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George F. Bearup, J.D. Senior Legal Trust Advisor

4-Jan-22

Fiduciaries

Take-Away: In something of a surprise, an agent who acts under a durable power of attorney is not treated as a fiduciary under the Michigan Estates and Protected Individual’s Code (EPIC). As the state’s Legislature actively looks at numerous proposed Bills to prevent financial elder abuse, it might consider amending  EPIC to designate an agent as a fiduciary.

Background: The Michigan Elder Abuse Task Force is pressing a Bill that would require an attorney to certify in a durable power of attorney that the principal understood the significance, i.e. the potential for abuse, of giving specifically identified powers to their agent, e.g. the power to make gifts, make assets joint, exercise powers of appointment, or change beneficiary designations. This Bill, if it becomes law, will require most durable powers of attorney to be updated to include the attorney’s certification that they made the principal aware that the potentially dangerous powers given to their designated agent, e.g. make gifts; change beneficiary designations, etc.,  could be abused.

It is not clear how such an attorney’s certification will curb the financial abuse of elders, but that seems to be the focus of the Bill, i.e. expressly make the principal aware that the person(s) named as their agents under their durable power of attorney could cause them financial harm, if not disrupt their estate plan. Perhaps an easier step, without the need to update existing durable powers of attorney, would be to expressly make an agent who acts under a durable power of attorney subject to the Estates and Protected Individuals Code (EPIC) and its provisions that prohibit self-dealing by fiduciaries.

EPIC: EPIC defines a fiduciary to include, but not limited to, a personal representative, funeral representative, guardian, conservator, trustee, plenary guardian, partial guardian, and successor fiduciary. [MCL 700.1104(e).] Strangely, this statutory definition of fiduciary does not expressly include an agent who acts under a durable power of attorney. Yet, an agent who acts under a durable power of attorney still owes fiduciary obligations to the principal under the common law. (More on that below.)

  • Agent Defined: An agent is defined under EPIC as an attorney-in-fact under a durable or nondurable power of attorney and an individual who is authorized to make decisions as a patient advocate concerning another’s health care. [MCL 700.1103(a).] As noted above, an agent as so defined, is not a fiduciary under EPIC.
  • Fiduciary Relationship: EPIC expressly defines a fiduciary relationship as one where an individual stands in a position of confidence and trust with respect to each heir, devisee, beneficiary, protected individual or ward for whom the person is a fiduciary. [MCL 700.1212.] To be expected, missing from the identified objects of a fiduciary’s standing of confidence and trust is the  principal of a durable power of attorney.
  • Prohibited Fiduciary Conduct: EPIC also describes prohibited conduct of a fiduciary: “Unless the governing instrument expressly authorizes such a transaction or investment, unless expressly authorized by the court, except as provided in section 3713, 5421 or 7802, or except as provided in section 4405 of the banking code of 1999 [citation omitted] a fiduciary in a fiduciary’s personal capacity shall not engage in a transaction with the estate that the fiduciary represents and shall not invest estate money in a company, corporation, or association with which the fiduciary is affiliated other than a bondholder or minority shareholder. A fiduciary in the fiduciary’s personal capacity shall not personally derive a profit from the purchase, sale, or transfer of the estate’s ” [MCL 700.1214.]

Of interest is that while an agent is not included in the statutory definition of fiduciary several Michigan court decisions have directly, or indirectly, applied this statutory prohibition against self-dealing to an agent who served under a durable power of attorney. In re Estate of Cummin, 267 Mich. App. 402 (2003);  In re Sell Estate, Michigan Court of Appeals, No. 321077, August 4, 2015.) A couple of court decisions expressly state that MCL 700.1214 does not apply to an agent who acts under a power of attorney, yet they also suggest that its prohibition against self-dealing can be extended to an agent who acts under a durable power of attorney. In re Byrne Estate, Michigan Court of Appeals, No. 307641 (March 25, 2014); Ruster v Koon, Michigan Court of Appeals, No. 330328, (February 28, 2017.)

