Because life doesn’t always go to plan, it is necessary to think about how your assets would be managed if you lose the capacity to manage them yourself. A key aspect of this wealth contingency planning is to nominate a personal representative or “attorney” to act on your behalf for financial matters.
The role of an attorney is particularly topical because most of us either have not appointed an attorney or have made an appointment without first considering a range of important legal and personal issues.
The serious consequences of these failings have come to light following the publication of several reports highlighting a number of cases where attorneys have misappropriated or poorly managed assets, resulting in diminished wealth.
This article provides you with details on who you can appoint as your attorney and what issues you may wish to consider before making the appointment.
So what is an enduring power of attorney?
Each Australian jurisdiction has legislation enabling a person (the principal) to appoint by written document a person (the attorney) to make financial decisions on the principal’s behalf. The document is called a power of attorney. It should also be noted that the same enduring power of attorney document can be used to appoint an attorney for personal matters also. However, for the purposes of this article we will be solely focused on financial matters.
The attorney stands in the principal’s shoes and can do most things the principal could do; exceptions include making medical decisions (these are made by a medical attorney) and other personal actions such as making a Will.
When does the power commence?
The principal must nominate in the power of attorney whether it is to commence immediately or upon some later event – such as when the principal loses capacity.
Whilst there has been debate in the past over what is meant by ‘loss of capacity’, recent changes to legislation have sought to clarify this by creating a rebuttable presumption a principal has decision making capacity in certain circumstances. However, complications can still arise when a person moves “in and out of” capacity, as sometimes happens with sufferers of dementia.
Who to appoint?
Many people simply appoint family members. Couples often appoint each other as attorney. If the other is unable to act, one or more children are commonly appointed as “back-ups”. Professionals such as lawyers, accountants or trustee companies can also be appointed, however for obvious reasons this is less common.
How many to appoint?
It is possible to appoint more than one attorney.
Where more than one attorney is being appointed, the principal can authorise them to act:
- Severally – meaning that any of the attorneys can do things on behalf of the principal (this can be problematic if the attorneys are not in agreement or fail to communicate);
- Jointly – meaning that all attorneys must agree on any decision (this is often sensible, but it gives each attorney a power to veto any decision); or
- by majority, where there are more than 2 attorneys (although this option is not available in some jurisdictions).
As mentioned above, it is also possible to appoint alternate or “back-up” attorneys in the event one of the first choice attorneys is unable to act.
What can go wrong?
As stated above, the cases where attorneys are failing to act in the principal’s best interests are on the rise.
One risk to your wealth is that if you lose capacity there will be no-one to oversee the actions of your attorney. This is a slight generalisation, however it is certainly true in a “real-time” sense – i.e. while it is always possible to have a wayward attorney removed from their position, this usually occurs only after the offending activity has taken place.
We remind clients that often attorneys start out with good intentions, only for things to happen that derail the process. The following is a case we handled, with names and a few details altered for obvious privacy reasons:
Heather had three children: two sons who lived interstate and a daughter Deidre who lived nearby. Heather became increasingly dependent on Deidre. In 2009 Heather made a power of attorney appointing Deidre as her sole financial attorney.
By 2010, Heather had become very frail, dementia set in and she lost capacity. Deidre had to reduce her normal working hours in order to look after Heather and eventually had no option but to place Heather into a high-care nursing home.
As Heather’s attorney, Deidre sold Heather’s house to fund the bond for the nursing home. The house – which had appreciated considerably over the last 15 years – sold for $1.5m and, after payment of the nursing home bond, Deidre suddenly had responsibility for $1.3m.
Deidre had never had so much money. She looked at the situation of her two brothers who were both financially secure and convinced herself that Heather would have wanted her to have a “reward” because of all the sacrifices she has made. Deidre made a gift to herself of $200,000.
Over the next year, Deidre started frequenting the pokies section of the local “Lucky Strike” Tavern and the whole of Heather’s remaining $1.1m evaporated, along with Deidre’s own savings.
It was only after Heather died in 2012 that her sons realised what Deidre had done.
Like the majority of cases, this was never reported to authorities. This is not uncommon – especially where there are no assets to pursue. It is suggested that this type of event is far more common than is recognised.
How can you protect your wealth?
There are a range of strategies that lawyers experienced in this field will be able to guide you through to help minimise or possibly avoid the risks that incapacity poses to your wealth. Appointing two attorneys to act jointly, along with an alternate, is a good first step. But there are other nuances to the role of an attorney that must be considered. As part of your planning take time to reflect on what your attorney will be required to do and whether they have the financial and emotional skills to perform these functions.
- is your attorney capable of taking responsibility for the management of a self-managed superannuation fund? This includes reviewing the investment strategy and making other decisions, such as whether to withdraw your superannuation pre-death and avoiding death benefits taxes;
- is your attorney capable of taking responsibility for non-superannuation investment decisions?;
- is your attorney capable (financially and emotionally) of making decisions regarding the sale (or retention) of significant assets such as the family home?;
- do you want your attorney to have power to make distributions to others, such as your spouse and children?;
- is there a possibility that your attorney will be unduly influenced by a third party – such as their spouse?
- will your attorney take control of your family trust and have power to distribute all assets from the trust to themself?
- are there likely to be family tensions, or complications arising from a ‘blended family’ environment?
- will your attorney work effectively with your existing advisers such as your financial adviser and accountant?
- does your attorney understand the importance of seeking advice where necessary, and who to obtain the advice from?
- will your attorney be able to work collaboratively with your medical attorney or guardian regarding matters such as medical care and accommodation?;
- is your attorney aware of the terms of your Will? For example, does your Will bequeath assets that you do not want sold by your attorney?
A Valuable New Year Resolution?
Having in a place a power of attorney could be one of your best and most responsible financial resolutions. Contact one of our experienced team members to discuss making your power of attorney or Will.
© Bernie O’Sullivan Lawyers