September 1, 2012

POAs: The Diligent Lawyer’s Dilemmas

By the SLD Estate Planning Committee

Powers of attorney have existed for centuries. Many were used to grant authority for specific undertakings and for limited periods of time. Then the grant of powers broadened, and lawyers began to use them as tools for the management of a client’s affairs. State legislatures approved the practice and provided that powers of attorney could survive the onset of incompetency of the grantor merely by stating so in the document. These documents are called “durable” powers of attorney. A durable power of attorney can be a simple document and it can be detailed and of great length.

The attorney-in-fact (or agent or grantee of the power) is frequently given almost unlimited power over the business affairs of the grantor by the broad language of the document. This was good planning because it provided for great flexibility in managing the grantor’s affairs. The functional equivalent of a living trust could be achieved without the bothersome burden of transferring the ownership of all of the grantors’ assets to a trustee “to avoid probate.”

In the past decades, there have been many news reports about abuse of elderly persons. Not uncommonly this abuse involves the inappropriate use of an elder’s assets by a trusted person. The trusted person may or may not be a relative. Often the abuser is a caregiver. Perhaps the misdeed is innocent or well-intended.

Some states’ attorney generals have offices dealing with elder abuse. A fair number of private organizations have elder abuse groups. Legislatures have enacted penalties for abusers. Yet caregivers continue to help themselves to the assets of their wards and grantors.

Recently an author was told by an attorney-in-fact that the attorney-in-fact would at some time transfer some of the grantors’ assets to the attorney-in-fact because the grantor liked him a lot and wanted him to benefit from the grantor’s estate. The attorney-in-fact was oblivious to his obligation to act under the authorizing document solely for the benefit of the grantor. He wanted the author to approve his proposed transfers on behalf of the ward.

The Uniform Law Commission (“the Commission”), formerly the National Conference of Commissioners on Uniform State Laws, is a 115-year-old organization of lawyers, judges, legislators, legislative staff, and law professors appointed by state and territorial governments. Its members research, draft, and promote state laws in areas where uniformity is desirable. In 2003, the Commission appointed 10 persons to study then-current state legislation, conduct surveys, gather current views, and, if appropriate, report to the American Bar Association House of Delegates. Their report came in 2006 in the form of a new Uniform Power of Attorney Act that the House of Delegates approved.

The Act makes some improvements in extant law. For example, specific authority must be included if the agent (new term for the attorney-in-fact) is to be enabled to make gratuitous property transfers.

The Act also provides that, if two or more agents are appointed, they may act separately. This obviously promotes convenience in handling the grantor’s affairs, if that is what the grantor wanted. Is it possible that the appointment of two agents was intended to create a check by one on the actions of the other? Is it more likely that the grantor, concerned about dissipation of his or her assets, was more interested in a check than flexibility?

Do we as practicing lawyers have a duty to discuss these alternatives with the client in a planning session? Is this true whether our respective states have adopted the 2006 Uniform Act or not?

The 2006 Act adopts a feature that is appearing in a number of states. Both the California and Florida acts do. This feature breaks the grant of powers into numerous subjects. The uniform form then requires the grantor to check those classes of powers he wants his agent to have. A final box permits the grantor to check “all of the above.” Seven special actions are prohibited unless those boxes are also checked. In California, however, the power is not “durable” unless the document so states.

To the extent that, in the signature process, the grantor must make selections of the classes of powers to be granted or check “all of the above,” some additional thought by the grantor is required. But has the grantor’s attention been adequately directed to thinking about the character of his nominated agent? Or of the possibility that the circumstances of the agent may change—loss of job, health needs, loss of scholarship, divorce, etc.?

How does the attorney raise these questions? Does he have a duty to do so? What if the proposed agent is in the consultation room?

One safeguard that can provide a measure of protection for the client’s assets lies in additional responsibility for the lawyer. The lawyer can retain the original executed power of attorney. Then, when the agent needs to use the authority, the attorney can certify that the original of the copy of the document attached to the certificate is in the lawyer’s possession and that, to the best of his or her knowledge, it remains in effect without modification.

Many law office management articles, however, advise lawyers against retaining original client documents, especially wills. Most durable powers of attorney are probably executed along with wills as part of an estate plan “package.” The same reasoning (efficiency, disappearing clients, etc.) regarding retention of wills applies also to powers of attorney. Clients move. Sometimes they change lawyers. Sometimes they are influenced by a different child.

What shall we do? Likely the client will need more than one original document. Some lawyers execute multiple copies of the durable power of attorney and deliver them all to the client for distribution as the client chooses. That eliminates the lawyer’s cost of storage. Also eliminated is later certification by the lawyer, as the documents are needed by the agent, that the “attached document is a copy of the original which is on deposit in the lawyer’s files.” But what of our responsibility to the client? Are we merely legal scribes? The Committee remains divided on the subject of retention of originals by the drafting attorney.

There may be some middle ground. Some authors suggest the use of a revocable inter vivos trust with a trusted trustee. Does the use of a trustee grant more protection than use of an agent? Will the potential financial abuser be less inclined to dip into the grantor’s funds because he has a different title? Experience is to the contrary.

There is another idea, short of court supervision (guardianship) and its periodic reporting. Full disclosure is the objective of securities regulation. Perhaps more disclosure on a current basis can help alleviate elder abuse. Consider this: have the grantor designate in the power of attorney some other trusted person to whom the agent must periodically report on a detailed basis all that he or she has done under the authority of the power of attorney in the preceding 30 (or 60 or 90) days, together with an annual accounting of all the grantor’s assets. This process would require the agent to keep a log of his or her activities along with current accounting records. The suggested reporting would not be to a public body. Rather, it could (and perhaps should) be only to another family member or trusted friend. To the extent that increased visibility will deter, reporting can only be beneficial in protecting the client’s assets from deliberate and unintended dissipation.

Should the lawyer explain this option of a required reporting? Perhaps legislation could require that any person who executes a power of attorney must be provided with a pamphlet that explains some basic cautions about all powers of attorney, i.e. their power, when they take effect, of the potential for well-intentioned but self-serving action by the attorney-in-fact, and, when they lapse, of inappropriate disposition of assets (i.e. they are not a will substitute). Then, armed with the fear of potential (perhaps even well-intentioned) faulty conduct by the designated agent, it may be easier for the lawyer to suggest to the client that periodic reporting may be a worthwhile requirement for the client to impose on the agent. Yes, it may also be well to provide for compensation of the agent.

Each state could also decide whether to make periodic reporting mandatory or optional. If legislation could require that each valid form of power of attorney give the grantor the option to require reporting, it is submitted that some significant progress could be achieved in discouraging what otherwise might result in abusive conduct.

Failure of the agent to render an accounting required by the power of attorney would be conduct that is the basis for action by any person named in the legislation. The person could be one named in Section 116 of the 2006 Uniform Act if it were adopted in the subject jurisdiction. Also, the power of attorney itself could provide that a failure to report is a breach of the agent’s duty to the grantor of the power, promoting a threshold for judicial correction and perhaps sanctions. The various bar association probate sections could encourage such legislation, and they could also be supportive of the reporting practice.