Generous attorneys: the limits on attorneys benefiting themselves

Generous attorneys: the limits on attorneys benefitting themselves

Introduction

Section 32 of the Powers of Attorney Act 1998 (Act) provides that an attorney is able to do anything that the principal could lawfully do by attorney (if the adult had capacity for that matter).

This means the starting point for considering what powers attorneys have to execute a transaction is that attorneys can exercise any power of the principal except those prohibited by the Act or common law. This article examines what those prohibitions and limitations are.

There is a range of personal powers that an attorney is not able to exercise on behalf of the principal, including, by way of example:

  • an attorney cannot make a will of the principal;
  • an attorney cannot vote in an election for Members of Parliament or council;
  • an attorney cannot undertake a non-delegable personal role of the principal, such as their role as an employee or act as director of a company;
  • an attorney cannot consent to the marriage of the principal or enter into a contract of marriage on behalf of the principal; and
  • an attorney cannot act in the role as a parent of a child of the principal.

Prohibitions under the Act

The Act expressly prohibits an attorney:

  • entering into a conflict transaction except with the express consent of the principal; and
  • making substantial gifts of the principal’s property but can make limited reasonable gifts of a seasonal nature or in relation to a special event (the Act cites birthdays and weddings as examples) or the gift is a donation the principal would be reasonably expected to make provided the gift or donation is not more than was reasonable having regard to the circumstances and the principal’s finances.

Overarching duty – fiduciary duties

However, it is misleading to look at the powers of an attorney within the strict confines of the express authority provided under the Act and the express prohibitions under the Act. An attorney’s powers must be considered in the context of their overarching duty to the principal, which is to always act in the best interests of the principal.

This duty to act in the best interests of the principal is supported by a large number of specific duties; namely:

  • the attorney must act honestly in all matters;
  • the attorney must keep reasonable records of any expenditure on behalf of the principal;
  • the attorney must keep their property separate from the property of the principal (note under the Act this does not apply to property owned jointly or as tenants in common with the principal. For example, if the attorney and principal are spouses and own their house together.);
  • fiduciary duties under the common law arising from their role as a fiduciary for the principal.

Being an attorney for someone is considered to be a voluntary office. An attorney must not gain a benefit and remuneration is only permitted if expressly authorised in the document.  The attorney has a duty to avoid conflicts of interest unless with the fully-informed consent of the principal.  The attorney will have a liability to account to the principal, or their estate, for any reward or profit they have gained through their role as attorney.

Authorising conflicts of interest

It is common practice for solicitors to prepare enduring powers of attorney documents which include an authority from the principal to the attorney to enter into conflict transactions. The purpose of this authority is to allow parties who either have, or are likely to have, intertwined financial arrangements (such as spouses) but also including parents and children where there is a family business or perhaps even business partners on rare occasions, to act with freedom even where a potential conflict of interest arises.

Note that the Act already allows for an attorney to deal with co-owned property on behalf of the principal without that being considered a conflict transaction. The drafters of the Act had anticipated that, where 2 people own property together, there is a high likelihood that they will be attorneys for each other and, in the event the property needs to be sold or refinanced, they will need to be able to act even if their partner has lost capacity.  The power to enter into conflict transactions primarily arises when dealing with property which is solely owned by the principal, rather than property which is co-owned with the attorney.

We recommend that people who currently share their finances or have joint financial arrangements consider authorising each other to enter into conflict transactions. It is not possible to predict with any certainty when a conflict transaction may arise and clients regularly do not have a good understanding of the ownership position of their particular assets, so allowing spouses to enter into conflict transactions can be practical and sensible.

Because gifts and conflict transactions are dealt with separately in the Act, a power to enter into a conflict transaction does not mean that the attorney has power to make substantial gifts of the principal’s property. If that was desired, then there would need to be an express authority for this in the power of attorney.

Gifts are not defined under the Act. Therefore, it would be wise to assume that any transaction which is not done for market value is either a gift or includes a component of consideration ( i.e. the amount less than the market value) as a gift.  For example, the purchase of a motor vehicle with a value of $50,000 for the price of $1 should probably be considered to be a gift of $49,999.

What does the authority authorise?

The Court will strictly and narrowly construe the breadth of any authorisation to enter into conflict transactions. That is, if it is not clearly within the scope of what was contemplated by the parties when the power of attorney was drafted, then it will not be authorised.  This is because the duty to act in the best interests of the principal takes primacy.

We all have an understanding of what acting in the best interests of the principal It is more than acting in good faith.  It is actively promoting the interests of the principal.  From a financial sense, the duty to act in the principal’s best interests means that you are acting in a way which expands, rather than contracts, the property available to the principal at any time.  Therefore, it would rarely, if ever, be acting in the best interests of a principal to enter into any transaction where their estate is diminished.  In the case of Re MC[1], the Court noted that “the best interests must include the welfare, health and wellbeing of the person in a wider sense than is suggested by the protection from neglect, abuse or exploitation“.

In the case of Reckitt -v- Barnett, the Court provided that “whilst a power of attorney may give a person authority to rob the donor, that does not make robbing the donor something they should not be accountable for“.

These matters generally come before the Court after the act of generosity by the attorney has already been completed. The Queensland Civil & Administrative Tribunal (QCAT), in its role of reviewing the acts of attorneys, must consider when a gift by an attorney was within the power and authority of the attorney and, further, whether it was in the best interests of the principal.

In the English case of Re W [2000] 1 All ER 175, there was a proposal to make a substantial gift of the principal’s money to the principal’s children. The reasoning given was that it would substantially reduce the tax burden on the family as a whole because of inheritance taxes.  The Court accepted that it was in the best interests of the family as a whole because it reduced the taxation burden.  However, the Court could not accept that it was within the principal’s best interests because their estate was being diminished.  The Court did not authorise the gift.

