8.1 Powers of Attorney

• Library: Estate Planning in Virginia (Virginia CLE) (2018 Ed.)

8.1 POWERS OF ATTORNEY

8.101 In General. A power of attorney creates an agency relationship between the grantor of the power, known as the principal, and the grantee, known as the agent or attorney-in-fact. In the past, general rules of agency governed the rights and duties among the principal, agent, and third parties. But after the Uniform Power of Attorney Act (UPOAA) ¹ was adopted in Virginia in 2010, agency law only applies when a statutory provision does not control. Because the UPOAA has been adopted in many states in the past 15 years, powers of attorney have increasingly become statutory instruments. These statutory instruments provide estate planning attorneys and their clients considerable flexibility for planning, including the use of so-called "hot powers." Hot powers include gifting authority and the ability to change life insurance beneficiaries, which may cause tension in a second marriage situation. The exercise of these powers requires a specific grant of authority in the power of attorney instrument. ²

A power of attorney may be referred to as a POA (power of attorney), a DPA (durable power of attorney), or a "springing" (contingent) power of attorney (one that takes effect only at the time of incapacity).

Adult incapacity is becoming a matter of increasing concern. The durable power of attorney, because of its flexibility, ease of use, and modest cost, is probably the single most useful planning tool to address the possibility of future incapacity. The scope of the agent's permitted acts is defined by the power itself.

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Crafting a power of attorney for a third party is the work of a lawyer and should be carried out with the protections afforded by the attorney-client relationship. A durable power of attorney holds great potential for abuse, especially when it relaxes or waives common law restrictions on self-dealing and gifts and limits liability to the principal. ³ Thus, a nonlawyer who provides his or her customer a power of attorney that authorizes the agent to deal on the principal's behalf with all of the principal's assets or accounts, whether or not maintained by the particular nonlawyer, exceeds his or her legitimate interests in the principal's affairs and is engaging in the unauthorized practice of law. ⁴

8.102 General Versus Limited Powers of Attorney. A general power of attorney is typically described as such by its title or the catchall phrase granting authority to the agent to "do all things which the principal could do acting for himself." ⁵ A limited power of attorney restricts the powers that the principal delegates to specific areas or concerns. For example, a limited power might authorize an agent to act for the principal in the sale or rental of land only during a specified period, or to manage the principal's accounts at a particular bank.

Because the Internal Revenue Service requires that a power of attorney include the principal's Social Security number, it may be useful to draft a special tax power of attorney to meet this requirement without divulging the principal's Social Security number in the general power, which may need to be recorded. ⁶ While the IRS publishes Form 2848 for this purpose, ⁷ the form has been held to be revoked if the taxpayer becomes incapacitated. ⁸

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Appendix 8-7 is an example of a power of attorney limited to making arrangements for burial or other disposition of remains. Section 54.1-2825 of the Virginia Code requires written acceptance by the person designated to make such arrangements. Section 64.2-1601 of the UPOAA, however, excludes powers of attorney for burial arrangements under section 54.1-2825 from UPOAA coverage, so that UPOAA provisions do not apply to forms for the designation of agents to arrange for burial or disposition of remains. But it is worth noting that forms for directing the disposition of remains are an often overlooked part of the estate planning process. The attorney should ask the client whether it is possible that family discord could arise concerning disposition of remains. Section 54.1-2825 provides a mechanism for assuring that the client's wishes are carried out. Those counseling veterans should be especially careful in this situation, as veterans often wish early in their lives to be buried in a military cemetery, such as Arlington National Cemetery, but later prefer to be buried closer to where their families reside. ⁹ Estate planning is not just about money, and preserving a client's legacy often means honoring their wishes after death. Thus, burial planning is important.

Section 17.1-227 of the Virginia Code provides, in part, that before an attorney or other party submits any instrument for recordation in the office of the clerk of a locality, including a power of attorney to convey real estate, the attorney or party must remove from the instrument any Social Security number of a party to the document. This is one reason of many why it is critical to use addresses and telephone numbers of agents and never Social Security numbers. Of course, the principal's Social Security number should also never be used.

