The full PDF in which this article appears can be found in Bifocal Vol. 43, Issue 3.
Steps Attorneys Can Take to Reduce the Risk of Financial Exploitation
Introduction:
Financial exploitation is often carried out by transactions with a person who lacks capacity, breach of contract, breach of fiduciary duty, fraud, or undue influence. While it is rare for a lawyer to knowingly play a role in these thefts, there are steps lawyers can take to reduce the risk of exploitation or to set the stage for a legal action for recovery should a theft happen.
The Basic Ethical Step:
A lawyer has an ethical obligation to communicate with a client in a way that the client can understand, to enable the client to give informed consent and decide the goals of the representation, and to take reasonable steps to protect a client with diminished capacity. When preparing documents to be signed by someone who is not the lawyer’s client, a lawyer has an obligation to not assist the client in a crime or fraud. To do this the lawyer needs to take reasonable steps to assure that the client, or the non-client who is impacted by the actions of the client understands the legal transaction.
The most common situation of needing to assess client capacity is when the attorney is drafting Powers of Attorney, Wills, Trusts, other contracts, or property transfers for a client. The lawyer needs to ask sufficient questions and confirm understanding that the client understands the fundamental nature of the legal act, the risks and benefits and the long-term consequences of the decisions they are making. When in doubt, the lawyer should look to Rule 1.14 and the comments to that rule for guidance. The ABA Commission on Law and Aging publishes a comprehensive “Lawyer Handbook” on client capacities.
While the obligation to assure capacity of the person signing the document, or impacted by it, may or may not attach to a non-client, a lawyer has a clear ethical obligation to not assist a client in the perpetration or continuation of a crime or fraud. Think of the following scenario. Daughter asks you to prepare a deed transferring dad’s house to her as a gift. Your client may be the daughter, not dad. But you have an ethical obligation to assure that you are not assisting her in a crime (theft by having a person who lacks capacity to consent, consenting to the gift) or a fraud (misrepresenting to Dad what he is signing.) To do this, you need to ask enough questions about the person who is signing the document to have a reasonable basis to believe the client is not using your services to steal the home. This applies even if you NEVER MEET DAD. The best policy is to never prepare a document that you don’t oversee the signing of. When overseeing the signing explain what the document means and ask enough questions to alert you to red flags of a crime or fraud. In most cases you only represent one of the two parties, so you need to tread carefully. If you suspect a crime or fraud, you need to have a private conversation with your client explaining your concerns. You are protecting your client from possible civil or criminal legal actions, and you are protecting yourself from possible ethics or malpractice claims, or public embarrassment. It is better to step aside, and refund the fees, than to be thought of as a lawyer who helped someone commit financial exploitation by looking the other way.
Major Gifts
When a client approaches you about a gift of significant real or personal property, you need to know why. It is common for adults to gift a home or farm with an implied promise that the adult will be able to live in the house the rest of their life, or a promise that the recipient will care for the person for the rest of their life. Exploitation takes place when those promises are not honored and legal action for enforcement can be nearly impossible without documentation of the promise. A lawyer can help their client, by putting those agreements in writing, signed by both parties. Reserving a life estate is an option, but there may be tax or public benefits reasons why a life estate is not desired (far beyond the scope of this article.) But if the reason for the gift, is a promise to provide in a meaningful way for your client’s needs, get it in writing. If the recipient of the gift is unwilling to sign, that should raise a concern that the promise is not going to be honored. Having it in writing gives your client some basis for a claim of breach of contract or breach of promised action if the promise is not honored.
This same principle applies to gifts of business interests, valuable personal property, financial assets, or interests. Find out the reason why the person wants to make the gift, and if they are expecting anything in return, get it in writing. If they are giving the income producing business to the kids in exchange for employment or a salary, get it in writing.
Fraud
Fraud involves an intentional lie, material misstatement of fact or intentional withholding of a material fact, resulting in a material benefit to the person perpetrating the fraud. Financial exploitation results when a person uses fraud to induce a person to enter into a financial transaction. The defense to this, is getting all of the terms in writing, verifying facts to the extent possible, and gathering the evidence up front, that would be needed later for your client to assert a claim of fraud, or for a criminal prosecution. This involves more than just following directions of your client, but asking for documentation, evaluating the claims being made, advising your client on risks, and papering the file for a defense. Again, you have an ethical obligation to not assist your client in the perpetration of a crime or fraud.
Breach of Fiduciary Duty
Breach of fiduciary duty results in financial exploitation when an agent, guardian or conservator, executor, administrator, or trustee enriches themselves with the assets they are charged with protecting. The two most common forms of financial exploitation by breach of fiduciary duty are misuse of a power of attorney or misuse of guardianship or conservatorship to steal assets, or insider dealing such as buying the grantors $20,000 car for $2,000. Many people who owe a fiduciary duty, are unaware that they owe a special duty of care to anyone. The first step in defense is prevention and this starts with detailed letters of instruction to every person who is appointed as a fiduciary. The actual duties of a fiduciary vary slightly from state to state. The instructions should include maintaining separate accounts, detailed financial records, to not buy assets from the estate for less than fair market value (or without review and approval,) and generally to put the interest of the other person ahead of their own. The letter of instruction also becomes critical evidence if litigation is ever needed. Have the fiduciary sign a copy acknowledging receipt, to be retained in the file.
Undue Influence
Undue influence is the exertion of influence over a person who is vulnerable, by a person in a position of position of power, to such an extent that it changes the choice or free will
of the person, to the benefit of another person. Probably the best undue influence screening tool is published by the California Elder Justice Coalition, at https://www.elderjusticecal.org/undue-influence.html. The tool can be customized to the elements for another state, and for the social and cultural issues that are likely to be common. The common elements are:
- A person who is vulnerable – but still has the ability to make informed decisions
- An influencer in a position of power or authority
- An action or tactic to influence the choice of the vulnerable adult
- An outcome that is unfair or improper
The best defense is prevention. Prevention starts with meeting with the client privately, and talking through the issues, the relationships, what has happened or been said, and the fairness of the outcome. If you suspect undue influence, you should explain your concerns to the client and listen to the answers of why. In some ways we are all influenced by someone. Ultimately, if you truly believe the proposed course of conduct is likely to result in a bad outcome, you can / should withdraw. If a client wants to name their alcoholic son who works in a liquor store as the agent on their power of attorney, despite there being lower risk family members willing to serve as agent, you should explain why and decline.
The ABA published the ultimate guide to preventing and litigating undue influence cases, “Undue Influence and Vulnerable Adults, by Sandra Glazier, Thomas Dixson and Thomas Sweeney. https://www.americanbar.org/products/inv/book/392767696/
Conclusion
Lawyers play a critical role in the prevention of financial exploitation and in creating documentation to enable litigation should the unexpected happen. Taking extra care on capacity assessment, documenting the reasons for transactions, instructing fiduciaries, and helping clients understand and avoid higher risk transactions are all ways lawyers can help prevent exploitation, or empower litigation if needed.