Take Away: While Durable Powers of Attorney are an extremely helpful estate planning tool, they can also cause tax and liability concerns to the individuals who hold the power of attorney. While the temptation of many lawyers who draft durable powers of attorney is to include the ‘kitchen sink’ of powers in the instrument, more thought needs to be given to the intended purpose behind or use of the Durable Power of Attorney, in effect narrowing the scope of the powers granted to the agent who acts under the instrument.

Background: Yesterday’s TRO meeting took me a bit by surprise when I learned that GLT is willing on occasion to act as an agent under a Durable Power of Attorney. My surprise is  based on my experience over the past 20+ years where other financial institutions regularly refused to act as agent under a Durable Power of Attorney. My guess is that the general refusal of financial institutions to serve as an agent under a Durable Power of Attorney is based on the perceived inherent liability associated with holding a broad Durable Power of Attorney. I can envision how a financial institution might hold a very limited Durable Power of Attorney to solely to change the title of the principal’s assets from the principal’s name to the trustee’s name as successor trustee of the principal’s trust, so that the re-titled assets can then be managed by the trustee, but an institution should balk at holding a Durable Power of Attorney which confers far broader powers on the agent.

Law:  An agent who acts under a Durable Power of Attorney is a fiduciary. MCL 700.5501. Saari v. Susser (In re Estate of Susser, 254 Mich App 232 (2002).  The interpretation of a power of attorney is governed by the law of agency, meaning that normally the powers granted will be strictly construed. Griswatch v. Niedzwiecki, No. 275188, 2008 Mich App LEXIS 831 (April 24, 2008.) The law of agency is not the same thing as the law of trusts, however. Courts will often view the powers delegated to the agent under a Durable Power of Attorney as conferring discretion on the agent; the agent possesses the power but does not necessarily have the additional legal duty to exercise the power the agent holds. That is not quite the same thing as a trustee that possesses powers under a trust instrument, where the law of trusts generally compels the exercise of the power consistent with the trustee’s multiple fiduciary duties.

Potential Liability: Most ‘form driven’ Durable Power of Attorney instruments tend to load up the agent with all sorts of powers going well beyond merely the ability to fund an existing trust, reflecting the drafting attorney engaging in ‘what if..?’ planning for the worst case scenarios. I was certainly guilty of that approach to drafting Durable Powers of Attorney.  If that is the type of Durable Power of Attorney presented to the agent, then the agent should accept the appointment with some caution. While the agent is not required by law to exercise any of the delegated powers, I worry that a court might ascribe a trustee’s duty and responsibility to protect the settlor’s estate to the powers delegated as agent. While the powers conferred on an agent under a Durable Power of Attorney are generally viewed as discretionary- i.e. generally there is no affirmative duty imposed on the agent to exercise any or all of the delegated powers, my concern is that a court could conflate the powers held by the agent-trustee with the directive authority held by the trustee-agent under a trust instrument, and somehow reach the conclusion that the agent had an affirmative duty (not just the discretion) to act on behalf of the principal.

Example: I could envision a situation where GLT holds a limited financial Durable Power of Attorney on behalf of a client with only the authority to retitle the client’s assets in the name of the client’s trust. The client subsequently dies and an asset is later discovered still in the name of the deceased client,  which results in the need to open a probate estate (with more costs and expense associated with estate administration.) A disgruntled estate beneficiary claims that GLT abused its fiduciary duty by failing to use the Durable Power of Attorney to fully fund the decedent’s trust. A court or jury could conclude that the purpose of the limited Durable Power of Attorney was to fully fund the trust to avoid probate, and from that, the agent-trustee thus had an affirmative duty to search and to locate all of the principal’s assets and to transfer their titles to the trust prior to the principal’s death in order to avoid probate. In sum, rather than merely holding the authority to transfer the principal’s assets, the agent had an affirmative duty to find and transfer all of the principal’s assets to his/her trust.

Naming a Guardian or Conservator: The question which brought the topic of Durable Powers of Attorney to the attention of the TRO group was the inclusion in a presented Durable Power of Attorney  that gave  the designated agent the ability under the Durable Power of Attorney to name a guardian for the principal. The correct observation was that normally this type of power is more customarily found in a Durable Power of Attorney for Health Care decision-making- but not appointing- a guardian. After this question was raised at yesterday’s meeting I went back and looked at EPIC and confirmed that the principal, not the agent, can nominate in his/her Durable Power of Attorney a conservator, guardian of his estate, or a guardian of his/her person for consideration by the probate court if a protective proceeding is later initiated. Note that the principal makes this nomination, not the designated agent acting under the Durable Power of Attorney. While the probate court then is directed to give priority to that fiduciary nomination,  the judge ultimately makes that appointment exercising his/her own judgment. Thereafter, the successor trustee then accounts to the conservator, just as it would account to the principal if still competent. MCL 700.5503.

