JAMES A. BARRINGER & NOËL M. LAWRENCE
Durable powers of attorney for property management have become widely accepted in the estate planning community as a method of planning for incapacity. Durable powers offer a way to avoid the inconvenience and stigma of a conservatorship and the cost of establishing a living trust. Because durable powers do not terminate on incapacity of the principal (unlike other types of agency), they are often given by elderly clients to trusted friends or relatives, so that someone can pay bills, make bank deposits, and handle other financial matters after the principal is not longer able. Some estate planners have their clients execute durable powers of attorney for property management as a routine part of the estate planning “package,” whether their clients ask for them or not.
Throughout this article, the terms “agent” and “power holder” are used rather than the more clumsy “attorney in fact.”
The Vulnerable Agent
In our practice, we have seen a number of durable power holders facing serious liability exposure. A typical fact pattern emerges in which an elderly person, as part of his or her estate plan, gives a power of attorney for property to a trusted confidante, such as one of the principal’s children or a close friend, or a housekeeper. The power of attorney is drafted by a competent attorney experienced in estate planning. The prospective agent however is not represented by counsel and receives little or no guidance about his or her duties, including the duty to keep accurate records and account for transactions using the power. The agent is not educated that he or she has assumed the role of fiduciary, with obligations and presumptions adverse to the agent.
The discretion exercised by the agent under the durable power is later questioned, perhaps by the relatives of the principal either before or after the principal’s death. Litigation ensues, e.g. to compel the agent to account, to impose a constructive trust and to assess damages. As a routine part of the complaint or petition, the agent is charged with fiduciary elder abuse, which increases the stakes because of the potential for an attorney fee award, punitive damages and even criminal liability. Welf & I C Sections 15657, 15656. Elder abuse charges also carry with them a terrible stigma that can damage the agent’s reputation in the community, regardless of the outcome of the litigation.
It is very easy and inexpensive for a critic of an agent to demand an accounting. All it takes is a letter from the principal, the principal’s conservator, or a deceased principal’s personal representative (or other “successor in interest”) requesting an accounting. Prob C Section 4236(b). The agent is then put to a huge amount of work if he or she is unprepared to meet this demand, which, because no one has educated the agent about the law’s view of the nature and extent of his or her obligations is almost always the case.
It is really hard to reconstruct transactions, and the struggle is made especially difficult if the agent does not have actual bank records. Very often, the accounts stood in the name of the principal, to whom statement were mailed, and the agent never received copies. As a result, everything has to be subpoenaed, and the agent is left to puzzle over faint photocopies received from the archives of banks and brokerage houses. The agent may be forced to reconstruct events stretching back many years, involving a conglomeration of transactions by both the agent and the principal. All the while, the law resolves all doubt against the agent. Any transactions that cannot be remembered or reconstructed make the agent look bad, and unexplained disbursements are usually charged against the hapless agent.
The Statutory Framework
Obligations and Compensation
Under prior law, a durable power holder was treated as an agent, with all the fiduciary duties of a trustee but the statute itself did not list those duties. The new law provides that, except where the new power of attorney statute provides a specific rule, the general law of agency, including CC Sections 2019-2022 and 2295-2326, continues to apply to powers of attorney. Prob C Section 4051. The statutory form durable power of attorney for property also continues, under the new law, to warn that the holder of the power “assumes the fiduciary and other legal responsibilities of an agent.” Prob C Section 4401.
The new law also spells out the agent’s duties: the duty of care and skill (Prob C Section 4231), the duty of loyalty (Prob C Section 4232), the duty to keep the principal’s property separate and identified (Prob C Section 4233), and the duty to keep the principal informed and to follow the principal’s instructions (which may be disobeyed only with court approval)(Prob C Section 4234).
The prior law was silent about compensation for the agents and whether they could charge the principal’s estate for expenses incurred in acting as agent. Under the new law, agents are entitled to reasonable compensation and to reimbursement for reasonable expenses. Prob C Section 4202. This is comparable to the provisions under the Trust Law for trustee compensation (Prob C Section 15681) and reimbursement (Prob C Section 15684(s)). Compensation comes at a price however because agents who receive compensation are subject to a higher standard of care than those who do not. Uncompensated agents are not liable for losses unless they result from the agent’s bad faith, intentional wrongdoing, or gross negligence. Prob c Section 4231(b).
