FAMILY FIDUCIARIES IN THE PROTECTIVE JURISDICTION.

• Date: 01 August 2020
• Author: Chen, Ben

Contents I Introduction II Financial Misconduct by Guardians and Attorneys A Asset Management for the Elderly: Guardianship and Durable Power of Attorney B Misuse of Power or Discretion C Examples III The Strict Model of Fiduciary Regulation A The Prophylactic Theory of Trust Fiduciary Law B Application to Guardians and Attorneys C Narrow Exemptions IV The Flexible Model of Fiduciary Regulation A Historical Foundations B Resurgence in New South Wales V Justifying the Flexible Model A Approximation of a Private Individual's Power to Authorise Departures from Strict Fiduciary Law 1 Default Law versus Mandatory Law 2 A Solution to the Problem of Over-Deterrence B Close Families in the Protective Jurisdiction 1 Cost-Effective Regulation by Intrinsic Bonds and Informal Norms 2 Ubiquity of Harmless Conflicts C Recognition of Inheritance Expectations D Common Criticisms 1 Indeterminacy 2 Discrimination VI Conclusion I INTRODUCTION

As baby boomers in Australia enter retirement with a higher life expectancy and more wealth than any generation before them, courts and legislatures are increasingly pressed to resolve disputes over the properties of the elderly. Empirical research consistently reveals the prevalence of financial misconduct against the elderly. (1) Mental and physical decline can make it difficult or impractical for many older people to safeguard their own financial interests. While their family members may provide assistance, they may also be swayed by their own inheritance expectations. This article addresses the problem of how best to tackle financial abuse by family guardians and attorneys who manage property for the elderly. (2)

Fiduciary law is the cornerstone of the regulatory framework for guardians and attorneys. (3) While there is no precise and unexceptional definition of a 'fiduciary, fiduciary law uniquely prohibits fiduciaries from making an unauthorised profit from their position, and from acting other than in the sole interests of their principals. This dual prohibition arises from the fiduciary duty of loyalty. Responding to alarming statistics and widespread community concerns, law reform commissions typically recommend to impose the strictest form of fiduciary duty on guardians and attorneys. (4) The majority of Australian jurisdictions have adopted those recommendations by statute. (5)

Bucking the trend, this article will argue that a moderate and flexible model of fiduciary law should be applied to regulate family guardians and attorneys. (6) In recent times, the typical property dispute concerns an elderly incapable person, and their guardian or attorney is usually a family member. (7) It will be argued that the prevailing, strict model of fiduciary regulation overreacts to harmless conflicts within close families, which conflicts may well be consistent with familial norms and the wishes of the elderly incapable person. Moreover, many property disputes concern inheritance; someone who expects to inherit from the elderly incapable person sues the guardian or attorney in order to enlarge the asset pool available for distribution when the person passes away. (8) The strict model fails to recognise potential conflicts between the elderly incapable person and the inheritance-motivated claimant. The primary beneficiaries of strict regulation are often not the incapable persons themselves, but those claimants who are driven by inheritance expectations.

In contrast, moderate and flexible fiduciary regulation appropriately responds to the problem of financial abuse by family guardians and attorneys. This article favours a flexible model that originates from historical Chancery jurisprudence and continues to find support in New South Wales. Several first instance judgments from New South Wales recently incorporated muchneeded flexibility into the fiduciary regulation of guardians and attorneys. These judgments continue to impose a duty of loyalty to prohibit conflicts of interest, but the errant guardian or attorney can avoid liability if they had acted to promote the best interests of the incapable person. This article proposes a subjective interpretation of best interests. This interpretation recognises that conflicts of interest are ubiquitous in close familial relationships. It further recognises that biological and affective bonds, as well as moral and social norms, can partially deter misconduct. In the subset of cases brought by claimants who are motivated by inheritance expectations, the proposed subjective interpretation further mitigates the perverse incentives that these claimants may have.

