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Attorneys transferring the principal’s home to themselves must be careful

A son, seeking to protect his inheritance, used his power under his mother’s Enduring Power of Attorney to transfer her home unit into his name. This left the mother without assets or funds to pay for her aged care costs.

The NSW Trustee and Guardian sought orders on behalf of the mother, that the home unit be transferred back into the mother’s name. The court granted those orders: Cohen v Cohen [2016] NSWSC 336, a decision of Hallen J in the Supreme Court of New South Wales.

The Court found that even though the Power of Attorney gave the power and authority to make the transfer, in using that power, the son had breached his fiduciary obligations (as attorney) to his mother (as principal).

The grant and use of the Power of Attorney to transfer the principal’s home

On 6 October 2000 the mother granted to her son an Enduring Power of Attorney in the prescribed form. Being enduring, it was intended to continue to be effective even though the principal suffers a loss of capacity through unsoundness of mind. The Power of Attorney was not limited in any way.

Clause 2 empowered the attorney “to execute any assurance or other document, or to do any other act, whereby a benefit is conferred on him”. This clause conferred valid authority upon the attorney to transfer assets to the attorney. Note: the Power of Attorney was granted before the law was changed to limit the power to confer benefits upon the attorney- Powers of Attorney Act 2003 (NSW) - s 12(2) and Schedule 3 part 2.

The Power of Attorney was registered and could therefore be used to transact real property.

The son was named as the sole beneficiary of his mother’s will, and so he could have expected to inherit the Lane Cove property on her death.

In November 2001, the mother purchased a 1 bedroom residential apartment (the “home unit”) at Burns Bay Road, Lane Cove, in her name. The price was $245,000. It was unencumbered.

On 26 August 2008, the mother appointed her son as her enduring guardian.

She lived at the home unit for 11 years, until about June 2012, when she moved into an aged care facility at Chatswood. She is now a high care resident.

On 31 July 2013, the son used the Enduring Power of Attorney his mother had given him in 2000, to execute a transfer of the home unit on behalf of his mother as transferor, and again as transferee in his own right. The consideration was expressed to be $1. Stamp duty was paid on a “dutiable amount” of $200,000, and the Transfer was registered. He did not consult his mother.

The property remained unencumbered. It is not in habitable condition and remains vacant.

On 18 November 2013, the son resigned his appointment as the mother’s Attorney and Guardian.

Why did the NSW Trustee and Guardian intervene?

As at 1 August 2013, the aged care costs owing to the aged care facility were $8,130.19. Two years later, in September 2015 the debt had increased to $20,797.02. The reason the nursing home costs were accumulating was that although her pension was being fully applied to the aged care costs, there was a shortfall. She was ineligible for the government subsidy to cover the shortfall because her assets exceeded the means test. This was because Centrelink ‘deemed’ the home unit to be her asset because it had been ‘gifted’ to her son.

The NSW Trustee and Guardian was appointed on 16 April 2014, because Mrs Cohen (then aged 90) was unable to manage her affairs due to blindness and poor hearing, as well as suffering mild dementia.

The NSW Trustee and Guardian registered an owner’s caveat on the title to the property, claiming ownership in fee simple and preventing any dealings by the son.

After requesting the son “to put a proposal that will deal with the debt”, and not receiving a satisfactory offer, the NSW Trustee and Guardian commenced proceedings for an order that the property be transferred to it for sale, so as to pay for her aged care costs.

The court’s findings on the fiduciary duty obligations of an attorney

The Court noted that a Power of Attorney created a relationship of principal and agent.

The Court approved what Hammerschlag J stated in Spina v Permanent Custodians Ltd [2008] NSWSC 561 (at 120, 121) -

“The terms of a power of attorney will circumscribe the extent of the power. Fiduciary duties will regulate how the power may properly be exercised. There is accordingly an important difference between lacking power and abusing it.

Where a transaction is entered into in breach of a fiduciary obligation, the Court may grant relief including by setting aside the transaction or awarding equitable damages or compensation.”

The Court found that by transferring the Lane Cove property to himself, the son had deprived the mother of her only substantial asset, and had therefore acted in breach of his fiduciary duties to her.

In addition, the Court found that the transaction was an unconscionable dealing, because the relevant relationship of “special disadvantage” existed, and the son knew that his mother “was not in a position to look after her interests” and had not established “that the transaction was fair, just and reasonable”.

Accordingly the Court declared that the son held the property in trust, and ordered it to be transferred back to the mother - effectively, to the NSW Trustee and Guardian. No restriction was placed on its sale.

Comments on the age care means test

This case illustrates the dilemma faced by children whose parents need to move out of their home to be cared for in an aged care facility. The dilemma is that their aged care costs will not be subsidised by the government because their home is included as an asset in the aged care means test assessment. The costs need to be paid by the parents, or the children.

In this case, the son failed in the strategy of divesting his mother of her home to protect his inheritance against her aged care costs. He must have thought either that the transfer of the home unit into his name would circumvent the aged care costs means test or that the transfer would put the home unit beyond the reach of the aged care costs his mother was accruing.

But the Centrelink rules are not that easy to circumvent because Centrelink continues to count the home as an asset for at least 5 years after it has transferred by gifting, that is, transferred out of the residential aged care recipient’s name other than by sale at market value.

With the benefit of hindsight, the son should have arranged to pay the aged care costs shortfall, and in that way protected his home unit inheritance.

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