Recently, we got this reader question:
I’m the agent of a Power of Attorney for my mom’s accounts. She has dementia and we use most of the accounts to pay for her basic needs and care. The power of attorney she gave me gives me the right to make gifts on her behalf to descendants up to the gift exclusion.
As her descendant and agent following the rules as written, it is my understanding that I could gift myself $14,000 each year. But can I really?
The Center for Fiduciary Studies defines a fiduciary as anyone who has the legal responsibility for managing property for the benefit of another, exercises discretionary authority or control over assets, and acts in a professional capacity of trust rendering comprehensive and continuous investment advice.
By this definition, as the agent of a Power of Attorney, you are a fiduciary. In fact, there is even an argument that this very scenario — someone delegating financial power over their assets to another person — is the origin of the concept and the word “fiduciary.”
In the non-fiduciary world, rules would take center stage. “Well, it says you can, so you must be able to,” the thinking goes.
However, in the fiduciary world, principles and ethics take center stage. The paramount question becomes: Is it in your mother’s best interest?
Even though Powers of Attorney are very common throughout the United States, their implementation is largely governed by state law. This can make answering a Power of Attorney question trickier than it should be. That being said, there is an organization called the Uniform Law Commission, which has as its goal to write well-constructed acts that can be easily adopted by many states in order to unify more laws across our country.
In 2006, the Uniform Law Commission created the Uniform Power of Attorney Act. This act was adopted into law by 25 states, including Virginia, and is currently proposed for adoption in 2018 by four more.
One of the many goals of the act is to “provide a default standard for fiduciary duties.” Here’s the relevant section interrupted by my annotations:
SECTION 114. AGENT’S DUTIES
(a) Notwithstanding provisions in the power of attorney, an agent that has accepted appointment shall:
The specific text of a power of attorney can modify any of these rules if they explicitly do so. However, if they do not explicitly modify the role, when you accept being an agent you are excepting the following fiduciary standard.
(1) act in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, in the principal’s best interest;
(2) act in good faith; and
(3) act only within the scope of authority granted in the power of attorney.
In other words, why did your mom appoint you agent? If you know it was her expectation that you continue to make annual $14,000 gifts to her descendants even after she got dementia, then continuing to do so might be in line with both her best interest and reasonable expectations.
However, if it was just her expectation that you handle her financial affairs and pay for her care and needs while she has dementia, then using her account to make gifts to yourself may not be acting in good faith.
(b) Except as otherwise provided in the power of attorney, an agent that has accepted appointment shall:
(1) act loyally for the principal’s benefit;
(2) act so as not to create a conflict of interest that impairs the agent’s ability to act impartially in the principal’s best interest;
(3) act with the care, competence, and diligence ordinarily exercised by agents in similar circumstances;
That second principle is key in your situation: “act so as not to create a conflict of interest that impairs the agent’s ability to act impartially in the principal’s best interest.”
The ability to make gifts from your mother to yourself is a conflict of interest even if you don’t act on it. Conflicts of interest are temptations, but they are not always right or always wrong. Again, the paramount question is: Is it in your mother’s best interest?
If your mother was not regularly giving these gifts in the past and the reason you are interested in giving them now is because you benefit from it, it is probably not in line with her intentions. If your intuition suggested that you should not designate gifts to yourself, your intuition was probably correct.
You need to act with the care, competence, and diligence that someone who did not have this conflict of interest would. That is the fiduciary duty.
The section continues:
(4) keep a record of all receipts, disbursements, and transactions made on behalf of the principal;
(5) cooperate with a person that has authority to make health-care decisions for the principal to carry out the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, act in the principal’s best interest; and
(6) attempt to preserve the principal’s estate plan, to the extent actually known by the agent, if preserving the plan is consistent with the principal’s best interest based on all relevant factors, including:
(A) the value and nature of the principal’s property;
(B) the principal’s foreseeable obligations and need for maintenance;
(C) minimization of taxes, including income, estate, inheritance, generation-skipping transfer, and gift taxes; and
(D) eligibility for a benefit, a program, or assistance under a statute or regulation.