Reimbursement of attorney fees is covered in Prob C Section 4947, which continues prior law without substantive change. Under Prob C Section 4947, in a statutory proceeding against the agent (such as to compel an accounting or remove the agent), reasonable attorney fees may be awarded to the agent if the court determines that the proceeding was commenced “without any reasonable cause.” On the other hand, attorney fees may be awarded to the party complaining of the agent’ s conduct if the court determines that that the agent clearly violated fiduciary duties or failed without reasonable cause to submit accounts. Prob C Section 4947(b).
There are three ways in which the new statute lessens the full burden of fiduciary duties under durable powers for property. First, as a general rule, an agent must “observe the standard of care that would be observed by a prudent person dealing with property of another and is not limited by any other statute restricting investments by fiduciaries.” Prob C Section 4231(a). The California Law Revision Commission explains that this is a nonprofessional standard of care analogous to that undertaken by a custodian under the Uniform Transfers to Minors Act (Prob C Sections 3900-3925). See 24 Cal Law Rev’n Comm’n Reports 346. An agent who has special expertise however must observe the standard of care that would be observed by others with similar expertise. Prob C Section 4231(c)
Second, as mentioned above, new Prob C Section 4231(b) sets a lower standard for uncompensated power holders: If an agent is not compensated, the agent is not liable for loss to the principal’s property unless the loss results from the agent’s bad faith, intentional wrongdoing, or gross negligence. It is noteworthy that this differs from the rule applicable to lawyers that, whether compensated or not, one must do a good job and the same standard of care applies.
Third, the new law clarifies that an agent’s duties do not arise unless and until the agent acts under the power or has expressly agreed to act. Prob C Section 4230. Moreover, acting in one transaction will not obligate the agent to act in a subsequent transaction (unless the agent has consented to act). Prob C Section 4230(b). Duties will not arise from merely being named as an agent.
These are good rules. We have had clients who either did not know that they were power holders and did not act on the principal’s behalf, or acted for the principal, but not explicitly pursuant to the power of attorney; but because of the existence of the power everything done after its creation was suspect. Under prior law it was possible for fiduciary duties to arise even if the individual named under a power of attorney was unaware of the appointment or was uncertain about when the duty to act commenced.
With respect to the authority of agents, the new statute does not provide a list of powers. Instead, it distinguishes between “general” and “limited” authority, and allows the drafter to incorporate by reference various powers form other statutory schemes such as the Trust Law and the guardianship and conservatorship statutes. Prob C Section 4263. “General” authority is defined in somewhat circular fashion in Prob C Section 4261.
If a power of attorney grants general authority to an attorney-in-fact and is not limited to one or more express actions, subjects, or purposes for which general authority is conferred, the attorney-in-fact has all the authority to act that a person having the capacity to contract may carry out through an attorney-in-fact specifically authorized to take the action.
Under Prob C Section 4262, “limited authority” means the “authority granted in the power of attorney, as limited with respect to permissible actions, subjects, or purposes,” and the “authority incidental, necessary, or proper to carry out the granted authority.”
The provisions for legal proceedings to interpret durable powers and to review the conduct of attorneys-in-fact have been reorganized in the new law, but remain substantially unchanged for the most part. In such proceedings there is no right to a jury trial. Probate Code Section 4904. The agent can be compelled by the court to submit the agent’s accounts or report the agent’s acts attorney-in fact to the principal, the spouse of the principal, the conservator of the principal or the estate of the principal, or to any other person required by the court in its discretion, if the agent has failed to submit an accounting or report within 60 days after written request from the person filing the petition. Probate C Section 4941(c).
This is similar to the requirement under Probate C Section 16061 that a trustee provide information after a beneficiary requests it. It is interesting that the Trust Law differes from the Durable Power of Attorney Law, however, by providing that a trustee can be compelled to provide information to a beneficiary only once every six months. Probate Code Section 17200(b)(7).
Agents are also subject to proceedings for their removal and to determine whether they have violated the fiduciary duties under the power of attorney. Prob C Section 4941(d).
Another part of the legal framework is that an agent under a durable power of attorney for property is subject to the elder abuse provisions of the Welfare and Institutions Code. In each of the cases in which we have represented an agent in litigation, the plaintiff brought or threatened to bring a claim for fiduciary elder abuse. If an agent (who is by definition a fiduciary) fails to discharge his or her duties under the power of attorney appropriately, it is very easy to plead and elder abuse claim.
