Private Client Services Update – Keeping Them Honest – Curbing Abuse by Agents Appointed in Powers of Attorney
By Vonda W. Chappell, Estate, Trust & Wealth Transfer
No one recites their wedding vows to his or her new spouse anticipating a breach of the trust represented by them. It is much the same with a principal who executes a power of attorney in favor of his or her designated agent. Be it a spouse, child, grandchild or trusted friend, a principal has formed an expectation that his or her agent will act in his or her best interest within the confines of the executed document. The sad truth of the matter is that the same breach of trust experienced by many married couples also plagues those in a principal – attorney in fact (or agent) relationship. The heartbreak of such a situation is only compounded when the once vibrant and flourishing principal becomes incapacitated or disabled, such that he or she is no longer able to recognize and respond to a breach of trust committed by his or her agent.
Situations involving a breach of trust occur all too frequently, and as a result, numerous measures, both statutory and otherwise, have been created to assist in keeping the actions of an agent in-check. Certainly, one of the most common methods utilized to protect the integrity of the agency relationship is frequently found on the face of the power of attorney itself. This feature is often referred to as a “springing” clause. It clearly advises that the agent has the authority to act on behalf of the principal only when the principal is incapacitated, disabled or otherwise no longer competent to administer his or her financial affairs and business activities. Typically, in order to satisfy this contingency, an agent will be required to obtain and maintain a current opinion of a licensed medical doctor certifying that the contingency has been met. Although the “springing” tool is frequently utilized, it can be confusing to the entity or individual to whom the power of attorney is presented and can create a continuing burden on the agent to acquire and maintain current certification of the principal’s condition.
In response to these shortcomings, attorneys may utilize escrow instructions from a principal directing him or her to hold a power of attorney in escrow until such time that he or she receives instructions from the principal to release the same to the agent or until the attorney or an attending physician instructs the agent to utilize the power of attorney on behalf of the principal as a result of him or her becoming unable to administer his or her own affairs. The advantage to an escrow arrangement is that the power of attorney can be drafted without any contingencies, but the potential for abuse of the power of attorney is lessened because of the continuing involvement of the principal’s legal counsel, who is able to verify the principal’s inability to act before the power of attorney is released to the agent. This mechanism helps secure the power of attorney and protects it from being haphazardly used by an agent when the principal desired to restrict his or her authority while the principal is able to act on his or her own behalf.
Another common technique is for a power of attorney to designate more than one agent and require that any action (or certain actions) be authorized by all, a majority of, or a specified number of the named individuals. Such a technique incorporates a system of checks and balances, rather than one individual agent having complete, unfettered control. A risk of using such designations is that co-agents who possess diametrically different ideals may deadlock a decision or action if they cannot work together to achieve the best interest of the principal. For this reason, a principal should select co-agents who he or she believes will work with one another to establish a complementary relationship to achieve the best results for the principal.
Virginia’s legislature has recognized the potential for abuse by agents and has responded by codifying certain provisions clearly aimed at this problem. Specifically, Virginia Code §26-85(A) sets forth certain duties of all agents appointed by a power of attorney, to include a duty:
- to act in accordance with the principal’s reasonable expectations for his or her best interest;
- to act in good faith; and,
- to act within the scope of the authority granted by the power of attorney executed by the principal.
Additionally, Virginia Code §26-85(B) directs that unless otherwise provided in the power of attorney appointing an agent, that he or she, upon accepting the appointment contained in the document shall:
- loyally act to promote the principal’s benefit;
- avoid a conflict of interest which would cause him or her to act contrary to the principal’s best interest;
- exhibit ordinary care, competence and diligence;
- keep good records of all financial business conducted on behalf of the principal;
- cooperate with the principal’s agent designated to make his or her health care decisions; and,
- act in such a manner as to preserve the estate plan of the principal.
Going a step further, the legislature then applies certain accounting requirements to an agent in an effort to ensure the faithful performance of his or her fiduciary duties. Specifically, Virginia Code §26-85(H) and (I) mandates the disclosure by an agent of the transactions (including receipts, disbursements and distributions) made on behalf of the principal unless otherwise provided in the power of attorney. A request for such a disclosure may be made by the principal, a court-appointed guardian or conservator of the principal, another fiduciary acting for the principal or a personal representative of the principal’s estate in the event that he or she is deceased. Responses from the agent are typically required to be provided within 30 days of such a request. Additionally, in the event that a principal is believed by someone identified in §26-87(A)(3) through (9) (to include the principal’s spouse, parent, descendant, adult brother, sister, niece or nephew, a beneficiary of the principal or his or her estate or trust, the local adult protective services unit or a caregiver of the principal) to suffer an incapacity, or if the principal is then deceased it is believed that the principal was suffering from an incapacity at the time that his or her agent was acting on his or her behalf, such a person may request that the agent disclose the actions taken on behalf of the principal and permit an inspection of the records and documents related to his or her actions. Again, the agent typically has 30 days within which to respond and the statute provides that such a response include his or her actions taken within the 5 years preceding the request or the date of a deceased principal’s death if he or she is deceased at the time that a request is issued. The failure of an agent to timely respond to a reasonable request issued in accordance with this statute may result in the filing of a suit asking the appropriate court to review an agent’s conduct for potential breaches of his or her fiduciary duties.
Lastly, since a principal may revoke his or her power of attorney during his or her lifetime for so long as he or she remains competent to do so, an agent who breaches his or her duties to a principal may be stripped of his or her authority by the principal’s execution of a revocation. If a principal chooses to revoke an existing power of attorney, it is good practice to record the executed revocation in the clerk’s office for the circuit court located in the jurisdiction in which the principal resides, together with any other jurisdictions in which the original power of attorney may have previously been recorded, to provide the dismissed agent with written notice of the execution of the revocation, together with a copy of the same, and for the principal to execute a new power of attorney naming a replacement agent or agents to ensure that there is not a lapse in the protections afforded by a power of attorney.
Unfortunately, many people do not recognize the sheer strength and seriousness of a power of attorney at the time that they execute such a document. An agent should be chosen only after careful consideration and should be designated in a document that is professionally crafted to speak to an individual principal’s specific needs and circumstances. A power of attorney is not a form document and should never be activated without some serious deliberation about the measures available to curb the potential abuse of such a document. Since it may be an impossible feat to ensure that agents will always act to promote the best interests of the principals who choose them, it is imperative to be familiar with the techniques and available responses when a trusted agent goes astray.
Vonda W. Chappell is the managing partner of the Chesapeake office of Kaufman & Canoles. Her practice includes corporate law, estate and trust planning and administration, guardianship and conservatorship matters, and commercial and residential real estate. Vonda can be reached at (757) 546.4150 or firstname.lastname@example.org.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.