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The State of Powers of Attorney and Corresponding Estate Planning Issues(1)

Thursday, January 10, 2013

By Andrew H. Hook, CELA, CFP

Hook Law Center, P.C., Virginia Beach, VA

Our society has moved away from supervised fiduciaries into an era of nonprofessional asset managers. Whereas a generation ago most families used professional trustees to manage assets, today many clients rely upon family members as fiduciaries under a Durable Power of Attorney (DPA). This development has led to increases in elder abuse.

Much of this elder abuse has occurred under the guise of a Durable Power of Attorney. A statistical analysis of abuse of principals under powers of attorney is included below.  A flow chart of common drafting decisions is also included. When drafting a DPA, attorneys should balance accountability of the agent with empowerment to avoid the potential for abuse by the agent.

An agent who is subject to extreme or burdensome oversight may be hesitant to act within the agency relationship and may refuse or resign the role of agent. However, a fully empowered agent without any oversight is more likely to commit fraud. Thus, drafting an instrument requires a careful review of each client's circumstances and an analysis of the likely scenarios in which the balance of power could falter towards abuse by the agent.

There are four methods attorneys should use to balance accountability and empowerment: (1) thoroughly explain to the client what it means to have an agent acting on his or her behalf; (2) carefully analyze the decision as to who the agent (or agents) will be and which powers are appropriate for this client to delegate; (3) draft the instrument to match the appropriate levels of oversight and empowerment; and (4) consider other asset preservation methods.

In the rush of daily practice, many attorneys forget to review the power a principal has over his or her agent, as well as the duties of agency. A client who is familiar with the confines of the agency relationship, is less likely to become a victim of elder abuse. The forthcoming revision of Bloomberg BNA portfolio 859 T.M.-3rd, to be published in 2013, will contain checklists and forms which will help attorneys advise their clients as to the duties of the agents they choose, as well as the means of protecting the rights of the principal.

Agents are fiduciaries, but the fiduciary duty under a Durable Power of Attorney differs somewhat from the common law duties an agent owes to a principal; at this time, many states have decided to follow the duties provided by the Uniform Law Commission's Uniform Power of Attorney Act (UPOAA). Even those states that have not openly adopted the UPOAA tend to be influenced by its fiduciary duty provisions.

One notable example of an important fiduciary duty that varies from state to state, depending on the state's incorporation of the UPOAA, is the duty to preserve a principal's estate plan.  Some states require an agent to "attempt" to preserve the principal's estate plan; others impose an outright duty of preservation.  Navigating this duty can be intricate, especially if a DPA is intended to be used across state lines. In 859 T.M.-3rd, the author addresses these and other issues relating to the management and implementation of fiduciary duties.

While it is critical to review the taxation and logistical implications of a power of attorney, it is just as important to carefully review who will be an appropriate agent. Of all the decisions clients make regarding their estate plans, the choice fiduciaries is arguably one of the most important, and it is one for which the advice and counsel of the attorney is critical. An agent is a fiduciary like a trustee or an executor; the decision as to who should serve as agent should carry similar weight to the selection of a trustee or executor. The portfolio leverages decades of elder law experience into a concise resource that will assist attorneys as they advise on the choice of appropriate fiduciaries. Is the agent able to manage money properly? How does the client know this to be true? The Great Recession has made finding a trustworthy agent a harder task. Attorneys should consider the impact that a family dynamic may have on an agent. Attorneys can quantify family dynamics and help clients make decisions through the use of new diagram "Smart-Draw" technology. Other technologies can be used to help bring an objective outlook to incredibly emotional client decisions.

The portfolio also contains numerous forms which will serve as helpful templates to ensure that appropriate levels of power are achieved. Should the agent have to do accountings to family members? How does one balance health decisions with power of attorney decisions? These questions and others are answered in the forms and practice tip sections.

Another theme of the text is that dangerous flexibility of a Durable Power of Attorney. A DPA is not for everyone.  Therefore, other instruments may be more appropriate. Trusts create clearer opportunities for direct wishes, and continue to be used in conjunction with DPAs in many estate plans. Guardianship is another option for some individuals. Many states have updated their guardianship and conservatorship statutes to allow for a more efficient process for families.

A Durable Power of Attorneyis not just a form; it is a formula for empowerment. Good drafting requires the attorney to consider the different variables in the formula.  This portfolio will help attorneys zealously advocate for their clients by teaching them how to balance the variables in the agency formula.

Appendix A: Statistical Analysis Of Durable Power Of Attorney Abuse

A word search on Westlaw on August 28th, 2012 created the data set outlined herein.

There were 672 reported cases in the nation over the last 8 years which substantively and directly involved power of attorney abuse. It is noteworthy, however, that many disputes do not go to court. Fewer still are handled by published opinions.  Additionally, not all published opinions are entered into reporter systems.

Although 672 may seem low, it is noteworthy that due to the rise in the use of Revocable Living Trusts, many people sue under trusts when DPA abuse occurs. This may be in part due to the clear duties of a trustee to account to beneficiaries. It may also have to do with attorney decision making or other tactical elements of litigation. Sadly, many beneficiaries do not learn of DPA abuse until after the principal's death.

Of these 672 cases, we drew a statistically representative sample of 29 cases. These cases were from many different states across the nation and entailed a variety of issues relating to DPA abuse.

Category

Number of Cases (Total = 29)

Percentage of Representative Sample (Total = 100)

Identity Theft

1

3.448 %

Theft Of Funds(General Misappropriation)

4

13.793 %

Gifting

10

34.482 %

Inappropriate DPA and Trust Transfers (dissolution and withdrawal of corpus)

3

10.344 %

Inappropriate Financial Products

2

6.896 %

Real Property Interest Transfers and Sales

4

13.793 %

Beneficiary Changes

2

6.896 %

Neglect of Principal (Physical Abuse)

1

3.448 %

Agent Mistake

2

6.896 %

Appendix B:

Chart

For more information, in the Tax Management Portfolios, see Cline, 825 T.M., Powers of Appointment-Estate, Gift and Income Tax Considerations, and Hook, 859 T.M., Durable Powers of Attorney, and in Tax Practice Series, see ¶6350, Estate Planning.