Item six is another relevant duty for your situation. An agent is tasked with attempting to “preserve the principal’s estate plan” including “the value and nature of the principal’s property.”
Even if she had regularly given out $14,000 checks to her heirs before her dementia, a fiduciary must still ask the question is: Is it in her best interest for you to continue her annual giving even though she has dementia?
And if your mother was not in the habit of making this type of gift, then starting now may deplete the value of her estate or it may be savvy intergenerational planning. Again, the important consideration is whether it is in her best interest.
(c) An agent that acts in good faith is not liable to any beneficiary of the principal’s estate plan for failure to preserve the plan.
(d) An agent that acts with care, competence, and diligence for the best interest of the principal is not liable solely because the agent also benefits from the act or has an individual or conflicting interest in relation to the property or affairs of the principal.
In sections (c) and (d) the act covers the important issue of liability. So long as you are acting in good faith and in the best interest of the principal, just because you benefit from the action doesn’t make it wrong. Continuing her giving even in dementia might be what she would have wished.
However the flip of this is, if you are not acting in her best interest or if you are taking advantage of your role as her agent, you are liable and can be sued in court for your actions.
(e) If an agent is selected by the principal because of special skills or expertise possessed by the agent or in reliance on the agent’s representation that the agent has special skills or expertise, the special skills or expertise must be considered in determining whether the agent has acted with care, competence, and diligence under the circumstances.
(f) Absent a breach of duty to the principal, an agent is not liable if the value of the principal’s property declines.
(g) An agent that exercises authority to delegate to another person the authority granted by the principal or that engages another person on behalf of the principal is not liable for an act, error of judgment, or default of that person if the agent exercises care, competence, and diligence in selecting and monitoring the person.
(h) Except as otherwise provided in the power of attorney, an agent is not required to disclose receipts, disbursements, or transactions conducted on behalf of the principal unless ordered by a court or requested by the principal, a guardian, a conservator, another fiduciary
acting for the principal, a governmental agency having authority to protect the welfare of the principal, or, upon the death of the principal, by the personal representative or successor in interest of the principal’s estate. If so requested, within 30 days the agent shall comply with the
request or provide a writing or other record substantiating why additional time is needed and shall comply with the request within an additional 30 days.
Also, in the event that there is more than one agent, the fiduciary duty extends to what you know other agents might do. The Uniform POA Act states in 111.d:
An agent that has actual knowledge of a breach or imminent breach of fiduciary duty by another agent shall notify the principal and, if the principal is incapacitated, take any action reasonably appropriate in the circumstances to safeguard the principal’s best interest. An agent
that fails to notify the principal or take action as required by this subsection is liable for the reasonably foreseeable damages that could have been avoided if the agent had notified the principal or taken such action.
If you know that another agent is going to breach their fiduciary duty, you are liable for not trying to stop them or not protecting your mom’s best interests. You cannot do nothing and let a co-trustee do something that harms her.
A fiduciary is held to the highest legal and ethical standards for the property entrusted to your care. You can be held personally liable for your decisions. The Center for Fiduciary Studies estimates that, although many are wholly unaware of their legal responsibilities, more than 5 million people serve in a fiduciary role and account for the management of more than 80% of the investable assets in the United States.
It is very important that you take your fiduciary duty seriously.
In the world of ethics, there is no “safe” answer. There are right answers, and the other actions are wrong. Which is which depends on the specifics of your situation. Gifting $14,000 to your mother’s descendants might harm your mother or might benefit her. Not gifting the $14,000 might harm your mother or might benefit her.
Your fiduciary duty must be your guide.
For more information on being a fiduciary under a Power of Attorney, you might benefit from reading the Consumer Financial Protection Bureau’s “Help for agents under a power of attorney in Virginia.”
Photo by Seth Reese on Unsplash