Chapter 04 – Powers of attorney and guardianship

Essentially, a power of attorney is a document given by an individual person (donor) authorising another individual person or persons (attorneys) to act or make decisions on behalf of the donor.

The rules governing powers of attorney and guardianship differ from state to state and this guide only covers those applying in Victoria. The rules differ from state to state and specific local legal advice will always be necessary.

In Victoria there are four main types of powers of attorney and guardianship as follows (each state has its own system):

  1. General Powers of Attorney which allow signing of documents by the Attorney but the power ceases if the donor becomes incapable;
  2. Enduring Powers of Attorney (Financial) which allow signing of documents and which endure, or continue in effect, if the donor becomes incapable;
  3. Enduring Powers of Attorney (Medical) which allow medical decisions to be made and only become effective if the donor becomes incapable; and
  4. Enduring Powers of Guardianship, which allow lifestyle decisions to be made and only become effective if the donor becomes incapable.

General Powers of Attorney are of limited use because of limited life and so are rarely used except in short term specific situations. In some circumstances a person may in effect appoint another person as a power of attorney for a limited commercial purpose, for example, the completion of task under a commercial contract such as a loan agreement. We do not discuss these powers here.

When should a power of attorney be used?

A power of attorney should be signed by a client whenever there is a concern whether that person will be able to make decisions for himself or herself, that is, whether the person will not have legal capacity, whether it be temporary or permanent. This often happens as a client gets older. All clients age 70 or more should have appropriate powers of attorney in place, and younger clients may need to have them in place depending on their individual circumstances. Other clients may consider powers of attorney on a more temporary basis. For example a client who is leaving Australia temporarily but for a significant period, say 6 months, may execute a power of attorney in favour of say, his three adult children, that is only effective for 6 months or is only effective while he is outside Australia.

Elder abuse

“Elder abuse” is a generic term for a range of inappropriate actions by persons who hold powers of attorney for elderly people.

The inappropriate actions range from minor and immaterial matters, to errors of judgement, for example, a son “under-spending” on his mother’s age care to maximise his eventual inheritance, to outright fraud, where holders, for example, stealing cash or other assets or borrowing money against the security of the elderly person’s assets.

These things happen. And it is incumbent on estate planning practitioners to advise clients of the risks connected to granting powers of attorney. Some common sense precautions can help minimise these risks. For example:

  1. make the power of attorney conditional upon two medical practitioners certifying that the grantor no longer has the ability to make decisions for herself or himself; and
  2. always appointing at least two people, one of whom should be unrelated, as the grantees, so there is less risk of the grantee abusing the power.

You can read a detailed report on elder abuse by Christine Matsinger from McColm Matsinger Lawyers here: Elder law – Elder abuse.

Revocation of power of attorney

A power of attorney can be revoked at any time by the grantor, provided the grantor still has legal capacity. Revocation should be in writing and ideally the earlier documents will be destroyed or marked as being revoked.

The situation is more complex where the grantor does not have legal capacity. A person who does not have legal capacity cannot create a legal document, and this includes a document that purports to revoke an earlier effective document. Here revocation requires the involvement of a court or a tribunal such as a state guardianship board. Specific legal advice should be sought in all such circumstances.

Sample

View the following sample of an enduring power of attorney (financial) to get an idea of what these documents look like. These are Victorian documents, are provided as samples only and should not be used without specific legal advice.
sample-enduring-power-of-attorney-financial
Direct link to Victoria Legal Aid: Enduring power of attorney (financial)

Assets inside discretionary or family trusts

Many clients will have assets owned in family or discretionary trusts and, although for some this may be obvious, advisers must remember that assets held in a trust are not owned by any one person and cannot be controlled by a will. This is, of course, one of the reasons why family trusts are used so frequently: they provide for perpetual succession, in the sense that they go on beyond the life of one individual and allow for wealth to be transmitted between generations. They also protect family assets from the risk of divorce and bankruptcy of an individual family member, and one of the key principles here is that no one beneficiary has a right against the trustee that is recognised at law (and if you do not own it you cannot lose it).

So if a client controls the assets in a family trust it is not possible to deal with those assets specifically under the will. A will only deals with assets owned personally by the will maker. The best that can be done with assets that are not owned personally and are owned in a family trust is to ensure that the correct people are given control of the trust. This is usually the same people who are expected to inherit under the will.

Most trusts will have a corporate trustee so a good start is to give shares in the company to relevant beneficiaries, who may also be surviving directors. In the simple scenarios discussed above, shares would form part of the estate and pass either to a surviving spouse or children or a testamentary trust. But just dealing with the shares in the trustee company is not sufficient.

Who controls the assets in a trust?

The real question is who has the power to appoint the trustee? This person, called the “appointor”, controls the trust. The appointor has the power to remove and appoint trustees and so has ultimate control of the trust. Usually the appointor’s role is shared between a husband and wife and it is only upon both of them passing away that the issue needs to be addressed.

Some wills use the word “guardian”, “supervisor”, “protector” or “principal” rather than “appointor”. Nothing turns on this and they are the one and the same thing.

The trust deed will specify who holds the power of appointment, and what needs to be done to exercise the power of appointment in favour of another person or persons if the current appointor dies, become incapable of acting as the appointor or ceases to wish to act as the appointor.

Usually this will involve a deed of appointment being exercised in which the new appointor is formally recognised, or appointed, as the appointor and in which the old appointor may resign or otherwise cease to act as the appointor.

Often the trust deed may provide that the power of appointment passes to the appointor’s legal personal representative on the death of the appointor. This is on the surface at least a common sense provision but it can create many other problems, and once again expert legal advice is recommended.

The trust deed may also provide a mediation process or other dispute resolution process to determine disputes between appointors.

The solution

A common solution is for the wills to provide that where a will maker is the sole remaining appointor of any trusts, then the will nominates the executors of their will (or the trustees of their testamentary trust if one is to be established) to be the appointors of those trusts.

That is, the will exercises the power of appointment, often using words like:

I direct that any power of appointment I hold in any trust be exercised in favour of my legal personal representative and that my legal personal representative deal with the assets in that trust as if they were personal assets subject to the control of this will and last testament.

More complex scenarios will require different and more specific arrangements to be made either in the wills or in separate trust documents.

What should a financial planner do?

The financial planner needs to be very careful about any comments or advice provided to clients concerning assets in family trusts, and in particular the interpretation of any clauses in the trust deed concerning the appointor. This potentially comprises legal advice and, in summary, the financial planner should obtain legal advice about the particular trust and then pass the advice on to the client along the lines of:

I have obtained legal advice on your behalf from Name of Solicitor and in summary he or she has advised that….

This is a perfectly acceptable approach which leaves the financial planner in control of the advice process but does not breach any laws regarding providing legal advice.

Each case will be different and will be determined by its own facts and the contents of the relevant trust’s deed. Specific legal advice will always be needed.

The Dover Group