Durable Powers of Attorney – Stopping The Potential for Abuse

I chuckled this morning when Wendy described the Heckerling Institute speaker’s description of a Durable Power of Attorney as creating a “license to steal.” Sadly, for the most part I agree with that generalization. Most parents are unwilling to view their child, or grandchild named as their agent under a Durable Power of Attorney, as a potential thief. Yet the abuse of a durable  power of attorney occurs far more frequently than we want to think, not to mention a free-wheeling agent using a Durable Power of Attorney to frustrate a client’s well thought out estate plan.

A few of the steps I took while practicing law in admittedly a feeble effort to prevent abuse of the Durable Power of Attorney by its agent included the following:

1. Identify Agent as a Fiduciary: I spelled out in the instrument of appointment that the agent was to serve in a fiduciary role. EPIC defines fiduciary but does not include within its definition an agent who acts under a durable power of attorney within its scope. See MCL 700.1104(e).  Yet Michigan’s common law is clear that the agent owes fiduciary obligations to their principal; at a minimum, the agent must not engage in self-dealing. MCL 700.1214. In Northern Trust Bank FSB v Becker (In re Byrne Estate) No. 307641 2014 Mich App LEXIS, 493, the Court acknowledged that MCL 700.1214 “does not apply generally to all persons who delegate authority another via  a power of attorney or other agency.” The Court’s decision did suggest, however that the substance of EPIC applies to self-dealing by an agent notwithstanding consent by the principal, if the principal suffers dementia.
2. Provide for the Agent’s Compensation: The instrument might clearly anticipate that the agent is to be compensated from the principal’s estate for their services, just like a conservator or guardian. If compensation is authorized, then the temptation for an agent to become a bit ‘heavy-handed’ might be minimized.
3. Note Agent’s Liability In Instrument: EPIC makes it clear that an attorney-in-fact may be liable for breach of fiduciary duty to the principal. MCL 700.5501(g). The Durable Power of Attorney can relieve the agent from liability, but not for a breach of fiduciary duty if acting in bad faith or with reckless indifference. Thus, while often the Durable Power of Attorney will seek to absolve the agent from liability (to induce the agent to actually accept the assigned authority and implied responsibility), the statutory exception for bad faith and reckless indifference should also identified in the agent’s acknowledgement, so that the agent understands that they cannot act with carte blanche to manage the principal’s assets. In the Agent’s Acceptance form, this limitation on exoneration from liability should be expressly identified, e.g. “I acknowledge that I can be held liable for breach of my fiduciary duties if I act in bad faith or with reckless indifference to the needs of my principal.”
4. Periodic Accountings: EPIC requires that the agent ‘shall maintain records of the attorney in fact’s actions on behalf of the principal, including transactions, receipts, disbursements and investments.” MCL 700.5501(f). Unfortunately the statute does not indicate if, despite this obligation to keep records, that the agent is then required to periodically account to the principal. Thus,  I often required the agent to give to the principal, if competent, and if the principal was incompetent to the successor named agent in the same instrument, an accounting of all actions taken by the agent every 90 days when the agent used or relied upon the Durable Power of Attorney, including any change in how the title to the principal’s assets were held. This would include transfers from the principal’s name to the principal’s revocable trust. I also would add that the agent’s records could, at any time, be reviewed by the successor agent, and sometimes expanded that right of review to extend to members of the principal’s family, e.g. children, or the principal’s attorney. This was intended to force the agent to keep good records and to refrain from commingling the agent’s assets with the principal’s assets. All too often when I became involved in family disputes, which centered upon the agent’s use of the Durable Power of Attorney, any inquiry of the agent was greeted with a ‘you do not need to know.’ Giving the right to review records to third-parties was away around the need-to-know defense.
5. Consent to Gifts: If the principal’s desire was to give to the agent the ability to make gifts using the principal’s assets, then either the ability to make gifts was limited to the annual exclusion amount, e.g. $14,000 per donee per year, or it required that gifts to a child, grandchild, or spouse of either, would be of an equal amount to all similarly situated donees, e.g. if one child received a gift of $5,000, then all children had to receive identical $5,000 gift. Alternatively, if sizeable gifts were to be made by the agent above a nominal dollar amount, e.g. gifts in excess of $1,000 in a calendar year, the written consent of a third party, e.g. the client’s CPA, would be required, whether or not the gift was taxable, thus covering of direct gifts of an individual’s medical expenses or tuition, while not being taxable yet capable of depleting the donor’s taxable estate. Yet another option would be to make the agent’s power to make gifts  contingent upon there being in place a written medical determination of the principal’s mental incapacity. Finally, with older principals where the possibility of applying for Medicaid in the future was a reality, the agent’s ability to make gifts would be limited by first obtaining the consent of the principal’s attorney who it is expected would first explain Medicaid’s 5-year look-back period to the agent as a threat to the principal’s Medicaid eligibility. Similar limitations might be added to apply to loans using the principal’s assets to close family members, where the the ability to make loans was conditioned on using market-rate interest and on furnishing adequate collateral security for the principal’s loan.
6. Add a Protector: I have read articles, but I concede that I never went this far, that named a trust protector to oversee the actions taken by the agent under the Durable Power of Attorney. Arguably I indirectly named protectors if I required the agent to obtain the consent of the principal’s CPA prior to making gifts of the principal’s assets, but some articles have suggested that,  like with trusts, a principal could designate a Durable Power of Attorney protector who could be delegated the authority to remove an acting agent, or to receive periodic agent accountings from the agent, or to approve the agent’s compensation,  or who would be given the authority to compel the agent to answer any questions that the protector posed. Admittedly adding a protector to a Durable Power of Attorney could make the Durable  cumbersome if the agent must report all actions to the protector , or it could impede the agent’s efficient administration of the principal’s financial affairs if the protector’s consent was a condition precedent to the agent’s exercise of authority, but it is something to consider if there are sufficient assets held by the principal outside of a trust and an extensive list of powers and authority are given to the agent to manage those extensive assets on behalf of the principal. While advisors usually strongly recommend a trust in such situations, some clients are averse to trusts, in effect utilizing the agent under a Durable Power of Attorney to function much like a trustee.

Maybe someday Michigan will adopt a statute, like some other states, that imposes treble damages on the agent who exceeds his/her authority using the Durable Power of Attorney, or it adopts an express statute [beyond the vulnerable adult criminal statutes) that makes it a crime to abuse a Durable Power of Attorney’s grant of authority. Until such statutes are in place to constrain an agent, then next best approach is to either limit the agent’s powers, or to require the agent to report all actions taken in reliance upon the Durable Power of Attorney’s delegation of authority, and address the consequences of an agent’s refusal to disclose either their actions or the records the statute requires that the agent maintain.