Welfare & Institutions Code Section 15610(f) defines such abuse as “a situation in which any person who has the care or custody of, or who stands in a position of trust to an elder or dependent adult, takes, secretes, or appropriates their money or property, to any use or purpose not in the due and lawful execution of his or her trust.” The elder abuse statute facilitates awards of attorney fees and costs as well as punitive damages against a defendant who is shown by clear and convincing evidence to be liable for any form of elder abuse, including fiduciary abuse. Welf & I C Section 15657.
An elder abuse claim can have a very adverse effect on an agent’s defense, especially if the plaintiff has involved the District Attorney in the dispute or is likely to do so.
Continuing Causes for Concern
Although the durable power of attorney statute has been consolidated and improved, there remain a variety of problems associated with them.
Bank Accounts, Brokerage Accounts and Other Assets
Three-Day Nonjudicial Freeze of Bank and Savings Accounts. Protecting assets that are not real property is considerably more difficult and involves going to court. In order to protect such assets pending litigation, a temporary restraining order and a preliminary injunction must be sought. A temporary restraining order protects assets until a hearing can be held on the application for a preliminary injunction.
Injunctive relief always takes time to accomplish, even ex parte. In emergency situations, when the plaintiff suspects that the perpetrator may move and hide assets, there are useful statutory provisions in the Financial Code that, in effect, allow for a short-term asset freeze until judicial intervention can be obtained. For funds or other personal property on deposit at banks or savings associations, if the perpetrator is a fiduciary (e.g. a trustee named under a wrongfully procured trust or holder of a power of attorney), the first thing to do is to give notice of adverse claim to each institution unlder Fin Code Section 952(a) (banks) and Section 6661(a) (savings associations).
Those statutes provide that an adverse claimant may deliver to the bank or savings association, at the office at which the deposit or account is carried, his or her affidavit (or declaration under penalty of perjury) stating (1) that of his or her own knowledge the person to whose credit the deposit stands is a fiduciary for the adverse claimant; (2) that the adverse claimant has reason to believe the fiduciary is about to misappropriate the deposit or account or the property; and (3) the facts on which the claim that claim of fiduciary relationship and the belief are founded. If such a notice of an adverse claim is made, the bank or savings association must freeze the account for a period of not more than three court days (including date of delivery) from the date that the bank or association received the claimant’s declaration.
Preliminary Injunction. Longer-term protection against further misappropriation will generally require court orders. For example, the plaintiff may seek orders enjoining withdrawals from a brokerage account formerly belonging to the decedent and now standing in the name of the defendant. Such relief is usually initiated by applying for a temporary restraining order (TRO) and preliminary injunction. A TRO may be issued for a limited period of time pending consideration of an application for a preliminary injunction. See CCP Section 527.
In many cases, the plaintiff will be well into the discovery phase of the case before he is armed with enough evidence for a successful TRO application. The application is typically made by providing the court with a copy of a verified complaint, additional affidavits or declarations, and a memorandum of points of authorities.
A preliminary injunction may be granted when it appears by the verified compliant or affidavits that the commission or continuance of some act during the litigation would produce waste or great or irreparable injury, to a party to the action. CCP Section 526(a)(2).
Normally an injunction will not issue if only money is involved, because the legal remedy of damages supposedly adequate. CCP Section 526(a)(4). However, in an action to recover specific funds, as distinct from a “naked claim for damages,” an injunction may issue to prevent dissipation of the funds. See Heckmann v Ahmanson (1985) 168 CA 3d 119, 136 214 CR 177. In the undue influence/elder abuse arena, it is often possible to identify the needed specific fund. A preliminary injunction may also issue when the obligation arises for a trust CCP Section 526(a)(7).
In deciding whether or not to grant a preliminary injunction, the court must consider the likelihood that the applicant will succeed on the merits at trial, the harm to the applicant if the injunction is denied, and the harm to the responding party if the injunction is issued.
When seeking to establish the likelihood of success on the merits, Prob C Section 21350 can be very helpful when it applies. In general, the statute shifts the burden of proof to the defendant in cases involving transfers to such persons as a fiduciary who transcribed the instrument or a care custodian of a dependent adult. This assumes the transferee is not related to the transferor by blood or marriage and is not a cohabitant with the transferor.
If the plaintiff is successful in obtaining a preliminary injunction, he will not only have preserved assets, he will have demonstrated to the defendant that the first judge before whom the case was presented agreed that the plaintiff will probably prevail. That knowledge, combined with the defendant’s deprivation of the subject funds with which to litigate, could promote resolution of the case on terms satisfactory to the plaintiff.
