In this article, Clarence Leung, Special Counsel, Autonomy First Lawyers, gives an overview of the issue of elder financial abuse in the context of business succession planning in relation to Enduring Power of Attorney (EPOA) and risk management initiatives.
Part 1) The nature of the chosen concern
- In 2020, the Australian Bureau of Statistics estimated that 4.1 million Australians were elderly, representing 16% of the population. In a Report published on 22 December 2022 commissioned by the Australian Government, titled National Elder Abuse Prevalence Study, financial abuse is one or more incidents by family members, carers or other professionals in the form of “making financial decisions for you without permission” and/or “misused a Power of Attorney.”
- Elder financial abuse is always described as the illegal or improper use of a person’s finances or property by another person with whom they have a relationship implying trust.
- There is a rebuttable presumption of mental capacity with ALL transactions EXCEPT a Will. In relation to a Will, there is no presumption of mental capacity, the onus of proving testamentary capacity always falls on the person propounding the Will by reference to the test for mental capacity to make a Will which was settled in 1870 in Banks v Goodfellow (1870) LR 5 QB 549. But the evidentiary onus shifts to a person challenging the Will if the Will was duly executed and rational (or regular) on its face.
- The mental capacity for Power of Attorney, however, is different and the presumption moves away from the “Will” position. In making an assessment on mental capacity there is common reference to a presumption of mental capacity, which is also called the presumption of sanity. It has been said by Dixon J that proof may be obtained by direct testimony, by circumstantial evidence, or presumptively. A presumption of sanity is but a deduction from probabilities. Per Axon v Axon (1937) HCA 80.
- More importantly, it has been said that greater mental capacity may be needed to make a power of attorney compared to that required for a Will. (Szozda v Szozda (2010) NSWSC 804)
In contrast with other transactions, the consequence of a principal lacking the required mental capacity to make a power of attorney is that the power of attorney is void.
- An EPOA will continue to be effective to confer on authority given to the person appointed – the attorney – even if the principal has lost mental capacity.
- Elder abuse through manipulation of older people’s real property will continue to be problematic, as the necessary adherence to indefeasibility and the narrow view of bank liability regarding fraudulent mortgages and guarantees are unlikely to change.
- That means there are greater opportunities for abuse, bearing in mind that taking the matter to NCAT and the protective jurisdiction of the Supreme Court for the review proceedings will be expensive, time-consuming and onerous.
Part 2) A proposal for managing the concern, and identified risk-management/professional responsibility issue
The best practice to prevent elder financial abuse by reducing the risk of mental incapacity and misuse of an EPOA may include the following:
- It is essential for the lawyer to establish that the client has appropriate capacity and understands the effect of the legal transaction, in addition to checking for volition in accordance with the Law Society of New South Wales publication “When a Client’s Mental Capacity is in Doubt – A Practical Guide for Solicitors” 2018, and “Guidelines for Solicitors Preparing an Enduring Power of Attorney”, 2008.
- Better to appoint more than one attorney and indicate they are to act jointly and should make decision together; or otherwise by simple majority if more than two attorneys are appointed.
- Appoint a Substitute attorney who will only have authority to act as your attorney if the first appointed attorney dies, resigns or vacates office.
- Better state that a power of attorney is not terminated if not all joint attorneys agree.
- Terms of Authority- activation of the appointment must be evidenced by certificate by qualified medical practitioners, for example, insert in the instrument: “This POA operates immediately as and from when I (the Principal) have lost the capacity to direct my financial, business and personal affairs evidenced by a report to that effect of a clinical neuropsychologist of at least 10 years’ experience and my attorneys have accepted their appointment.”
- In consideration of S9, Power of Attorney Act NSW 2003 and the decision of Re Narumon (2018), insert relevant clauses when the authority involves death benefit nomination: eg “Management of my superannuation benefits clause”, such that the Attorney can make, confirm or change any existing binding death benefit nomination with respect to any superannuation fund of which the principal is a member if this is required to prevent the nomination from lapsing.
- Ambit of restriction under S10, consider limiting the scope of the authority as necessary, such as “limited to application for grant of probate and or letters of administration”, or state that the authority is subject to occurrence of events or a time limit.
- It is better not to have the power expressed to be “irrevocable power of attorney” under S15.
Practitioners also need to consider the several key points in specific context as follows
1. An attorney acting as an appointor of a discretionary trust
It has been said that an attorney cannot act as an appointor (including protector and guardian) of a discretionary trust because this is inconsistent with an attorney exercising fiduciary powers, like a trustee, something which, it is suggested, an attorney cannot do. However, S10 has been construed as NOT prohibiting an attorney acting as a fiduciary.
It is stated in Mercanti v Mercanti (2016) WASC 297 concerning a trustee, but it applies equally to an appointor, that “it is possible for some powers to be held in a fiduciary capacity while other powers are held by the same person in a different capacity”. The issue then arises: If the appointor owed fiduciary duties, there would be potential difficulties (by reason of conflict of duty) for an attorney owing a fiduciary duty to its principal and, as appointor, owing fiduciary duties to beneficiaries of the trust. The finding in Rayner (2010) NSWSC 810 indicates that in the absence of documentation so prohibiting, an enduring financial power of attorney was able to exercise the powers of appointor, if the principal has lost capacity.
Caveat 1: Accordingly, there remains a debate about an attorney acting in place of the principal as an appointor. A prudent lawyer may need to inform the client of the debate and state that any authority conferred on the attorney may OR may not lead to the attorney so acting. Also, the terms of the trust appointing the appointor should always be checked.
2. Attorney acting as a director
It is generally accepted that an attorney cannot act for the principal as a company director. Per Mancini v Mancini (1999) NSWSC 799: “The office of a director is not a property right capable of being exercised by an attorney or other substitute or delegate of the person holding the office.”
An alternative way of understanding this statement is that an attorney cannot exercise the authority conferred on the principal as a director UNLESS that authority is found in the constitution.
Caveat 2: Because the correct legal position is still a matter of some uncertainty, it is probably better for lawyers to err on the conservative side and advise AGAINST an attorney acting as director in place of the principal.
3. Attorney’s authority concerning death benefit nomination
Can an authority make, remake, amend, confirm or revoke a nomination on behalf of the attorney’s principal as a member of a superannuation fund (PS- superannuation benefits are generally non-estate assets)? To date, there has only been one court decision in Australia precisely on this point-Re Narumon Pty Ltd (2018) QSC 185- where the court concluded that there was no restriction in the superannuation legislation which could prevent an attorney from exercising the right to make a nomination for a member.
Caveat 3: The findings in Narumon were based on the delegation and conflict provisions in the Queensland legislation, and these provisions differ from those in other jurisdictions including NSW. There will continue to be doubts whether an attorney has authority to deal with a member’s death benefit by way of nomination in all circumstances.
- 7 key things to think about when making an Enduring Power of Attorney (Compass)
- Vulnerable Client Guidesheet
- More on Business Succession Planning
- Failing to Plan for Business Succession – A Cautionary Tale
The writer would like to acknowledge and thank the specialists who have helped with this article, by way of discussions and publications, including Nathan Yii, Darryl Browne and Michael Perkins. Without their intellect and insights, this article would not have been possible.