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The Pennsylvania Supreme Court, in a 4-3 decision reversed the Superior Court's decision and upheld the change of a beneficiary designation on an IRA account from one which would have passed the IRA account proceeds to the principal's stepdaughters to one which gave the IRA to the principal's brother and sister. The principal's will left his probate property to the stepdaughters. The agent was the principal's mother, and the power of attorney contained the statutory language granting the authority to "engage in retirement plan transactions."

The current statute under Section 5603 (q) states that such a power can do a number of specific things and "in general, exercise all powers with respect to retirement plans that the principal could if present." Of course the principal could have changed the beneficiary designation, and the Supreme Court held that the statute means what it says.

An important part of the analysis by the majority of the Court was that the adjacent subsection of section 5603, section 5603 (p), contained the following limiting language: "however, the agent cannot designate himself beneficiary of a life insurance policy unless the agent is the spouse, child, grandchild, parent, brother or sister of the principal." If the legislature had intended to limit the power of the agent with respect to a retirement account, the majority reasoned, it would have said so as it did with respect to life insurance policies.

The Superior Court had analyzed the change in beneficiary designation as a gift, under section 5601.2 and because it did not qualify as a "limited gift", nor was it specifically authorized as an "unlimited gift", it did not grant the agent the power to appoint a beneficiary.

The dissenting opinion, authored by Justice Saylor, and joined in by Chief Justice Castille and Justice Todd, agreed with the majority that the beneficiary change was a "retirement plan transaction", but thought that conclusion did not preclude the applicability of the protective changes inserted with respect to gifts with the 1999 amendments to our power of attorney statute; including the overruling of the Estate of Reifsneider, 531 Pa 19, 610 A.2nd 958 (1992) in so far as it would permit an agent to make a gift under a power of attorney which does not specifically provide for the power. The dissenting opinion found a legislative intent and the material overlap between Sections 5602 (dealing with the form of power of attorney) and 5601.2 (dealing with special rules for gifts) such that the principles of the gift limitations might be applied in this context as well.

Of course we know that the change of a beneficiary designation is not really a present gift (the majority opinion footnotes the lack of a necessity for filing a gift tax return with the execution of a beneficiary designation as indicating that the limitations of the gifting provisions should not apply), but is a change in the principal's estate plan.

The real point to be made in this connection is that the policies behind the limitations concerning gifts are equally applicable to the exercise of powers by an agent where the agent is effectively changing the principal's estate plan.

Senate Bill 53, on the back burner in Harrisburg, contains the following addition to Section 5603 (q):

"However, the agent cannot designate himself beneficiary of a retirement plan unless the agent is the spouse, child, grandchild, parent, brother or sister of the principal. An agent and a beneficiary of a retirement plan shall be liable as equity and justice may require to the extent that, as determined by the court, a beneficiary designation made by the agent is inconsistent with the known or probable intent of the principal."

Likely the result would have been different had this amendment been in effect. A subcommittee on Guardianships and Powers of Attorney is in the final stages of preparing a report to the Decedents' Estates Laws Advisory Committee in response to a House Resolution requesting a review of the Uniform Power of Attorney Act which will also address concerns relative to the abuse of powers of attorney by agents. It is expected that the report and proposed legislation will address more broadly and more clearly not only the area of gifting by an agent, but also the execution of beneficiary designations, or similarly, the use of TOD, POD, or survivorship registrations. The present direction of that report is towards allowing beneficiary designations or probate substitutes if such power is granted in the power of attorney and if the exercise of the power is consistent with the principal's current estate plan. The general thinking is that if there is a change to be made in the principal's current estate plan by an agent, that change would be allowed only with both an express power to that effect in the power of attorney and court approval after notice to all appropriate parties.

In the meantime, I use the following alternatives in my own power of attorney form to try to clarify the Agent's power and provide flexibility:

[BENEFICIARY DESIGNATION ALTERNATIVE 1:]

8. No Power to Execute Beneficiary Designation Transfer into Joint Accounts or Execute POD or TOD Designations. My Agent shall have no power to execute a beneficiary designation relative to any policy of insurance on my life, Individual Retirement Account, Pension, Profit Sharing or Savings Plan, or any other employee benefit plan, whether qualified or non-qualified, annuity or other instrument or account such as one designated as “payable on death” “in trust for” or “transfer on death” by which a beneficiary designation would determine the recipient of such benefits after my death. Nor shall my agent have the power to transfer any of my funds or assets into an account with survivorship rights to any other person at my death.

[BENEFICIARY DESIGNATION ALTERNATIVE 2:]

8. Consistent Beneficiary Designation Power, Joint Account or POD or TOD Designation Allowed. I give my Agent the power to execute a beneficiary designation on any policy of insurance on my life, Individual Retirement Account, Pension, Profit Sharing or Savings Plan, or any other employee benefit plan or on any employee benefit plan, whether qualified or non-qualified, or any annuity, provided that such designation shall be consistent with a prior beneficiary designation made by me, and if none, then such beneficiary designation shall be consistent with the provisions of my will and current estate plan. Similarly, my Agent shall have the power to transfer funds into an account designated as “payable on death” “in trust for” or “transfer on death” by which a beneficiary designation would determine the recipient of such benefits after my death or into an account with survivorship rights to another person at my death provided that such designation is consistent with the provisions of my will and current estate plan. No third party including any financial service company, bank, life insurance company, custodian or trustee of a retirement benefit shall be under any duty to inquire about the consistency of such beneficiary designation or registration. My Agent shall have the power to execute a beneficiary designation, or to effect a change in survivorship rights as set forth above which is different from a prior beneficiary designation, or if none from the provisions of my will and/or my current estate plan only pursuant to an order of a court of competent jurisdiction, such court having found that such designation, ownership or registration is a prudent exercise of estate planning powers and consistent with my known or probable intent."

The foregoing language is fully warranted up to its purchase price. Nothing more. :)

Here are the Slomsky opinions for your information.

J_68_2009 Slomski Dissent

J 68A and 68B 2009 Slomski Majority

This will give you something to worry about in addition to what in the world is going to happen to the Estate Tax and the Generation-Skipping Transfer Tax. More on that later as I have time.

Please read the important information relating to tax advice at the bottom of this web page.

Best regards,
Bob Wolf, Moderator

“Any tax advice in the foregoing message was not intended or written to be used, and cannot be used by any person for the purpose of avoiding tax penalties that may be imposed with respect to the matters addressed. Some of that advice may have been written to support the promotion or marketing of the transactions or matters addressed within the meaning of IRS Circular 230, in which case, be advised that the advice was written to support the promotion or marketing of the transaction(s) or matter(s) addressed, and you should seek advice based on your particular circumstances from an independent tax advisor.”