The approach taken in this article is primarily grounded in equitable doctrine and theory. Although guardianship and power of attorney statutes are diverse across Australian jurisdictions, on the specific issue of fiduciary duty, they either adopt the equitable principles governing trustees or stay silent. (9) Equitable doctrine and theory thus remain relevant even in the 'age of statutes'. Moreover, the Convention on the Rights of Persons with Disabilities ('CRPD')--which has been the focus of recent scholarship and law reform regarding guardianship and power of attorney--is vague on the issue of fiduciary duty. (10) Equitable doctrine and theory can provide a surer guide to adjudicators and law reformers.

This article aims to fill in several gaps in the private law literature and disability rights literature. While there is a large body of scholarship on mental capacity to make health care and medical decisions, (11) issues regarding property and financial decisions are often marginalised. (12) Leading texts on equity and fiduciary law also tend to avoid grappling with the complex web of statutes and equitable principles that govern the fiduciary duties of guardians and/or attorneys. (13) Moreover, existing studies of private law's response to elder financial abuse tend to focus on the doctrines of undue influence and unconscionability. (14) Covering all Australian jurisdictions, this article joins a small but growing number of specialist treatises to provide an account of how fiduciary law can deter and sanction misuse of power by guardians and attorneys. (15)

There are nonetheless important issues that fall outside the scope of this article. In atypical cases, the guardian (of property) or attorney is a private professional or institution or a government agency, rather than a relative or friend of the incapable person. Focusing on typical cases, this article has little to say about how best to regulate professional or institutional guardians and attorneys. Another issue concerns the fiduciary regulation of supporters--defined as persons who offer supportive, rather than substituted, decision-making assistance to persons who may lack mental capacity. While law reform commissions and human rights scholars tend to recommend supported decision-making, (16) they disagree on whether to impose fiduciary duties on supporters. (17) How best to regulate supporters is an issue that may arise when supported decision-making systems become more prevalent.

Part II below will elaborate upon the problem of financial misconduct by guardians and attorneys, and provide illustrative examples. Part III will introduce the prevailing, strict model of fiduciary regulation. Part IV will show that recent first instance judgments from New South Wales have developed an alternative, flexible model. The crux of this article, Part V, will argue in favour of the flexible model that emerges from these judgments. Part VI will conclude.

II FINANCIAL MISCONDUCT BY GUARDIANS AND ATTORNEYS

A Asset Management for the Elderly: Guardianship and Durable Power of Attorney

Population ageing is old news. Recent estimates suggest that 3.8 million Australians (15% of the Australian population) are aged 65 years or over, and both the number and the proportion of older people are projected to grow. (18) The trend in population ageing coincides with decades of significant economic growth. Since 1960, the Australian economy has grown 77-fold. (19) In the modern economy, the stereotype that older people are 'frail, out of touch, burdensome or dependent' is outdated. (20) Physical and/or cognitive decline is nonetheless common among the elderly. In particular, recent studies estimate that about 459,000 Australians live with dementia. (21)

Guardianship is a common legal mechanism to facilitate the provision of property management services to the elderly. To create a guardianship for a person, an Australian court or tribunal must first be satisfied that the person lacks mental capacity to manage an aspect of their life or property. Mental capacity is typically a functional concept that accounts for cognitive functioning, the specific tasks to be undertaken, and concerns for autonomy and protection. (22) The presence of some mental or physical disability in the medical sense is usually neither sufficient nor necessary for meeting the legal test of mental incapacity. (23) Once a person is found mentally incapable of managing some aspect of life or property, the court or tribunal has a discretion to appoint a substitute decision-maker--the guardian--to make decisions regarding that aspect of life or property. The discretion to create a guardianship is typically exercised to promote the best interests of the incapable person, taking into account their known wishes and the availability of less restrictive forms of decision-making support. (24)

While a guardianship is officially created, a power of attorney is a private instrument through which a person--the principal--authorises another person -- the attorney--to act on behalf of the principal. (25) Under modern power of attorney statutes, a durable (or enduring, or lasting, depending on the jurisdiction) power of attorney can commence, or remain valid, upon the principal losing mental capacity. (26) These statutes allow individuals who anticipate their loss of capacity in the future to...