8.103 Capacity to Execute Power of Attorney; Breach of Duty; Presumption of Fraud; Actual Possession of Instrument. The same standard of capacity required for entering into an ordinary contract is required for the power of attorney, which is an agency agreement. ¹⁰ The

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grant of authority under a power of attorney is strictly construed, and the presumption is for limited authority. ¹¹ Thus, when a general power is intended, the instrument should so specify. For example, the UPOAA states that if a power of attorney grants an agent authority to do all acts that a principal could do, the agent has, subject to several limitations, the general authority described in the act. ¹²

This is particularly true when the principal is a family member who wishes the agent to act in ways that could appear inconsistent with or even contrary to the principal's individual interests, especially when the actions would benefit the agent or the agent's family. The UPOAA addresses typical actions that are expected with respect to personal and family maintenance for the principal. ¹³ Such acts might include (i) making gifts from the principal's estate to the agent or to others in the family to whom the agent might have a duty of support, (ii) disclaiming the principal's interests in property, which could accelerate a beneficial interest in the agent, and (iii) creating irrevocable trusts for the benefit, in whole or part, of persons other than the principal. These actions may be entirely consistent with the principal's known but otherwise undocumented wishes and could, if challenged, be frustrated or even become the subject of a fraud suit against the agent. Section 64.2-1622(B) clarifies that unless the POA specifically provides that these actions are approved, an agent who is not related to the principal may not exercise the power to create an interest in the principal's property for himself or anyone to whom the agent owes a duty of support.

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Unlike most fraud cases, in which fraud must be proven, fraud arising from self-dealing or apparent self-dealing by an agent with the principal's property gives rise to a presumption of fraud. ¹⁴ But where it is appropriate to the client's intent, the power of attorney can be drafted in a manner that eliminates or rebuts this presumption.

Because the POA agent has a fiduciary relationship with the principal, he or she may be liable to the principal for breach of a fiduciary duty. An agent who violates duties owed to the principal is liable to restore the value of the principal's property to what it would have been absent the violation and to reimburse the principal for any attorney fees and costs. ¹⁵

The power of attorney is effective when delivered, unless subject to contingencies or escrow delivery. By statute, ¹⁶ actual possession of the instrument is all that is required; a general, special, or limited power of attorney (or any other writing vesting any power or authority to act in another) will be deemed valid when it is in the possession of the agent. A photocopy or electronically transmitted copy of an original power of attorney has the same effect as the original. Third parties dealing with an agent have no obligation to inquire into the manner or circumstances in which possession of the instrument was acquired. ¹⁷ In some instances it may be advisable to include language specifically acknowledging that third parties may rely on the validity of a power of attorney in the agent's possession to increase the likelihood that the third party will accept its validity when it is presented by the agent. A person who is asked to accept an acknowledged power of attorney may request and rely upon, without further investigation, an agent's

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certification under oath of any factual matter concerning the principal, agent, or power of attorney. ¹⁸

8.104 The "Durable" Language. At common law, the incapacity of the principal terminated an agent's authority under a power of attorney. ¹⁹ A common law power of attorney is therefore useless to the subsequently incapacitated client and should be avoided. All states have enacted legislation to overcome the common law rule. ²⁰ In Virginia, pursuant to section 64.2-1602, a POA created after the enactment of the UPOAA is durable unless it states otherwise. That section, one of the most important parts of the UPOAA, states: "A power of attorney created under this chapter is durable unless it expressly provides that it is terminated by the incapacity of the principal." This default durability rule affects estate planning in the business context in many ways. When structuring a buy-sell agreement, for example, parties will often create POAs for business purposes in anticipation of the possible incapacity of the general partner of a limited partnership. Due to the UPOAA, such POAs are automatically...