Powers of Attorney: Protecting Yourself from Abuse

As part of the estate planning process, we often ask our clients to consider signing a durable power of attorney. This document gives another person (the “attorney-in-fact”) the power to do a variety of things on your behalf, such as access financial accounts, transfer property, or defend legal actions.

An “attorney-in-fact” acting under a power of attorney owes fiduciary duties to the individual who executed the power of attorney. This means an attorney-in-fact must act solely in the best interest of the principal and is required to act with good faith, care, and loyalty on behalf on the principal. Acts of self-dealing which benefit the attorney-in-fact are prohibited.

Although most attorneys-in-fact act in the interest of the grantor, these powers are sometimes abused, even by family members. Often, this abuse targets the elderly or others who are unable to care for themselves. For example, instead of using the principal’s funds to pay for long-term care expenses, the wrongdoer may instead withdraw money for a personal vacation trip.

Improper use of powers of attorney is a serious violation of law. An individual who abuses a power of attorney can be subject to a variety of legal claims including fraud, misrepresentation, conversion, breach of contract, and breach of fiduciary duty.

What can you do to protect yourself? First, if you are granting a power of attorney, you must be absolutely sure that you select a trusted attorney-in-fact who will act in your interest and carry out your wishes. Second, if needed, the document granting a power of attorney should specifically outline those wishes – and any limitations. It is also advisable to revisit the power every few years, particularly if the relationship situation or dynamics have changed. Conversely, if you have been granted a power of attorney, use your power with good faith in the principal’s interest, and watch for signs of abuse by others.

Supreme Court Rules on Securities Fraud Class Actions

A United States Supreme Court decision near the end of its last term makes it more difficult for investors to pursue class action suits alleging securities fraud, but it does not effectively prevent such actions altogether.

The case involved a challenge to Basic Inc. v. Levinson, a 1988 decision in which the Court adopted a “fraud on the market” theory in securities fraud class action suits. In these securities fraud cases, a presumption arises that a company’s false statements improperly inflated the share prices and that investors relied on that inflated price when they bought. This presumption helps plaintiffs fulfill the requirements for a class action suit of Rule 23 of the Federal Rules of Civil Procedure, particularly the need for “questions of law or fact common to the class.”

In the June decision in Halliburton Co. v. Erica P. John Fund, the Court held that companies can rebut this presumption during the class certification stage of litigation with evidence showing that the stock price was not inflated. Prior law prevented this evidence until the merits of the case were at issue, thus encouraging earlier settlements.

The impact of the ruling is unclear. Although the court did not abolish the “fraud on the market” presumption altogether, it did allow corporate defendants to offer contrary evidence earlier in the litigation process.

The New York Times has a summary of the decision, and Forbes and the Wall Street Journal have full discussions of the potential impact of the ruling.

IRS Streamlines Tax-Exempt Application Process for Most Charities

The Internal Revenue Service has recently released a new tax form to help small charitable organizations apply for tax-exempt status. Form 1023-EZ, introduced in July 2014, provides an alternative to the longer Form 1023 and will allow the IRS to more efficiently process applications for 501(c)(3) tax-exempt status.

From the IRS news release:

The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

"Previously, all of these groups went through the same lengthy application process -- regardless of size," [IRS Commissioner John] Koskinen said. "It didn't matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.”

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months.

To determine if your organization qualifies to file the new form, review the Form 1023-EZ Instructions and Revenue Procedure 2014-40, as well as consult an attorney. Form 1023-EZ must be filed online and requires a user fee of $400.

Nonresident Commercial Real Estate Brokers

Ohio law requires a real estate broker’s license before an individual or entity can sell, rent, lease, or manage property in return for a fee. However, an important exception does exist for commercial real estate brokers who are located outside the state.

Ohio Revised Code 4735.022 permits an out of state broker who is actively licensed in another state to act as a broker in Ohio without obtaining a license if certain conditions are met. The out of state broker may act as a broker in Ohio if it works in cooperation with a licensed Ohio broker.

The two parties must sign a written agreement detailing the terms of cooperation, and the out of state broker must agree to follow Ohio law, submit to the jurisdiction of Ohio courts, and provide an out of state certificate of good standing. Documents and trust funds must be held by the Ohio broker, and importantly, the name of the Ohio broker must be included on all advertising.

The Ohio Association of Realtors has more information on the topic, as well as a sample agreement.

Your New Sidewalk: Who Pays?

Ohio municipalities have the power to levy charges known as “special assessments” against properties. These assessments – which are distinct from property taxes – are used for a variety of purposes, including building sidewalks, removing snow, planting shade trees, and laying water pipes.

The process begins when a city, either by its own determination or a citizen petition, passes a resolution of necessity declaring the need for the improvement. The city must also determine the cost of the improvement, and the amount of each special assessment can be calculated in one of three ways:

1. By a percentage of the tax value of the property assessed;
2. In proportion to the benefits that may result from the improvement;
3. By the front foot of the property bounding and abutting upon the improvement.

According to Ohio law, special assessments must be limited to the special benefits conferred upon the property. The cost of the assessment cannot outweigh the benefit to the property. For example, when a proposed sidewalk would harm a property’s value by destroying shrubs and eliminating the home’s privacy, the special assessment was declared unlawful. (Martino v. City of Sidney, 140 Ohio App. 3d 340 (2000)).

If a property owner objects to the assessment, he must act quickly – an objection must be filed with the city clerk’s office within two weeks of notice of the resolution’s passage.  As illustrated by this recent example from Cleveland Heights, objections are heard by a equalization assessment board, which then makes a recommendation to the city council. After all objections are resolved, the city council passes a final resolution to move forward with the project.

The final assessment will be added to the real property tax bill.  In most cases, a special assessment may be paid at once or over a period of years – however, assessments not paid at once may be subject to interest.