| December 1998 |
Drafting Powers of Attorney to Comply with the New Legislative Changesby Thomas J. MurphyThe 1998 Arizona legislature recently enacted two pieces of legislation that substantially changed the existing law governing financial powers of attorney (POAs). The two bills – SB 1050 and HB 2359 – made very significant changes to ARS 14-5501 through 14-5507 by requiring new language and execution procedures in all POAs and, more importantly, by adopting new or increased liabilities for anyone acting as an agent pursuant to a POA. These bills took effect August 1, 1998. A Summary of the New Legislation The Benefit Rule The new legislation does not define the term "benefit," which has already caused attorneys to give widely differing interpretations to that term, as discussed below. The statute states that "‘best interest’ means the agent acts solely for the principal’s benefit" (emphasis added).2 This is being widely interpreted to mean that the statute will be violated even if the agent receives a coincidental or nominal benefit when engaging in a transaction that primarily benefits the principal. In other words, the agent can receive absolutely nothing unless the authority for the transaction is "specifically identified in detail" and properly initialed. This can create some real hardships for the agent, particularly if the agent is likely to be an heir of the principal since the agent could forfeit the right to inherit from the principal.3 (This scenario is discussed in further detail later in this article.) Proving the Principal’s Capacity Other controversial changes have been the new provisions of ARS 14-5506 regarding the burden of proving the principal’s capacity at the time the POA was executed. The new legislation essentially creates a presumption of invalidity whenever the principal is alleged to be a "vulnerable adult," as defined by ARS 46-451 (i.e., an adult "unable to protect himself from abuse, neglect or exploitation by others because of a physical or mental impairment").4 If the party challenging the POA can prove by a preponderance of the evidence that the principal was a "vulnerable adult," then the agent has the burden of proving by clear and convincing evidence that the principal had capacity at the time of execution. If the party challenging the POA cannot prove vulnerability, the burden of proof remains with the agent but the standard is by a preponderance of the evidence, rather than by clear and convincing evidence.5 Additional Execution Requirements The new legislation requires that the witness and the notary must sign an attestation clause that is similar to self-proved wills.6 Specific language is provided in the statute. The witness and notary must be two different individuals and the witness cannot be the agent or the agent’s spouse or child.7 Exemptions Several entities or types of transactions are excluded from the coverage of the new legislation. If the principal is not a "natural person," then the new execution requirements do not apply.8 Also exempted are POAs, which create a "power coupled with an interest," which is defined as "a power that forms a part of a contract and is security for money or for the performance of a valuable act."9 This was intended to cover real estate transactions such as releasing or conveying interests in realty under a deed of trust or similar security interest. Also exempted are healthcare directives10 and POAs validly executed in another state.11 Should Attorneys Continue to Have Their Clients Execute POAs? There is considerable discussion within the estate planning and probate bar as to whether it is advisable, from both the clients’ and the attorneys’ perspective, to continue to have clients execute POAs. The thought is to transfer all assets into a trust and use the trustee powers to accomplish the tasks customarily done by agents acting pursuant to a POA. This would mean that relatively nominal assets normally left out of a trust, such as small bank accounts or automobiles, would be transferred into trust and subject to the trustee’s powers. However, this overlooks the fact that the ownership of certain assets is not or cannot be transferred into a trust. Retirement plans, deferred compensation plans, employer-provided life insurance policies and other employee benefits are typically not owned by the trust, although the trust may be the beneficiary. Assets acquired after the creation of the trust frequently never are transferred into the trust. Or the grantor may simply forget about certain assets. A POA will be required to deal with these assets should the client become incapacitated. Advising the Agent The recent legislative changes dramatically increase the liability exposure of the agent, which in turn creates increased liability exposure for the attorney who drafts the POA. The agent now has a greater need for an attorney than does the principal. As a result, it is a wise practice for the attorney drafting the POA to alert the agent to the potential dangers, particularly regarding the consequences of the benefit rule and ARS 46-456, which is the statute dealing with financial exploitation of vulnerable adults. There can be extremely dire consequences for an agent who runs afoul of either of these two items. As a result, there is concern that an agent may have a cause of action against the attorney if that attorney failed to apprise the agent of the duties and obligations of an agent and of the severe consequences for failing to uphold those duties and obligations. This is not some theoretical exercise, since it is not unusual for the attorney to have an ongoing, professional relationship with both the principal and agent, such