Removing Defendant as Fiduciary
If the defendant is a fiduciary, the plaintiff generally will seek court orders, suspending the powers of the fiduciary or removing the fiduciary. In some cases this may be an effective alternative to obtaining a preliminary injunction, in terms of preventing further misappropriation of the victim’s assets.
Probate Code Section 4234(a) requires the attorney-in-fact to “keep in regular contact” with the principal. This duty could, in theory, be construed as a duty to monitor the principal’s condition if coupled with an agreement in writing by the agent to act. Like all duties applicable to agents, the duty to keep in regular contact does not apply until the agent acts under the power or has “expressly agreed in writing to act for the principal.” Prob C Section 4230.
Controversies may arise over whether agents have so agreed. For example, an agent who consented in writing to be named in a typical “springing” power (e.g. by signing the document) might be held to have agreed to act on the principal’s incapacity. Why, after all, would a principal sign a springing power if he or she did not intend by this device that the agent would affirmatively “mind the store” when the principal no longer could? And why would the agent sign the document if he or she did not intend to act in that manner?
Lack of awareness of the principal’s incapacity would probably not be an excuse, because of the duty under Prob C Section 4234(a) to “keep in regular contact.” It might be more difficult to imply such a duty to act in the case of the “nonspringing” durable power because it might be less clear that the agent “agreed” to do anything on the principal’s incapacity. Finding an “agreement to act” would be crucial to any case against an agent based on a failure to act because Prob C Section 4230(a) states:
Except as provided in Prob C Section 4230(b) and (c) (where the agent acts or expressly agrees to act in writing), a person who is designated as an attorney-in-fact has no duty to exercise the authority granted in the power of attorney and is not subject to the other duties of an attorney-in-fact [including the duty to keep in contact with the principal], regardless of whether the principal has become incapacitated, is missing, or is otherwise unable to act.
Thus an agent who is merely designated but does not agree expressly in writing to act can sleep soundly while completely ignoring the principal.
Comment: An agent who wishes to avoid being bound by an express agreement to act on the principal’s behalf should not sign the durable power. Mere knowledge of the existence of the durable power is not enough to impose liability for the agent’s failure to act. The California Law Revision Commission Comment to Prob C Section 4230 makes it clear that (24 Cal Law Rev’n Comm’n Reports 400): being named as an attorney-in-fact under a durable or nondurable power of attorney imposes no duty on the named person to act. This is true even if the attorney-in-fact knows of the designation and has received the power of attorney. A duty to act under this part arises only by reason of an express agreement in writing. Reliance is not sufficient to impose a legal duty to act.
Clarify Attorney-Client Relationship
Lawyers should make clear to the agent or prospective agent who that attorney represents and who that attorney does not represent. Attorneys who represent principals should advise prospective agents that they have the right to seek independent counsel.
Educate the Agent
Whether or not independent counsel is brought in, at the very least, it would be good practice to provide the agent with a detailed explanation of his duties and liabilities under the durable power of attorney. This is in the best interests of both the principal and the agent. A form of letter that could be sent to an agent describing his or her duties and powers follows this article. (To avoid confusion, such a letter should probably not be sent to an agent who has not accepted any duties as discussed above.) If the attorney sending the letter does not represent the agent, that fact should be made very clear. Indeed, because of the inherent conflict of interest, dual representation in such situations is not advisable.
Educate the Principal
Principals should be informed of the responsibility and potential liability they are shifting to their agents. They might then be more reluctant to place their cherished friends and trusted family members in this situation.
Identify Risky Situations
Some situations can be recognized in advance to have significant potential for problems between competing beneficiaries to an estate. That kind of situation seems particularly ill-suited to a durable power of attorney, especially one that appoints only one of the competing beneficiaries as agent.
Consider naming two agents and requiring them to act unanimously.
Authorize Hiring Attorneys
Practitioners drafting durable powers of attorney should consider including provisions for hiring attorneys and accountants. This may defer frivolous actions against the agents.
Limit Agent Powers
Durable powers of attorney have a logical place in many estate plans. In the opinion of the authors, however, durable powers should be used with precision and care, usually limited in some way and not in the broad general form that is too often recommended to unwitting clients. If for example, the principal has a living trust, the agent’s power can be limited to the power to transfer assets to the trust.
