Special Focus Issue - Elder Abuse

Preventing Financial Abuse By Agents Under Powers of Attorney

by Ellen J. Henningsen

Power of Attorney for Finances and Property is a dangerous instrument when placed in the hands of an unscrupulous agent. Consider the case of 84-year-old Mrs. Smith. To make sure her "affairs were in order," she hired an attorney to draft a Durable Power of Attorney for Finances and Property, naming her niece, Ann, as her agent. Mrs. Smith signed a general Durable Power of Attorney, granting Ann broad powers. Ann was authorized to "do anything and everything I would be entitled to do, including but not limited to the power ... to do anything that I could do with respect to insurance policies on my life; ... and to make gifts of any of my property to anyone for any reason." The document did not include any restriction on Ann's authority and was silent about Ann's fiduciary duty as Mrs. Smith's agent.

Mrs. Smith soon suffered a stroke, and Ann began to handle her aunt's financial affairs. After spending several months receiving rehabilitative services in a skilled nursing facility, Mrs. Smith was able to return to her home. She soon discovered that Ann had cashed out her life insurance policies and taken the money. Worse, Ann had not paid Mrs. Smith's mortgage, property taxes, or utility bills – that money was gone, too. Her house was in foreclosure, the taxes were delinquent, and the utilities turned off. The likelihood of recovering any money from Ann was minimal, so a civil action was not pursued. The district attorney declined to prosecute, concerned that the broad grant of authority to the agent, particularly the unrestricted gifting clause, would create a reasonable doubt in the minds of jurors that Ann had exceeded the scope of her authority.

The benefits of Powers of Attorney for Finances and Property are well known, but the risks are often ignored. As illustrated by the above scenario, financial abuse of Wisconsin's elderly often occurs by agents acting with apparent authority pursuant to Powers of Attorney. Attorneys who draft these documents for elderly clients need to recognize and respond to this risk. This article suggests ways that attorneys can help prevent and remedy financial abuse involving Powers of Attorney.

Attorneys can reduce the risk that an agent will abuse his power by crafting a document that clearly explains the limits of the agent's authority and by educating the agent about his responsibilities and limitations; an agent who is aware of his responsibilities and limitations is less likely to abuse his power. Attorneys can increase the likelihood that abuse will be discovered by crafting a document that includes oversight provisions. Attorneys can increase the likelihood that financial abuse will be remedied by creating both documentary and testimonial evidence that can be used in a civil or criminal case to establish that the agent knew that her conduct was unauthorized. Consider the following suggestions.

Grant Only Those Powers Needed

Attorneys should question their clients to determine exactly what they want the agent to be authorized to do and not do, and draft accordingly. If, for instance, the principal only wants the agent to pay bills and keep accounts balanced, a Power of Attorney that is so broadly drafted that the agent has the authority to effectively disinherit heirs by changing beneficiary designations and retitling assets and real estate goes well beyond what the client wants, and exposes the client to an unnecessary risk of abuse. Clients who assert that they want the agent to do anything the client could do should be given examples of exactly what that means, and asked if that is what the principal wants.

Clients who want agents to have the authority to make gifts should be questioned about the purpose of those gifts. Perhaps the client will respond that she wants the agent to continue the client's pattern of providing cash to children and grandchildren on birthdays and holidays. A clause limiting the agent's authority to make gifts for that sole purpose should then be drafted. A principal who suggests an unrestricted gifting clause should be advised that such a clause can be interpreted as authorizing the agent to give away all of the principal's money to the agent or to anyone else of the agent's choosing – an informed principal will be able to decide if this is what she in fact wants, and the attorney can draft the document accordingly. More likely, the principal will reveal that this broad grant is not wanted, and the attorney can draft an appropriately limited gifting clause.

Attorneys should meet with the client alone, that is, outside of the presence of the proposed agent, to ensure that the client is able to express his own wishes, not the wishes of the proposed agent. (Please see the accompanying article by Betsy Abramson elsewhere in this issue for a discussion relating to the competency of the client to execute a Power of Attorney.)

Include a Statement of the Fiduciary Duty

Common law imposes a fiduciary duty on the agent.¹ Unless expressly stated otherwise in the document, the agent's authority is limited by the fiduciary duty. As a fiduciary, the agent is to act with utmost loyalty to the principal, in good faith, and solely for the principal's benefit; the agent may not use the principal's money or property for the agent's benefit.² Unfortunately, many are not aware of this limitation, and Power of Attorney documents often are silent. Including a recitation of the duty in the Power of Attorney document puts the agent on notice of the limitation, and provides necessary proof for a civil or criminal case against the agent in the case of wrongdoing. An additional safeguard is to have the agent affirmatively accept this duty by including an acknowledgement provision in the document for the agent to sign. An agent who hesitates or refuses to sign is not a good choice for agent.

Because making gifts to the agent is contrary to the fiduciary duty, Powers of Attorney that authorize gifts to agents often include a waiver of the entire fiduciary duty, either in the gifting clause or in the document as a whole. Arguably, such a waiver is unenforceable. Even if permissible, however, this practice should be avoided as it strips the principal of the only protection against misconduct by the agent and virtually eliminates any chance of civil recovery or criminal conviction.

Carefully Craft Gifting Clauses

The common law requires that gifting be expressly authorized in a Power of Attorney; without an express gifting clause, the agent has no power to make any gifts.³ Nevertheless, if the principal does not want the agent to make gifts, include an express prohibition of gifting so that it is clear the agent does not have this power.