Other Agent Powers: Another provision in EPIC that deals with delegated powers to agents under Durable Powers of Attorney and the principal’s trust is with respect to the power to revoke, amend, or distribute trust property. A settlor’s retained power to revoke or amend his/her trust, or to distribute trust property from the trust can be exercised by an agent under a Durable Power of Attorney. But only to the extent that the delegated power is expressly authorized by the terms of either the trust instrument or the Durable Power of Attorney. MCL 700.7602(5). The Comments to this Michigan Trust Code provision, which is based upon the Uniform Trust Code Section 602, note:

Most settlors usually intend that the revocable trust, and not the power of attorney to function as the settlor’s principal property management device. The power of attorney is usually intended as a backup for assets not transferred to the revocable trust or to address specific topics, such as the power to sign tax returns or apply for governmental benefits, which may be beyond the authority of a trust or are not customarily granted to a trustee…. As described by the UTC comment, permitting an agent under a power of attorney to amend or revoke the trust likely would go beyond most settlor’s intentions.

Agent’s Limited Powers: While the Trust Code permits an agent to revoke or amend the principal’s trust instrument, there is no express authority in EPIC for an agent to create a will or trust for a principal. MCL 700.2501-2502; MCL 700.7402(1). Yet while EPIC is silent on the power of an agent who acts under a Durable Power of Attorney to create a trust, the power of an agent to create a trust on behalf of their incapacitated principal has long been accepted and acted upon by attorneys, their clients, and from time to time acknowledged by the courts. EPIC further recognizes the power of a probate court, without appointing a conservator, to authorize, direct or ratify a trust relation to the protected individual’s property if the court determines that it is in the protected individual’s best interests to do so. MCL 700.5408. The Restatement (Third) of Trusts, Section 11(5), also recognizes the power of an agent to create trusts on behalf of incapacitated principal- which is intended as a restatement of the common law of trusts.

Tax Complications: A recent example where holding a Durable Power of Attorney caused significant transfer tax complications is Estate of Powell v. Commissioner, 148 Tax Court 18 (May 18, 2017.) In that case the son held his mother’s Durable Power of Attorney. The son, using the Durable Power, created and funded a limited partnership on the same day the Durable Power was created;  $10 million in cash and securities of the mother’s assets were transferred, using the Durable Power,  to the limited partnership. The mother took a 99% limited partnership interest, with the son and his brother taking the 1% general partnership interest (the sons used promissory notes as their capital contribution to the partnership.) The son, again using his mother’s Durable Power of Attorney, then transferred all 99% limited partnership interests in a Charitable Lead Annuity Trust (CLAT). Discounts were claimed for the transferred limited partnership interests. Upon the mother’s death the CLAT was to terminate with its assets transferred to the two sons.  Mother died a week later. Yes, bad facts trying to exploit valuation discounts on Mom’s death bed, which resulted in a bad decision from the Tax Court. What the Tax Court did, in part,  was to focus on the son’s Durable Power of Attorney held on behalf of his mother. From that authority he held as her agent, and also as acting general partner of the partnership, the court found that the son, agent and general partner, would do his mother’s bidding with regard to distributions to be made from the limited partnership, even though the mother arguably only held a non-voting limited partnership interest. As a result, the court found that the mother indirectly still controlled the use and enjoyment of the assets  held in the limited partnership and the income those assets generated, which finding in turn triggered estate inclusion of all the partnership assets in the deceased mother’s estate by under IRC 2036(a)(2). The court found that the son-agent held a fiduciary duty to his mother under the Durable Power of Attorney, which caused him to honor her directions even though he held his general partnership interest independent of the Durable Power of Attorney- thus, an implied understanding of her control existed. This was the first case where the Tax Court used IRC 2036(a)(2) to cause estate inclusion, finding an implied retained control over the transferred assets by virtue of the son holding his mother’s Durable Power of Attorney. Thus, in order to avoid an implied understanding that the IRS might latch onto, it would not be prudent for the general partner of a partnership to serve as the agent of the limited partner if the goal is to remove wealth from the limited partner’s taxable estate.

Conclusion: Durable Powers of Attorney can be highly effective estate planning tools to manage an incapacitated individual’s assets, including the ability to transfer title to assets to the individual’s trust. But with expansive powers comes the risk or higher expectations of exercising the delegated powers, resulting, perhaps, in his broad duty to monitor the agents affairs and an affirmative duty to exercise those delegated powers. And the courts now seem to be inclined to expand upon the fiduciary relationship created under a Durable Power of Attorney to find an implied understanding to do the principal’s bidding when it comes to family entities created for estate planning purposes. The upshot is the need to take a close look at the powers conferred under a Durable Power of Attorney and perhaps narrow those powers to the major concerns of the principal and avoid kitchen sink Durable Powers of Attorney. At least it is something to think about.