THE BEST INTENTIONS | Unintended Consequences from Durable Powers of Attorney
The road to hell, as the old saw says, is paved with good intentions. Nowhere is this more true than in the case of estate planning. The casebooks are filled with examples of parties attempting to arrange their affairs to ensure orderly transfer after death, only to have these plans result in protracted litigation and unintended consequences.
Recently, estate planners have seen a substantial increase in the use of Durable Powers of Attorney. A valuable estate planning tool for centuries, the Durable Power of Attorney (DPOA) has grown in prominence, given its usefulness as a tool for wealth management, and health care administration for individuals facing health care challenges and long term senior care.
To respond to this need, many clients anticipating these issues, sign Durable Powers of Attorney granting trusted friends and/or loved ones authority to execute documents, transfer real property, open and close bank accounts, transfer funds, pay bills, and engage in a dizzying assortment of transactions all involving the “protected person”. A broadly written power of attorney gives “carte blanche” to the “attorney in fact” ¹ to exercise unrestricted authority to manage the affairs of the person granting the power.
In a majority of cases, the DPOA accomplishes what the client sought to address, providing for management of financial affairs in the event of serious life challenges. But, with the increase in the use of the DPOA, there is an increased risk it will come into direct conflict with other estate planning documents and plans. Where the valid exercise of powers of attorney results indisposition of property which has been provided for in an estate plan, conflict and havoc can result.
THE BEST LAID PLANS ²
Frequently, clients will seek to dispose of their assets by way of a Will or a Trust, or both, as the case may be. These testamentary documents provide a firm and structured plan for transfer of property upon death. In the case of living trusts, provisions can be made to transfer property upon disability. One benefit of a carefully prepared testamentary plan is that it allows for “contingent” transfer, or distributions which will occur only upon the occurrence of a specific event.
For example, grandmother makes a provision the farm Blackacre is to go granddaughter A, but only if it is still in existence at the time of her death, and Blackacre has not been sold to cover health care costs in the event of her disability. Another example is where Father wills Blackacre to son B , as long the property continues to be used as a hazelnut orchard, but if it is not, then it goes to daughter C. In this way, careful provision can be made to dispose of assets consistent with the wishes of the client.
But, what happens when acting in good faith, using a Durable Power of Attorney, the attorney in fact, liquidates assets or real property, specifically provided for in a will, in order to provide for long term Alzheimer’s care?
The law provides for claims for intentional interference with prospective inheritance, and allegations of bad faith and fraud against the attorneys in fact who were exercising their power under the Durable Power of Attorney. Further, attorneys in fact are held to a very high standard of conduct, and allegations of breach of fiduciary duty and bad faith are certainly cognizable within the context of such a suit.
The first line of defense to avoid conflicting estate planning documents is to review both the Durable Power of Attorney and any potential testamentary documents (Wills, Codicils, etc.) to make sure that their provisions do not conflict in any way.
For instance, be sure that any codicil which contains a specific bequest (i.e. a bequest transferring a specific piece of property to a particular beneficiary) is drafted in such a way that the attorneys in fact, using the durable power of attorney, will not incur liability for liquidating a piece of property. One way in which this can be avoided is to make the language in the will or codicil as specific as possible, enumerating the exact circumstances under which the client wishes to liquidate the property (for instance, for Alzheimer’s care, but not for rent or living expenses).
Another way in which to avoid conflicting documents is to be clear with any beneficiaries of a specific devise that it is possible that the property may be used for other purposes. Recognizing many people are very private about disposition of their property, and that disposition of assets can often be an emotionally charged issue, raising political issues within the family, it is even more important to be clear and unambiguous about the authority granted to the attorneys in fact.
The first place to start is to have your estate planner and/or attorney review the documents to ensure they work together, rather than create potential conflicting liabilities and powers, and to ensure your best intentions are carried out.