Tips and traps for an attorney acting under an enduring power of attorney

This article was originally published by the Retirement and Estate Planning Bulletin.

A power of attorney is an important legal document. It allows a person (the principal) to authorise one or more persons, a licensed trustee company or the NSW Trustee and Guardian (the attorney) to act on their behalf in relation to the management of their personal financial and legal affairs. The power of attorney document can be limited to authorise specific actions, or it can be general, authorising the attorney to do anything the principal may legally do.

The law relating to powers of attorney stems from the law of agency and common law. In New South Wales, the law relating to powers of attorney has been supplemented by statutory law. The current statutory law is the Powers of Attorney Act 2003 (NSW) (the Act). The Act deals with the making and revocation of a power of attorney, the responsibilities and obligations of attorneys and the role of the NSW Supreme Court (the Court) and the Guardianship Division of the NSW Civil and Admin-istrative Tribunal (NCAT) in reviewing the making, operation and revocation of a power of attorney.

The Act prescribes the forms for creating powers of attorney. The two prescribed forms are set out in Sch 2 to the Powers of Attorney Regulation 2016 (NSW). The forms prescribed are for a general power of attorney and an enduring power of attorney. The focus of this bulletin is on enduring powers of attorney (EPOA) made under the Act and their significant risk and problematic issues for the attorney.

What is an enduring power of attorney (EPOA)?

An EPOA, unlike a general power of attorney, is a document which continues to operate after the principal has lost mental capacity to manage their own financial and legal affairs. The ageing population and the increase of age-related illnesses such as dementia means that planning for mental incapacity during a person’s lifetime is becoming an important aspect of a person’s overall estate planning. An EPOA only operates during the principal’s lifetime and ceases to have any legal effect when the principal dies. Conversely, the principal’s Will has no legal effect during the principal’s lifetime and commences legal operation on the death of the principal.

What can the attorney do?

An attorney can do anything the principal may legally do. However, the authority is not as wide as it reads and is subject to some legal restrictions and to any conditions and limitations in the EPOA document appointing the attorney.

The types of things that an attorney can do or be authorised to do for the principal include:

• completing legal transactions

• accessing the bank accounts of the principal to pay for expenses or to make repayments on loans taken out by the principal

• making investment decisions including the selling of real estate (in which case the EPOA will need to be registered at NSW Land Registry Services) and the realisation of other investments

• paying taxes and other proper liabilities and expenses of the principal

• insuring the assets of the principal that require insurance

• maintaining, preserving or improving the assets of the principal as may be required

The types of things that an attorney cannot do for the principal include:

• any action that is not in the best interests of the principal unless authorised to do so under the EPOA document

• make gifts to other people from the assets of the principal unless authorised to do so under the EPOA document

• conferring benefits on the attorney from the assets of the principal unless authorised to do so under the EPOA document

• enter into a transaction that places the attorney in a conflict of interest position with the principal

Attorney is in a position of risk

An attorney appointed under an EPOA has a position of great trust and responsibility. The responsibility is not only to the principal that appointed them (who may no longer have mental capacity). The attorney is also responsible to the people that rely on the principal during the lifetime of the principal and the beneficiaries of the principal after the death of the principal. Those people usually closely scrutinise the actions of the attorney, especially in cases where there has been a financial loss to the principal or the estate of the principal.

The case law, the provisions of the Act and the increased efficiency and focus of the Court and NCAT all suggest a willingness to pursue attorneys for financial loss to the principal resulting from imprudent action, investments or inaction by the attorney.

The Act sets out the people who have the legal standing to apply to the Court or NCAT for a review of the operation of an EPOA of the principal. These people are the principal (if they have mental capacity), any person who is a guardian or enduring guardian of the principal as well as any other person who, in the opinion of the Court or NCAT, has “a proper interest in the proceedings or a genuine concern for the welfare of the principal”.

Recent case law examples highlight the risks faced by an attorney.

The problem for an attorney and legal advisers acting in a way that is not in the best interests of the principal is seen clearly in the NSW Court of Appeal decision in McFee v Reilly.¹  In that case, the son of the deceased principal successfully argued that his mother who was attorney for the principal, and the principal’s legal adviser, breached their fiduciary duty to the principal because they arranged the transfer of real estate in the principal’s name to the daughters of the principal for a monetary consideration of $1. In Bird v Bird,² the NSW Court of Appeal suggested that executors must investigate the actions of an attorney who acted under a power of attorney when the principal was alive even if that attorney was the spouse of the principal.

In Lindsay v Arnison,³  the attorneys for the principal, after the death of the principal, were ordered by the Court to provide a proper accounting of their dealings with the principal’s bank and building society accounts when they were acting as his attorneys.

Tips and traps

Attorneys should think carefully before they sign their acceptance as attorney on the EPOA document. The attorney needs to consider whether they have the time and skills to diligently manage another person’s financial and legal affairs. If more than one attorney is appointed, the attorney needs to keep in mind the need to work with the other attorney who they may not know. Differences of opinion about what decisions should be made for the principal will become time consuming and stressful if there is no deadlock breaking mechanism in the EPOA document. Also, an attorney under an EPOA cannot resign as attorney after the principal loses mental capacity without an order from the Court or NCAT.

The attorney needs to read through the EPOA document and understand when it becomes operative and what are the conditions and limitations in the document. The EPOA document assists the attorney by clearly setting out the attorney’s duties and responsibilities. They include acting honestly and in the best interests of the principal. The attorney is also required to keep the principal’s money and property separately from the attorney’s money and property and to keep reasonable accounts and records of their dealings with the principal’s money and property. The attorney is required to exercise their powers according to the terms, conditions and limitations of the EPOA document.

If the EPOA becomes operative on the principal losing mental capacity, a prudent attorney should obtain a letter from the principal’s doctor or an appropriate specialist confirming that the principal has lost mental capacity and is unable to manage their own financial and legal affairs.

Attorneys are trusted agents of the principal. There-fore, they have fiduciary duties and obligations to the principal that appointed them and must adhere to their fiduciary duties or risk being liable for any breach.

If an attorney decides to sell a specific asset of the principal, it is prudent for the attorney to make enquiries of the principal’s lawyer to see if that asset was the subject of a direct gift in the principal’s Will. This may avoid an ademption problem and the need for legal proceedings to give effect to the protection given to beneficiaries and others by s 83 of the NSW Trustee and Guardian Act 2009 (NSW).

Advice to protect the attorney

If in genuine doubt about what they should do for the principal, an attorney can obtain legal advice and the reasonable legal costs for that advice can be paid for or reimbursed from the principal’s money.

Attorneys may, through no fault of their own, be placed in a difficult and uncertain position when needing to act in the principal’s interest. It is important for attorneys to be aware that they have the right under s 38 of the Act to apply to the Court or NCAT for advice or direction “on any matter relating to the scope of the attorney’s appointment or the exercise of any function by the attorney”.

Attorneys have an important role if they choose to accept their appointment as a trusted agent of their principal. They should not be placed in a position where they risk personal liability for accepting the legal responsibility to act as attorney. Attorneys should always act prudently and not hesitate to obtain appropriate advice when issues become difficult or complex.

Author: Gerard Basha

 

1. McFee v Reilly [2018] NSWCA 322; BC201812308.

2. Bird v Bird (2013) 11 ASTLR 225; [2013] NSWCA 262; BC201311981.

3. Lindsay v Arnison [2017] NSWSC 41; BC201700576.