Use a Living Trust Instead
Consistent with the previous suggestion, practitioner should strongly consider using living trusts rather than durable powers of attorney as the primary method of planning for incapacity, especially if there is a potential for conflict among beneficiaries. The body of law applicable to trusts is highly developed having evolved over 600 years. Durable powers of attorney are recent statutory creatures that have received little judicial gloss.
The trustee’s duty to account is much clearer and the trustee can do so regularly, disclose all of his or her acts and rest safe in the knowledge that, unless someone timely objects, the fiduciary has no further liability for the acts and transactions disclosed. A trustee of a living trust, with control of most of the principal’s assets, can do. Besides, if a power of attorney is carefully drafted to cover investment, accounting and other administrative powers, exculpation of the agent, definitions of incapacity, gift powers or other types of substituted judgment (akin to a trustee’s dispositive discretion), compensation of the agent, and authority to hire counsel, you wind up with a document as lengthy and involved as a trust.
The legal profession invented durable powers of attorney for property management to provide a convenient, low-cost substitute for trusts and conservatorships. In doing so, however we have created a potential monster that only the legal profession can tame. Durable power documents should be drafted as narrowly as practicable, given the principal’s situation and needs. Living trusts should be considered as an alternative to durable powers because the expense and hassle of creating and administering each of these devices is approaching parity. Above all principals and agents should be educated about the duties the agents are expected to perform.
Form: Letter from Principal’s Attorney to Agent,
Describing Agent’s Duties
Re: Durable Power of Attorney Dated_________________
We represent [name] the principal who named you as agent under a durable power of attorney for property management. You have accepted the duties of an agent under that durable power of attorney. We are writing this letter to make you aware of certain of your more important duties under the power of attorney and to encourage you to seek advice from your own attorney regarding those duties.
It is important for you to understand that we do not represent you, and that you should seek independent legal counsel as needed. Please also note that this letter must not be considered a substitute for your careful reading of the durable power of attorney document itself.
As agent under a durable power of attorney, you have the following duties under California’s Durable Power of Attorney statute:
1. You must act strictly in accordance with the powers granted to you in the power of attorney document, and avoid any actions as agent that are not authorized by that document. You must carefully review the power of attorney document to determine the scope and limitations of the powers granted to you by the principal.
2. As a fiduciary you have a duty of care in dealing with the principal’s property. You must act as a prudent person in all transactions on behalf of the principal. If you have special skills or expertise, you must apply the full extent of those skills in serving as agent.
3. You have a duty of loyalty. This means that you must act solely in the interest of the principal and must avoid conflicts of interest. You may not use or deal with the principal’s property for your personal profit, or take part in any transaction in which your interest is adverse to the principal’s.
4. You must keep the principal’s property separate and distinct from other property in a manner to identify the property clearly as belonging to the principal. You can comply with this duty by making sure that title to the principal’s assets is held in the principal’s name or in your name as attorney-in-fact for the principal. You must never commingle the principal’s property with assets of any other party, including your assets.
5. To the extent reasonably practicable, you have a duty to keep in regular contact with the principal, to communicate with the principal , and to follow the principal’s instructions. The “reasonably practicable” language basically means that if there is not enough time to communicate with the principal, you can still act. If you believe that following the instructions of the principal would not be in the principal’s best interest, you may disobey the principal’s instructions only with prior court approval. If the principal becomes incapacitated or there is some question about the principal’s capacity to give instructions to you, you may consult with the principal’s spouse, physician, attorney, accountant, other member of the principal’s family, or any other person, government agency or business agency, to assist you in carrying out your duties under the durable power of attorney.
6. You must keep careful records of all transactions you undertake on behalf of the principal. The importance of this duty cannot be overemphasized. As an agent you must be prepared to account for your dealings on behalf of the principal within 60 days after demand for an accounting is sent to you by a person authorized by law.
You can be compelled to account to the principal or to the principal’s spouse, conservator, or the personal representative of the principal’s estate regarding the principal’s property and your dealings with it. In such an accounting, you would have to identify all receipts and disbursements, all assets under your management, any liabilities of the principal known to you and any compensation paid to you as agent. Failure to account or failure within an account to adequately explain transactions could expose you to substantial liability.
The foregoing is intended to make you aware of your most important duties under the durable power of attorney. Again we urge you to consult with independent counsel about how to perform your duties as agent, the scope of your powers, how to protect yourself against liability, and other matters.
Please sign and return the enclosed copy of this letter.
[signature of attorney]
[name of attorney]
I have read and understand this letter.
[signature of agent]
[name of agent]