Powers of Appointment and Powers of Attorney: Do They Overlap?
A case study on trust powers held by an agent from Kosmann v. Brown
Table of Contents
Background
Powers of appointment have somewhat of a strained definition. In prior articles and videos, we have discussed how powers of appointment are typically defined (from a state property law standard) as powers held in a nonfiduciary capacity. But, this is not always the case. Trustees who are also holders of nonfiduciary powers of appointment (in their capacity as trust beneficiaries) may still be subject to fiduciary duties. Federal tax law does not distinguish between fiduciary and nonfiduciary powers of appointment. When it comes to decanting, a trustee’s distribution power is often treated as a power of appointment.
These issues often pop up where a beneficiary is also a trustee. But, what do we do when confronted with the authority and duties of any fiduciary – such as an attorney-in-fact? Does the traditional view of a power of appointment as a nonfiduciary power mean, for example, that a fiduciary cannot exercise it? Or, instead, could it be that a fiduciary cannot abandon their own fiduciary duties when exercising a power of appointment that would otherwise be a nonfiduciary power when viewed in isolation from the identity of the powerholder?
Before we get started, it is important to note that the terms power of appointment and power of attorney are often confused. The former is a power to change legal and/or beneficial ownership of property, usually with respect to trust-owned property. The latter is the power to step into the shoes of a living individual to make property-related decisions with respect to individually-owned property. There is some overlap between the two terms, but they are usually treated as two separate and distinct planning tools.
All of these issues coalesced in a recent opinion of the Virginia Court of Appeals, Kosmann v. Brown, 903 S.E.2d 567 (2024).
Facts
This case involved four individuals – two of whom were deceased at the time of the initial petition:
Brown, as settlor of the Brown Living Trust, a trust that was revocable when created;
Monroe, as attorney-in-fact for Brown under a durable power of attorney;
Kosmann, as a co-trustee (later sole trustee) of the Brown Living Trust; and
Seamans, a remainder beneficiary and successor trustee of the Brown Living Trust.
Monroe, pursuant to her authority as attorney-in-fact for Brown, executed an amendment to the Brown Living Trust that (1) named Monroe and Kosmann as co-trustees, (2) made the trust irrevocable, and (3) named Monroe, or her estate, as remainder beneficiaries (effectively divesting Seamans of her contingent remainder interest at the time) while adding a charitable bequest. Monroe also executed a resignation of trustee under which Brown, through Monroe (as attorney-in-fact), resigned as trustee of the Brown Living Trust.
Monroe died shortly thereafter, leaving Kosmann as sole trustee. After Kosmann cut off payment for Brown’s memory care unit from the trust, Seamans petitioned for a declaratory judgment that Monroe (while living) lacked authority to amend the Brown Living Trust, and that Kosmann thus lacked authority to act as trustee in the present. Both Kosmann and Seamans petitioned for summary judgment, which was granted to Seamans based on language in the Brown Living Trust that provided:
Any right or power, other than (i) an amendment by Will, or (ii) any right or power that would constitute a general power of appointment if held by [Brown’s] Attorney-in-Fact, may be exercised for and on [Brown’s] behalf by any Attorney-in-Fact who, at the time of the exercise, is duly appointed and acting for [Brown] under a valid and enforceable Power of Attorney executed by [Brown].
In granting summary judgment, the circuit court determined that Monroe’s acts of (1) directing the trust residue to herself or her estate upon her passing, and (2) releasing the right to revoke such that the residue was vested, both caused the amendment of the trust to be an exercise of a general power of appointment in violation of the trust’s prohibition on an attorney-in-fact exercising any right or power that would be a general power of appointment in their hands. Seamans was determined to be the rightful trustee of the trust, and Kosmann (as ostensible trustee) appealed.
Findings on Appeal
Kosmann cited two statutory definitions of a general power of appointment – one in the (Virginia) Uniform Trust Code and the other in the Uniform Power of Appointment Act – each for specific carve-outs which were presented with the tenor of “gotchas.” In Va. Code. Section 64.2-701, Kossman relied upon the following language:
“Power of appointment” does not include a power of attorney.
And, in Va. Code Section 64.2-1600, