The Durable Power of Attorney (“POA”) is one of the oldest estate planning tools available to families. These instruments allow the named agent the right to perform certain tasks on behalf of the person granting them the authority. As we lawyers say, the agent is legally stepping into the shoes of the person granting the authority, known as the principal. This power becomes especially important if the principal becomes unable to act for him or herself.
Unfortunately, like many instruments created to help people, POAs can become a source of abuse by the named agents. This abuse, propelled in many instances by self dealing and old fashioned greed, typically involves an agent using his or her power to personally benefit him or herself, often at the expense of the principal, his or her family and the principal’s estate.
New York, like other states, permits the agent to make gifts to any person in any year. Gifts can be limited (to the gift tax annual exclusion of $13,000 per year per donee) or unlimited, based upon the directive in the instrument. The principal must explicitly grant this power and the power must be exercised for the “best interests of the principal”. On September 1, 2009, New York revised its POA form to further restrict gift giving by an agent to himself. The new law requires the principal to describe exactly what kind of gifts he or she wishes to authorize the agent to make to himself.
BEST INTERESTS OF MOM OR DAD
The questionable uses of a power of attorney instrument is a frequent cause of familial conflict and these disputes invariably end up in court. Determining what amounts to “the best interests of the principal” is clearly a subjective determination for a court to make. For example, if the goal of a gift is to reduce the size of the principal’s estate to minimize estate and gift taxes, such a gift would likely be deemed quite noble and in the principal’s best interests. If that same gift were made to the agent herself, however, a court may not find that to be in the principal’s best interests. New York courts have presumed that gifts made by an agent to him or herself were not in the best interests of the principal. This presumption places the burden on the agent to prove that gift was not selfishly or improperly motivated.
An agent is considered a fiduciary of the principal and his or her actions are subject to vigilant scrutiny. Agents owe their principals duties of loyalty and trust and are strictly prohibited from acting in a manner that is inconsistent with these duties. If self dealing is suspected, a court will typically inquire into many factual issues. The factors that may be considered include whether a principal was/is incapacitated; the nature of the principal/agent relationship; whether the principal was subject to the control of the agent; who benefited from the alleged abuse; and whether the agent’s financial transactions differed from those made by the principal.
New York courts have commented that the relationship between an agent and principal has been held to “automatically establish” a confidential relationship. The failure of the agent to rebut this presumption of impropriety may lead to the agent losing his or her authority, or other sanctions.
Sadly, this form of abuse is rarely discovered until after a principal has died. The family and fiduciaries of the principal may be shocked to discover that the principal’s estate has been depleted or accounts have been re-titled. Fortunately, the New York Surrogate’s Court Procedures Act provides a mechanism for recovery of assets. These proceedings are called “discovery proceedings” and are designed to bring assets that have been improperly transferred back into the estate of the decedent.
In this proceeding, the court must determine what happened to the assets of a decedent. While fiduciaries typically bring such actions, any interested party may petition the court for intervention. Initiating this proceeding will trigger two stages of legal activity; the inquisitorial stage and the trial stage. In the inquisitorial stage, the fiduciary of the estate will petition the person(s) believed to be in possession of assets of the estate to determine where estate property is located and how it was acquired. If sufficient evidence is provided, the court will order the persons in possession of estate property to return the property to the estate.
If the surrogate is unable to order the turnover of the property, the proceeding will move to the trial stage. The petitioner will be required to prove that the property in question was improperly acquired by the agent. The agent will then bear the burden of proving that the assets were acquired by means other than fraud, undue influence or mistake.
As the reader can probably tell, these are contentious proceedings that require careful legal analysis by your counsel. If you have any questions concerning this article or would like to discuss a potential case, please reach out to us at SGR.