An unlimited gifting power is exceptionally dangerous because it permits agents to give away the principal's property and assets under circumstances that the principal may not have intended. For this reason, the statutory Power of Attorney form expressly prohibits gifting by agents for any reason.⁴ Most principals do not want their agents to have this unlimited power.

An unlimited gifting power that is silent about the authority of the agent to make gifts to the agent can be reconciled with the agent's fiduciary duty not to use the principal's money for the agent's benefit, by interpreting it to prohibit gifts to the agent. However, in the author's experience, unlimited gifting powers are rarely interpreted this way. Therefore, a principal's intent to either permit or prohibit gifts by the agent to the agent should be expressly stated in a gifting clause.

Gifting clauses can be limited in other ways to protect the client from financial abuse. For instance, gifting can be authorized for the sole purpose of continuing an established pattern of charitable giving. Or the agent can be authorized to make gifts to the principal's children (including the agent, if a child of the principal) but only in equal amounts and to all at the same time. Perhaps the agent should be required to provide notice to a third party of any gifts over a certain amount or to a certain individual, particularly if the agent is the recipient. Perhaps the agent should be required to obtain the consent of all of the principal's children if a gift is made to the agent. Perhaps the client should name a special agent for the purpose of making gifts to the agent. Restrictions also could be included that clarify that the gifting clause is not to be used to change the client's estate plan. Any number of restrictions are appropriate, depending on the client's wishes. Particular care should be taken when drafting gifting clauses that authorize gifting for estate and medical assistance planning purposes to ensure that the principal's wishes are met and the risk of abuse minimized.

As noted above, the practice of waiving the fiduciary duty so that agents can make gifts to themselves should be avoided. Instead a clause can be included to the effect that the agent must act in a manner consistent with the fiduciary duty when making gifts, except that the agent may make gifts to himself under specified circumstances.

Include Oversight Clauses

Although providing a regular accounting to the principal is part of the common law duties of an agent, principals and agents often are not aware of it. Include a provision in the document setting forth this requirement, including how often it should be done and what it should include. Consider including the name of a third party, in addition to the principal, to whom the accounting also should be given. This provision is particularly important if the principal becomes incapacitated.

A provision detailing which records the agent must keep and for how long also should be included. Records include check statements, cancelled checks, check registers, mutual fund statements, and so on. Consider including a requirement that these records must be turned over to a designated third person on request.

Many agents use their apparent authority under a Power of Attorney to open joint accounts with the principal, thus blurring the distinction between agent and co-owner. To avoid this problem, include a provision indicating the proper titling of accounts between the agent and the principal; that is, the agent should open only Power of Attorney accounts and be listed as the agent. The principal and agent should be instructed to avoid joint accounts with the principal and agent, and the Power of Attorney should state that any joint account between the two is not jointly owned, but created solely for the convenience of the principal.⁵

Educate Your Client and the Agent

Instruct your client about the responsibilities of the agent, such as the requirement to provide a regular accounting. Make sure your client understands the warning signs of financial abuse and what to do if suspicions arise. Provide the client with instructions about how to revoke the Power of Attorney, along with a blank revocation form, and a sample cover letter to send to the agent and financial institutions.

Meet with the agent. Give the agent a copy of the booklet Powers of Attorneys and Trusts: Duties and Rights as Agents and Trustees, published by the State Bar of Wisconsin, and point out relevant portions. Discuss the duty owed to the principal and review the Power of Attorney document, providing instructions to the agent about her powers and limitations. Confirm the basics of your conversation in a letter to the agent. If the agent abuses her power, your testimony about this meeting, along with the Power of Attorney document, and a copy of the confirming letter, will provide compelling evidence against the agent in a civil or criminal case.

Avoid Representing the Agent

After the agency relationship has begun, agents often consult with the drafting attorney about matters pertaining to the agent's duties. In addition, the agent may retain the attorney for legal services unrelated to the Power of Attorney. When an attorney-client relationship exists with the individual acting as the agent (as distinguished from a relationship with the agent as the representative of the principal), the attorney who suspects that the agent is abusing the principal is prohibited from alerting the principal, the county lead elder abuse agency, or law enforcement.⁶ To avoid this dilemma, the attorney should avoid providing legal services to the agent except in the agent's capacity as a representative of the principal. It is best to clarify before the agency relationship begins that the attorney will only provide legal services to the agent in the agent's representative capacity. In addition, consider including in the acknowledgement provision mentioned above a clause to the effect that the agent agrees that the attorney will only provide services to the agent in the agent's capacity as the principal's representative and that communications between the attorney and the agent are not subject to the attorney-client privilege.

Conclusion

Certainly, the vast majority of agents perform their duties in a responsible manner. Those who do not can cause their victims financial and emotional devastation. By understanding the risks that a Power of Attorney presents and by responding accordingly, attorneys can prevent financial abuse of their elderly clients and assist in the civil or criminal prosecution of the abusers.

Endnotes

1 Bank of Calif. v. Hoffmann, 255 Wis. 165, 171-71a, 38 N.W.2d 506, 509 (1949).

2 Id., 255 Wis. at 171, 38 N.W.2d at 509; Alexopoulos v. Dakouras, 48 Wis. 2d 32, 40-41, 179 N.W.2d 836, 840 (1970).

3 State v. Hartman, 54 Wis. 2d 47, 56, 194 N.W.2d 653, 657-58 (1972).

4 Wis. Stat. § 243.10(1).

5 Wis. Stat. § 705.03.

6 SCR 20:1.4.

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