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Why the SBA doesn’t like your power of attorney form: An estate planning trap for owners of certified small businesses with government contracts

This article will review the second of two instances where it is very important to make sure your estate plan documents are in compliance with federal regulations if you are an SBA certified, economically-disadvantaged small business (8a), woman-owned small business (WOSB/EDWOSB), or an SBA or VA certified veteran-owned small business (VOSB/SDVOSB).

I previously discussed how a joint trust for married couples is in violation of SBA regulations. Another hidden estate planning trap for certified small business owners can be found in their financial power of attorney form, which is the document that gives another person the power to act on your behalf for financial matters when you are no longer able to act for yourself (the most common use being a condition such as Alzheimer’s).

Financial Power of Attorney – an Estate Planning Perspective

A financial power of attorney can be made effective either immediately upon signing the document, or upon the written confirmation of independent medical professionals that a patient is no longer able to make their own financial decisions.

When advising a married couple who already pools all of their assets together, a standard recommendation from estate planning attorneys is for the married couple to give each other power of attorney effective immediately. This lifts the burdensome need down the road for a spouse to be declared incompetent by two doctors.

Financial Power of Attorney – a Government Contracting Perspective

But as we saw previously when discussing joint trusts, the SBA requires unconditional and direct ownership of a business by the qualifying person in order to become certified and bid on set-aside awards. Taking from the WOSB regulations as an example, they state:

“To be considered unconditional, the ownership must not to subject to any conditions, executory agreements, voting trusts, or other arrangements that cause or potentially cause ownership benefits to go to another.” (13 CFR § 127.201(b))

And here is a passage taken from the financial power of attorney form that my firm uses:

My agent is a fiduciary and may perform any act and exercise any power with regard to my property and affairs that I could do personally. Without limiting the broad power conferred by the proceeding sentence, I authorize my Agent to:… Conduct and participate in any kind of lawful business of any nature or kind, including the right to sign partnership agreements, continue, reorganize, merge, consolidate, recapitalize, close, liquidate, sell, or dissolve any business and to vote stock, including the exercise of any stock options and the carrying out of any buy‑sell agreement.”

While the intent in making a financial power of attorney effective immediately is to ease a future burden (and not for the spouse to actually act right away), there is no doubt the language from our financial power of attorney is in conflict with the SBA and VA requirement that a certified person’s business ownership be unconditional.

Take-away Lesson for Financial Powers of Attorney

The commonly quoted statistic in estate planning is that less than 50% of persons have any type of written estate plan in place, and it is very common for business owners to not think about an estate plan until long after their business is already running and successful.

The SBA and VA take their regulations very seriously, and making ownership misrepresentations can subject a business owner to severe criminal and civil penalties. My concern is that many estate planning attorneys will not even realize that a financial power of attorney form that grants immediate power to a spouse could be in violation of federal regulations.

Before signing any estate planning documents, small business owners with government contracts need to make sure their financial power of attorney form is compliant with SBA or VA regulations. If you own a business with federal government contracts and have any questions regarding setting up your estate plan, please contact Attorney Adam Zuwerink at adam@govconlawyer.com or 231-457-4235.