The lesson from this case is that a Court will not authorise the acceleration of an estate plan. If the principal needs to undertake particular gifts, transfers or other transactions in order to fulfil their estate plan, they need to do it whilst they have capacity as the Court won’t authorise such transactions once they have lost capacity.

No community property

The New South Wales Supreme Court rejected the concept that spouses have “community property” in the case of Smith[2].

In this case a second spouse had been appointed as an attorney for her husband. She undertook a range of transactions between herself and her husband which demonstrated that she believed she could treat her husband’s property as her own or that she considered it was community property of the relationship.  The Court said:

There is no licence for a fiduciary to enjoy (in, and for the due performance of her fiduciary obligations towards an incapable person) anything other than a small benefit incidental to the incapable person’s enjoyment of his or her own property.

The relationship of spouses is not of itself authority to enter into conflict transactions or to gift property of the principal.

Two QCAT cases – context is critical concerning gifting by an attorney

RJG [2016] QCAT 127

  • The principal had a history of making $50 and $100 gifts to her grandchildren. After she had lost capacity, her attorney (being her daughter) was her enduring attorney.
  • The attorney made two gifts of $5,000 each to the principal’s grandchildren (the attorney’s children) as Christmas gifts.
  • In reviewing the transaction, QCAT found that the gifts were excessive and not in keeping with what the principal would have gifted when she had capacity. Therefore the gifts were a breach of s.88 (in relation to gifts) of the Act.  QCAT ordered the attorney to repay the money to the principal within 30 days.  Note that the obligation to make this repayment/reimbursement was on the attorney rather than on the recipients of the gifts.

BME [2014] QCAT 67

  • In this case there was a long history of the principal substantially benefiting the attorney and the attorney’s daughter. The principal had paid for school fees and school trips for her granddaughter totalling more than $100,000 over 9 years.  Whilst the gifts might have been benefiting the granddaughter, they were of substantial assistance to the attorney as well in assisting him with household expenses.
  • The principal had a large estate and the Court noted that the principal was receiving in excess of $100,000 per year from dividend income.
  • The attorney gifted $25,000 to himself from the principal after the power of attorney had been activated. It was unclear to QCAT as to whether the principal had lost capacity at that point.
  • In addition to the gift of $25,000:
    • the attorney purchased the principal’s car for above market value;
    • the attorney did not keep adequate records of the principal’s property; and
    • there was no authorisation of conflict transactions in the enduring power of attorney.
  • The Adult Guardian had applied for the attorney to be removed as an attorney because of the breaches of the Act.
  • Before reading any further, a reader could be forgiven for expecting the attorney to be slammed by the Court for egregious breaches of duty and be required to repay the gifted money.
  • The Court examined all of the attorney’s conduct in significant detail (including review of investment activity by the attorney for the principal) and was satisfied that, despite the gift and failure to keep adequate records, the attorney acted honestly and with reasonable diligence to protect the principal’s interests.  Whilst the Tribunal found that he had failed to comply with some of the provisions of the Act, he had not breached the gifting or conflict transaction rules.  On its face, this result is difficult to reconcile with the facts as recorded, until the wider context is considered.
  • The Court explained that:
    • the transactions were consistent with the pattern of transactions by the principal when she had capacity and the Tribunal was satisfied that she would have made those transactions herself had she been in a position to do so; and
    • the principal had the necessary means to make the transactions.
  • The Court said:

I find him honest and to have intended to act always in his mother’s best interests, taking account of her expressed wishes“.

  • The Court did not require the attorney to repay any money and did not remove the attorney as attorney for his mother. The Court said that it was satisfied that the decision-making arrangements currently in place would be likely to be affected to protect her financial interests moving forward.  The Tribunal did order that, moving forward, he provide better accounts and records for his mother. The Tribunal also noted the gifts were not appropriate to be made after the principal had moved into a nursing home.

How then do we draft enduring powers of attorney to allow conflict transactions?

Case law shows that it is possible for a principal to authorise an attorney to undertake conflict transactions, including those which substantially benefit the attorney, provided that the authorisation is fully informed and abundantly unambiguous. The QCAT cases show that context is critical.  It would be substantially more difficult for a principal to authorise an attorney to make gifts which are contrary to the transaction history between the parties compared to if the principal is merely authorising what he or she already did when they had capacity and managed their own affairs.

The Tribunal will take into account the express wishes of the principal. Therefore, if the principal intends to benefit an attorney in a particular way, it will be helpful to have the principal’s wishes set out in a statement of wishes or in the power of attorney document itself.

We recommend however that if the power of attorney document authorises substantial gifts, then there will be a closer examination than perhaps otherwise of the following issues in relation to the execution of the power of attorney document:

  • Did the principal have capacity when the power of attorney document was signed?
  • Was the attorney exercising undue influence on the principal in arranging for the principal to authorise these gifts and benefits for the attorney in the document?
  • Was it unconscionable for the attorney to accept appointment in the circumstances and on its terms?

The advice of a solicitor will assist in overcoming the above challenges. The solicitor should not act for both principal and attorney and preferably should not be the longstanding solicitor of the attorney.

The Re Narumon case provides authority for the proposition that a properly authorised attorney may make a binding death benefit nomination on behalf of the principal, including a nomination which nominates the attorney themselves. We recommend principals consider where they are nominating someone as their death benefit beneficiary, whether part of their estate plan should include an authorisation in their enduring power of attorney for that attorney to make or renew death benefit nominations, including nominating themselves.

[1] Re MC (1989) 3 VAR 87

[2] Smith -v- Smith [2017] NSWSC 408

2019-03-21T09:25:49+00:00March 21st, 2019|