Virginia Fiduciary Law Blog

LITIGATING POWERS OF ATTORNEY: AN OUNCE OF PREVENTION

 Individuals looking for assistance with the management of their financial affairs are often advised that they need a “power of attorney.”  The notion is not altogether misplaced.  Few people want to be the subject of costly guardianship proceedings, involving court filings and medical or psychological determinations. Powers of attorney, now that they can be “durable” and can last through any period of disability, may be the right answer.  But, given the increasing litigation over actions taken by attorneys-in-fact or agents, the inquiry should not end there.

 Naming someone attorney-in-fact, or “agent” under modern Virginia statutes, creates a fiduciary relationship.  A fiduciary relationship implicates duties of care and loyalty by the fiduciary toward property or money belonging to the fiduciary’s principal. Standards of care and loyalty applicable to a fiduciary's dealings are generally higher than in arm's length commercial transactions.

 Both principal and agent must be mindful of these considerations.  In particular, and although a power of attorney may be designed to be revocable, if the principal were to become disabled, an agency under a power of attorney may in fact result in a longstanding legal relationship, possibly lasting until death.  (Death revokes all powers of attorney.) What is more, the majority of financial powers of attorney are drafted to take effect immediately:  that is, they are “live” upon the principal’s signing and do not require a prior determination of disability to be triggered. 

 The alternative to a “live” power of attorney would be to create “stand-by” powers of attorney.  Stand-by powers of attorney are dormant, “springing” into force upon the happening of some specified future event.  For most individuals, there may be cogent reasons not to create “stand-by” powers of attorney, however.  One such reason is that third parties, with whom the agent must deal, may not have a satisfactory  way of determining whether the conditions necessary to trigger the agency have occurred.  This could negate the agent’s effective ability to serve the principal if doing so requires the cooperation of such third parties.  Another reason may be  that triggering events can involve an emergency, such as a disabling event, and obtaining the requisite documentation at such a time may be inconvenient or, worse, impossible to obtain.

 Because financial powers of attorney frequently are broadly drafted, the intended principal who is considering asking his or her lawyer to draft up a power of attorney should first reflect on the objectives to be served by the power of attorney.  The choice of agent under a power of attorney merits equal consideration. If a client has a broader estate plan, care should be given to determine whether different appointments in fiduciaries are indicated—should your trustee be the same as your agent, for instance? 

 Despite the routine manner in which powers of attorney today may be treated by clients, lawyers and even non-lawyer commercial suppliers of power of attorney forms, clients seeking to create such relationships would do well to give careful thought to the nature and scope of such appointments.  Likewise, any agent who undertakes to fulfill such an appointment should consult counsel early to determine the contours of the agent’s duties.  The alternative is to be embroiled in costly fiduciary litigation—regardless whether the actions of an agent are ultimately held unlawful. 

TACKLING THE UNIFORM TRUST CODE IN COURT

Provisions in the Uniform Trust Code (“UTC”), adopted in a growing number of states, explicitly contemplate a modification or termination of a trust under circumstances not anticipated by the settlor.  These provisions hold the potential to prevent or resolve trust litigation, particularly if all parties can concur on a desired outcome.  Given a sound basis in law and parties who agree to a settlement, judges tend to be practical; they are not inclined to thwart the resolution of costly trust disputes.  The UTC’s provisions for the modification and termination of trusts, particularly in the case of noncharitable trusts, contemplate the application of such common sense.  What happens if the end of hostilities is not quite so tidy, however?  The Virginia Supreme Court recently addressed just such a case in Ladysmith Rescue Squad, Inc. v. Newlin. 

The costs of failing to achieve unanimity

After “several years of litigation” relating to a multi-million dollar testamentary unitrust, the parties in Newlin reached a settlement of the trustees’ original suit for aid and direction.  They agreed to submit several unresolved issues to the trial court for approval:  the trustees, the income beneficiaries, and Upper Caroline, one of two charitable remaindermen, moved the trial court to permit the trustees to divide the trust into two equal trusts—to be called the “Upper Caroline Trust” and the “Ladysmith Trust.”  These parties also sought to terminate the Upper Caroline Trust by commuting the income beneficiaries’ interests based on their life expectancies and by distributing the remainder to Upper Caroline.  Ladysmith, the other charitable remainder beneficiary, objected.  Over Ladysmith’s objections, the trial court granted the motions to divide the unitrust, commute the income interests, and terminate the Upper Caroline Trust.  The Virginia Supreme Court granted Ladysmith an appeal. 

 Preserving the guiding principles of the trust law under the UTC

In support of the trial court’s rulings, the trustees cited § 55-544.17 of Virginia’s UTC, claiming the trust’s division was proper.  They relied on § 55-544.12(A) to argue that the trial court could modify and terminate the trust under circumstances not anticipated by the settlor.  The trustees also argued that the 2005 adoption of the UTC “effected a ‘dramatic change’ in the trust law of Virginia.”  The Virginia Supreme Court reversed, finding the trustees’ arguments unavailing:  “The framers of the UTC were careful to preserve the guiding principles that have historically been the foundations of the trust law.”  The court noted that to the extent provisions of the UTC were in derogation of the common law or principles of equity, they must be strictly construed.  “The UTC has not so altered the law as to permit beneficiaries, after the death of a testator, to defeat the terms of his will that postpone their enjoyment of his bounty, merely because they ‘would rather have [their] money today than wait.’”

 The court further noted that the record did not disclose evidence of trust assets being “mismanaged,” the trust becoming “uneconomic,” that its objects were “unobtainable,” or that any factor, “aside from the desires of the beneficiaries,” justified amending the trust.  It explicitly disagreed that the settlor could not have foreseen the beneficiaries’ desire to accelerate payment.  The court lamented the “depressing frequency” with which beneficiaries had “for centuries” engaged in litigation over wills and trusts, noting that the likelihood of such litigation increased “in direct proportion to the amount in controversy.”

 Broader perspectives of Newlin for UTC states

With 22 states and the District of Columbia having adopted the UTC, and more slated to do so, Newlin is instructive in several respects.  The UTC has undeniably begun to shape the landscape of trust litigation.  As estate planning attorneys and counsel to trustees in administration begin to scrutinize the possibilities offered by the language of the UTC, so must courts increasingly grapple with the UTC’s inherent ambiguities and limitations.  While the UTC makes available a number of salutary statutory devices to trustees and trust beneficiaries, the settlor’s intent may still predominate. 

Although the UTC’s treatment of the modification and termination of charitable and noncharitable trusts presents subtle but important distinctions, the Newlin decision did not explicitly address the UTC’s wider statutory scheme in this regard.  When dealing with charitable trusts, however, absent of one or more of the substantive factors listed by the court in Newlin—mismanagement, uneconomic administration, or unobtainable purposes, for example—courts are likely to remain wary of finding “circumstances” not anticipated by a trust’s settlor as grounds to alter a trust. 

In a broader sense, with the proliferation of multi-party trust disputes, the premium on achieving unanimity has never been higher.  Almost every will or trust is different—hence the old estate planning adage, “no will has a twin brother.”  Evaluating and seizing on these nuances can offer opportunities for achieving finality earlier in the litigation process, even in the most difficult trust and estate disputes.  Whether in conveying a demand or evaluating those of another claimant, parties should keep in mind that achieving a global resolution often requires mutual economic concessions carefully calibrated to conclude all controversies.  The alternative for parties embroiled in costly trust disputes can mean more of the same:  protracted litigation.