Durable Powers of Attorneys — Time for Some Limits?

A durable power of attorney is an important part of any estate plan. With a durable power of attorney, an attorney-in-fact (agent) can manage an individual’s (principal) financial affairs without the need for a probate court appointed conservator when the principal is either unable, or incapable, of making decisions. While a durable power of attorney adds important flexibility to managing an individual’s assets, an agent abusing the authority given to them under a durable power of attorney can also destroy a principal’s estate plan.

A recent court decision is a reminder of the dangers of giving someone a durable power of attorney when it was abused by the agent, I this case the principal’s son. In Nice v United States, No. 18-7362 (E.D. Louisiana, October 16, 2019) Mary Ellen found herself a widow after 62 years of marriage. Mary Ellen’s son, Chip, who moved in with Mary Ellen in 2004 shortly after his father’s death. Mary Ellen began to show signs of cognitive impairment, and she was subsequently diagnosed with ‘early dementia,’ which became progressively worse as the years passed. In 2011, Chip obtained a durable power of attorney from his mother. Chip then slowly separated Mary Ellen from managing her finances and began to divert his mother’s income to his own personal use. Using Mary Ellen’s durable power of attorney, Chip had distributions from Mary Ellen’s IRA deposited in her bank account, which Chip then withdrew and used for his own benefit. By 2014, Chip’s sister had seen enough, and she filed a lawsuit and had herself appointed as Mary Ellen’s conservator. As conservator, she also had the court declare that Mary Ellen’s durable power of attorney given to Chip a nullity due to her dementia.

Not only was Chip’s behavior egregious, the worst was yet to come. The issue in this federal court litigation was who was responsible for the payment of the income taxes on the funds that Chip withdrew from Mary Ellen’s IRA. No taxes had been withheld from the IRA distributions over the years and an income tax bill of $519,502 was outstanding at the time of the litigation. Mary Ellen, through her attorneys, claimed that she should not be liable for the income tax liability. They argued that since Mary Ellen never received the IRA distributions, she was unaware of the distributions from the IRA, she did not exercise any control over those IRAs and therefore, she did not benefit from the IRA distributions. Unfortunately, Mary Ellen had periodically written small checks from the depository account for her piano lessons and her hair appointments. Based on the few checks that Mary Ellen wrote against the bank account the federal judge found that Mary Ellen was responsible for the income tax liability, because she “continued to have access to the account and she arguably had the ability to control the disposition of the funds.” Therefore, the IRA distributions wrongfully obtained by Chip, using his mother’s void durable power of attorney, were nonetheless taxable to Mary Ellen, even though Chip had effectively deprived her of most (if not all) of the IRA distributions. The judge’s decision was silent with regard to where Chip was, or what liability, if any, Chip had to his mother. It is clear that the Nice family was destroyed by Chip’s greed and misuse of his mother’s durable power of attorney.

In Michigan, a durable power of attorney is governed by the law of agency. An agent who serves under a durable power of attorney acts as a fiduciary, whether or not the instrument describes or mentions that relationship. At common law, and under Michigan statutes, the agent is subject to the prohibition of self-dealing, but if the principal consents and has full knowledge of the facts, the agent may personally engage in a transaction with the principal or the principal’s other agents, i.e. self-dealing.

The Michigan statute that authorizes a durable power of attorney provides some guidelines with regard to the agent’s standard of care when using the power of attorney, but it is questionable how effective that standard of care is to constrain the actions of an agent who intends to abuse the trust placed in him or her. Michigan’s statute requires the agent: (i) to take reasonable steps to follow the principal’s directions; (ii) provide an accounting to the principal upon request; (iii) not make a gift of all, or any, of the principal’s property, unless provided in the durable power of attorney; (iv) unless provided in the durable power of attorney, while acting as agent, not create an account or other asset in joint tenancy between the principal and agent; and (v) maintain records of the agent’s actions, including transactions, receipts, disbursements, and investments.

The problem with these constraints is that by the time someone discovers the fact that the agent did not adhere to the proscribed standard of care, considerable damage is done to the principal’s financial or to the principal’s estate plan if assets no longer exist to be governed by principal’s Will or Trust. To avoid that situation, additional provisions should be added to a durable power of attorney for financial affairs to provide greater protection to the principal and his or her financial affairs. Some examples follow:

The durable power of attorney should be held by a trusted third party, e.g. the principal’s estate planning attorney, until the events arise where the durable power of attorney is needed by the agent for decisions.

Rather than impose a duty to account on the agent predicated upon the principal’s request, the agent should be required to periodically account to the principal, if he or she capable of understanding the accounting, otherwise the agent should provide an accounting to the successor agent named in the durable power of attorney. These accountings should at a minimum be annual, and preferably within a reasonable period after the agent exercises the durable power of attorney, e.g. within 60 days of any change to a beneficiary designation.

For some extraordinary powers given to the agent under a durable power of attorney, such as changing the beneficiaries for an IRA, a transfer-on-death investment account, or life insurance policy, that exercise might require the consent of a co-agent. For example, if the agent wants to change the beneficiaries of the principal’s IRA, the written consent of the successor agent identified under the durable power of attorney would be required before the change is enforceable.

Dollar limits can be imposed on the agent’s authority under the instrument. For example, the agent might be authorized to only withdraw the principal’s required minimum distribution from his or her IRA. Any amounts to be withdrawn above the required minimum distribution amount would require the consent of a third party, like the principal’s accountant. Similarly, dollar limits can be imposed to restrict the agent’s ability to make gifts, such as limiting the amount of the gift to an individual to the gift tax annual exclusion amount of $15,000, or restrict the total amount that the agent may gift using the durable power of attorney in a calendar year, e.g. “no more than $45,000 may be gifted by the agent during the calendar year using this durable power of attorney.”

The agent’s ability to make charitable gifts on behalf of the principal might be limited to only those charities to which the principal made gifts in prior years, as reported on the principal’s income tax returns.

If the principal is formally diagnosed with dementia, that diagnosis might act as a trigger to elevate the ‘back-up’ named agent to a co-agent capacity, where both agents will have to act in concert with each other to utilize the durable power of attorney.

Language might be included in the durable power of attorney that provides that if the agent fails to timely report his or her activities using the durable power of attorney, or fails to timely file an accounting, then the agent’s actions will be presumed to be a breach of fiduciary duty and self-dealing. This would provide an added incentive to the agent to follow through with his or her reporting and accounting responsibilities.

A durable power of attorney is a critical and necessary lifetime part of an effective estate plan. But that same durable power of attorney can also be the source of the principal’s financial ruin, as the Nice facts abundantly demonstrate. Consider the adding some guardrails to your durable power of attorney to provide additional peace of mind that the agent named in the instrument will act responsibly and consistent with your best interests.