as a parent and child or husband and wife. It is also not unusual for some bad blood to exist among families. A grave concern is that the new legislation can create an ominous weapon in the hands of the children of a first marriage to use against the second spouse who is the agent of the children’s parent. Likewise, a sibling who feels cheated or who carries a grudge can wreak havoc if the agent fails to follow the dictates of the new legislation. To address this concern, it is advisable to include the following clause, prominently displayed, within the POA: Advisory Notice To Agent. There have been recent changes to ARS 14-5506, a statute which governs the exercise of powers of attorney. Under that new statute, an agent cannot receive any benefits from the principal unless those benefits are specifically identified in detail within this instrument or within a written contract. Otherwise, the agent could be subject to criminal prosecution or subject to the penalty provisions of ARS 46-456, which authorizes the loss of the agent’s right to inherit from the principal as well as payment of treble damages and attorneys’ fees. An agent should carefully review these statutes or consult with a knowledgeable attorney prior to exercising the authority granted by this power of attorney. In the new POAs, this author has the clause in a shaded box in the opening article of the POA. This warning lets the agent know that the duties and obligations that are about to be undertaken are very serious. It also affords some degree of protection to the attorney drafting the POA since it would make it more difficult for the agent to claim ignorance of the consequences of the new legislation. Agent’s Compensation and the Benefit Rule As previously stated, the new ARS 14-5506 requires that, if an agent is to receive any benefit, then that authorization must be "specifically identified in detail" and initialed by the principal and witness. But nowhere in the legislation is the term "benefit" defined. This has already created considerable controversy within the estate planning bar, since it is not clear whether reimbursements to the agent are benefits. Good arguments exist for both positions. One argument states that simply reimbursing oneself for expenses already incurred is not a benefit since the agent is no better off than he was prior to incurring the expense. However, other attorneys emphasize the fact that the agent is receiving funds from the principal which he would not otherwise have had, which makes it appear like a benefit. Until this issue is resolved, it needs to be addressed in the POA. This author’s practice is to expressly authorize reimbursements by including as many examples as could conceivably occur. The clause, which must be separately initialed, reads as follows: Benefits Received By Agent. It is my intention that my Agent be reasonably compensated for the services rendered on my behalf and be reimbursed for any expenses paid by the Agent which were incurred on my behalf. Reasonable compensation shall be the greater of $15 per hour, or the hourly wage or salary equivalent which the Agent customarily receives in his or her regular employment. Reimbursement shall include, but is not limited to, monies paid for medications (whether prescribed or purchased over the counter); medical co-payments; fees for medical, nursing and caregiver services or laboratory work; household or personal incidentals; automobile maintenance and repair; lawn services or landscaping; fees for professional services (such as an attorney, CPA or financial advisor); reasonable travel or lodging costs in performance of the duties created by this power of attorney; maintenance and repair of my residence; and care of my pets. Benefits authorized to be received by my Agent shall include any imputed rent deemed to exist due to any arrangement, agreement or understanding between my Agent and me which allows my Agent to live rent-free in my residence or other property owned by me. The clause limits the agent’s compensation to the greater of $15 per hour or the agent’s hourly wage or salaried equivalent. This provision comes from the customary, though largely unwritten, practice of the Maricopa County probate courts regarding fiduciary fees. The benefit rule also requires that the authorization for any benefit must be initialed by both the principal and agent.12 A benefit can clearly be more than reimbursement or compensation. It also will include the power to gift as well as the power to make distributions from retirement plans, insurance policies or annuity contracts to the agent. Any paragraph authorizing this must be initialed. This author simply provides a blank line between the paragraph’s title and the text of the paragraph. Be sure to leave enough room for both sets of initials. Also, take care that the initials do not run into the margin as this may create a problem if the POA is ever recorded. The next issue concerns which paragraphs need to be initialed. This author has reviewed the work of many other attorneys in preparing this article and they run the full range of possibilities. Some attorneys now have their clients initial every paragraph. Some only have the gifting paragraph initialed. This author has the client initial the paragraphs concerning the power to sell, the power to gift, the power to qualify for Medicaid or other government benefits, the power to exercise community property rights, the power with respect to retirement assets and insurance contracts and the above-described authorization for compensation and reimbursements. ARS 46-456 This statute, which was enacted in 1996, is a malpractice bombshell awaiting the