The Durable Power of Attorney: Defining the Agent's Duties
| Publication year | 2012 |
| Pages | 49 |
| Citation | Vol. 41 No. 5 Pg. 49 |
2012, May, Pg. 49. The Durable Power of Attorney: Defining the Agent's Duties
May 2012
Vol. 41, No. 5 [Page49]
Trust and Estate Law articles are sponsored by the CBA Trust and Estate Section. Topics include trust and estate planning and administration, probate litigation, guardianships and conservatorships, and tax planning.
Coordinating Editors
David W. Kirch, of David W. Kirch, P.C., Aurora-(303) 671-7726, dkirch@dwkpc.net; Constance D. Smith, of Fairfield and Woods P.C.-(303) 894-4474, csmith@fwlaw.com
About the Author
Dennis N. Whitmer was a trust officer for thirty years. He is Special Counsel with Hamilton Faatz and Waller, P.C. (HFW) and represents fiduciaries and serves as an expert witness in fiduciary matters-(303) 881-4991, dnwhitmer@hfwpc.com. Martha L. Ridgway and Dylan Metzner of HFW and Lisa Sellinger, a University of Denver law student, helped research and edit this article.
This article examines the duties to which an agent may be held under a durable power of attorney. An understanding of the complexities of this issue is essential for legal counsel to adequately advise the principal and the agent concerning the role, expectations, and obligations of such an agent under a durable power of attorney.
The financial durable power of attorney is a useful document that has gained widespread acceptance and use over the last few decades. Durable powers of attorney have been increasingly used as a simple and effective financial management tool to handle an incapacitated person's affairs. That said, this simple document can cause a plethora of problems when it is misunderstood or its powers are abused.
Legal commentators have focused primarily on the increase in cases of abuse by dishonest or unreliable agents and the damage to the principal that occurs.(fn1) Rarely addressed are the potential liability and other problems that an honest agent acting in good faith may encounter.
This article explains that the duties of an agent under a durable power of attorney remain relatively undefined when compared to other fiduciary relationships. It also identifies several circumstances in which this lack of definition can create problems, and suggests actions lawyers can take in drafting and counseling clients to remedy these problems.
A Hypothetical
Several years ago, mom, an 82-year-old widow, executed a standing power of attorney (which is effective when signed), appointing her older son and her only daughter as co-agents (there was no requirement that they act together). Both of these children live nearby. She also has a younger son who lives many miles away. Mom learns that she must have an operation that likely will leave her incapacitated for several months. She contacts agent son and asks that he take over her bill paying and looking after her home while she recovers. She says nothing about any other financial matters. Agent son presents the durable power of attorney to mom's bank and starts paying bills. He also picks up the mail and looks after the home. Sister agent does not become involved (because mom did not ask her to do anything) and leaves the heavy lifting to her brother. Mom has a difficult recovery and is marginally coherent for the next ten months.
Unfortunately, during that time, the national financial bubble bursts and investors holding securities lose roughly half the value of their accounts. Mom has a brokerage account previously worth $2 million that now is worth $1 million. Agent son did not present his power of attorney to the brokerage company and took no steps to take over the management of the account.
Younger son suddenly rides into town with legal counsel and petitions to become mom's guardian and conservator and threatens to sue agent son and agent sister for breach of fiduciary duty, contending that if mom's brokerage account had been managed correctly, the losses would not have occurred. On further investigation, the facts reflect that mom had concentrated her holdings in certain insurance companies and bank stocks that declined much more significantly than the general market.
Agent son argues that he is not responsible for the losses because he never assumed responsibility under the power of attorney to take over the brokerage account. He explains that this was a task that he was not qualified to assume and it was not what his mom asked him to do. He also states that mom was very proud of all of the gains she had made in the account and she didn't want anyone "messing" with it. That account was her "baby."
Sister agent contends that she never even acted as an agent and did not get involved because she thought agent brother was handling everything. Moreover, mom did not ask her to do anything.
Background of Durable Powers of Attorney
Durable powers of attorney have their genesis in agency law. The durable power of attorney essentially is an agency relationship that continues during the principal's incapacity. Agency law has been around for a significant period. Conversely, the durable power of attorney is a fairly new concept in the legal profession.
The first prototype statute enabling a durable power of attorney to manage the affairs of an incapacitated principal was enacted in Virginia in 1954.(fn2) Since 1973, Colorado has had three relatively different statutes that govern the durable power of attorney. The most recent is the Colorado Uniform Power of Attorney Act (CUPA), effective in 2010. Each of the three statutes treats the duty of the agent differently.
Before the concept of durability, an agency agreement between a principal and an agent terminated on the death or incapacity of the principal. This general rule was based on the premise that the principal directed the activities of the agent, and the agency relationship terminated when the principal was no longer able to direct the agent.(fn3) Thus, an agency agreement could not be used as an effective tool in disability planning. This issue began to attract national attention, which eventually led to the Model Special Power of Attorney for Small Property Interests Act (Model Act) in 1964, as promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL).(fn4)
The Model Act contained a number of restrictive provisions reflecting the NCCUSL's concerns with this new concept of durability. The Model Act was designed to provide the elderly and incapacitated, who did not have significant assets, a cost-effective alternative to trusts, guardianships, conservatorships, or other more complex forms of managing their financial affairs. The prefatory note to the Model Act provided that the Model Act's primary purpose was
to provide a simple and inexpensive legal procedure for the assistance of persons with relatively small property interests, whose incomes are small, such as pensions or social security payments, and who, in anticipation or because of physical handicap or infirmity resulting from injury, old age, senility, blindness, disease or other related or similar causes, wish to make provisions for the care of their personal or property rights or interests, or both when unable adequately to take care of their own affairs. It is not contemplated that a power of attorney executed under [the Model Act] will be used for the general handling of sizable commercial property interests. Neither is it intended wholly to replace conservatorship or guardianship, but rather it is designed as a less expensive alternative.(fn5)
The NCCUSL recognized that "extensive safeguards and more detailed and complicated procedures" would be necessary if the durable power of attorney was extended for use when the principal owned significant assets.(fn6)
The NCCUSL gave a good deal of consideration to the duties of the agent acting under a durable power of attorney. In light of the limited scope of protection that the Model Act was intended to afford, it provided three alternatives of the standard of liability. The first alternative held the agent liable for only intentional wrongdoing, gross negligence, or fraud; the second held a compensated agent to the...
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