates Group.