unknowing attorney. It creates a private cause of action for the financial exploitation of vulnerable adults and authorizes various penalties and remedies when such exploitation occurs. This is probably due to its relatively recent enactment and the fact that, until this new legislation was passed, there was no mention anywhere in Title 14 of this statute. The applicability of its draconian penalties may have been increased by the new legislation. The bombshell concerns the definition of financial exploitation and the remedies created for such exploitation. For purposes of ARS 46-456, exploitation includes the breach of a fiduciary duty13 owed the incapacitated or vulnerable adult. The statute makes no allowance for small or minimal breaches, and the consensus among the probate bar is that any breach by a fiduciary, such as an agent, will likely trigger the penalty provisions of the statute, which are severe. They include treble damages and the loss of the agent’s right to inherit from the principal. This can be a very unfair result for minor breaches, such as the failure to pay bills timely. The issue that is causing great concern among the estate planning and probate bar is whether or not the new POA legislation raises the bar for the agent in the performance of his duties. For instance, if the agent receives a benefit that is not "specifically identified in detail," has the agent breached his duty to the principal, thereby triggering the penalty provisions of ARS 46-456? This is not clear, and until it has been resolved, attorneys may be exposing themselves to significant liability if they do not advise the agent of these dangers. Are Pre–August 1 POAs Affected by the New Legislation? It appears that the new legislation does not apply to POAs executed before August 1, 1998. While ARS 14-5501(D) deals with the requirements for all POAs executed after August 1, there is nothing to be found in that statute or in the new ARS 14-5506 that limits the benefit rule to pre-existing POAs. However, section 12 of Chapter 161, which enacted SB 1050, but which is not contained in ARS 14-5506, states that the provisions of ARS 14-5506 "apply only to powers of attorney executed from and after the effective date of this act," which is August 1. As a result, it may be advantageous to not revoke pre–August 1 POAs, since the agent will apparently have much more latitude in conducting the principal’s business and less liability exposure. Attorneys must then take care in considering whether to include a provision in a new POA, which states that the new POA does not revoke a prior POA. If there is a desire to maintain the validity of a pre–August 1 POA, an attorney may wish to draft an instrument stating this. However, there will undoubtedly be problems with banks, brokerage houses and the like who may insist that the pre–August 1 POAs are no longer valid. To deal with this, the instrument should contain the following clause: Power to Sue Third Parties Who Fail to Act Pursuant to Power of Attorney. If any third party (including stock transfer agents, title insurance companies, banks, credit unions and savings and loan associations) with whom my Agent seeks to transact refuses to recognize my Agent’s authority to act on my behalf pursuant to a power of attorney, I authorize my Agent to sue and recover from such third party all resulting damages, costs, expenses and attorneys’ fees that are incurred because of such failure to act. The costs, damages and attorneys’ fees incurred in bringing such action shall be charged against my general assets to the extent that thay are not recoverable from said third party. Exemptions in the New Legislation The new ARS 14-5507 specifically exempts healthcare directives from the new legislation. It also apparently exempts healthcare POAs and living wills.14 This author has always drafted separate POAs for financial matters and for healthcare matters. The exemptions create added reasons for doing so. What Else Should a Practitioner Be Doing? The new legislation makes it much easier for a party to challenge the capacity of the principal.15 Given this, together with the increased incentives for those with less-than-pure motivations, greater care must be taken by the attorney to preserve proof of the principal’s capacity. It is advisable for the attorney to keep extensive notes regarding conversations with the principal and the attorney’s observations of the principal’s behavior and demeanor. More widespread use of videotaping may occur. It also may be advisable for the attorney to obtain and keep medical and mental health records of the principal. Conclusion The uproar within the estate planning and probate bar that ensued after the new legislation was passed has subsided somewhat. Certain problems can be resolved by careful draftmanship. Other problems were not as pervasive as originally feared. After further review and analysis of the statutes, with consultations with other attorneys and with the brainstorming process that occurs whenever substantial revisions to existing forms takes place, I began to realize that, from a draftman’s perspective, the new legislation may have created in some unintended but admirable results. The revisions to the POAs have forced attorneys to formulate a better-drafted, more precisely worded POA with the principal and agent being better informed than they previously would have been. Yet, for many clients, the downside to the new legislation is significant enough to warrant the avoidance of POAs by increased emphasis on trusts. Let’s hope that no one mentions this to the members of the 1999 legislature. Thomas J. Murphy is a solo practitioner in Phoenix. ENDNOTES: |