Agent’s Fiduciary Obligations: EPIC contains several statutory provisions with regard to an agent who acts under a durable power of attorney. [MCL 700.5501 through MCL 700.5505.] However, those provisions are silent with respect to the imposition of fiduciary duties on an agent. Instead, Michigan’s common law becomes the source of imposition of fiduciary duties of an agent, not EPIC.

  • Mental Capacity to Delegate Powers: The principal must be competent at the time he or she signs the durable power of attorney that delegates authority to his or her agent. Accordingly, the principal must possess the ability to consent to, render a degree of control over, and appreciate the significance and consequences of the resulting agency relationship created under the durable power of attorney. Persinger v. Holst, 248 Mich. App. 499 (2001.)
  • Fiduciary Relationship Created: The grant of a durable power of attorney creates a fiduciary relationship between the principal and the agent. Smith v. Onaway Community Federal Credit Union, Michigan Court of Appeals, No. 246196 (October 21, 2004.)
  • Fiduciary Obligations Not Presumed: There is no requirement that the durable power of attorney instrument expressly state that it imposes fiduciary obligations on the agent. In re Estate of Susser, 254 Mich.App. 232 (2002.)
  • Powers Strictly Construed: A durable power of attorney is governed by the law of agency, not trusts. Consequently, the powers that are granted to an agent under a durable power of attorney will be strictly construed. Cooper v. Edgewater Bank, Michigan Court of Appeals, No. 296189 (July 19, 2011); Griswatch v. Niedzwiecki, Michigan Court of Appeals, No. 275188 (April 24, 2008.)  However, the principal, if competent, can expand the written authority given to his or her agent under their durable power of attorney. In re Estate of King, Michigan Court of Appeals, No. 263497 (January 31, 2006.)
  • Self-Dealing Prohibited: Because the agent owes common law fiduciary duties to the principal, the agent is subject to the prohibition against self-dealing by the agent. In re Estate of Cummin, 258 Mich. App. 402 (2003.) However, an agent may engage in self-dealing if the principal consents and has knowledge of the details of the transaction; the passage of time and the change in the principal’s mental status cannot affect the agent’s authority to transfer property if the principal had consented to the transaction with knowledge of its details. Murphy v. Hegi, 474 Mich. 1117 (2006).

Protecting Elders from Financial Abuse: As noted above, it is unclear how having an attorney’s certificate that the principal was made aware of the potential for abuse by an agent using some of the delegated powers under a durable power of attorney will go a long way towards stopping financial abuse using a durable power of attorney. Rather than implicate attorneys, and potentially enhance their liability to disgruntled heirs and beneficiaries who believe that their decedent’s agent abused the durable power of attorney because the principal was not made fully aware of the dangers of such powers by the attorney, an easier approach might be to:

(i) amend EPIC to include within its definition of fiduciary an agent who acts under a durable power of attorney;

(ii) clarify the intent of this EPIC amendment, that the definition of agent would be limited to an individual who acts under a power of attorney for financial affairs;

(iii) separately add a new definition for a patient advocate, so that a patient advocate no longer falls under the definition of agent;

(iv) make an agent subject to the self-dealing prohibitions of MCL 700.1214, which would require that the durable power of attorney would have to expressly permit or authorize self-dealing (effectively eliminating verbal authorizations by the principal which are permitted under the common law); and

(v) treat an agent’s violation of MCL 700.1214 as a conversion of the principal’s assets subjecting the offending agent to possibly double or treble damages, court costs and attorney’s fees awards.

Conclusion:  The Michigan Elder Abuse Task Force is busy at work and we can expect from it many proposed Bills in the near future. The source of the problem of an agent abusing a durable power of attorney for financial affairs is not the principal, nor the principal’s attorney. The source of the problem is the agent’s abuse of the position of confidence and trust that the principal places in the agent. Alerting the principal in advance of the potential for abuse of the powers contained in the durable power of attorney will not do much to curb an abuse of those delegated powers, if the agent is so inclined to misuse his or her powers. Instead, if the financial abuse of elders is so prevalent in our society that we as a society must take some corrective action, and it is, it would seem that criminalizing such bad behavior, along with financial punishment, like treating the abuse of the financial durable power of attorney as a conversion of the principal’s assets would be much more as an effective deterrent.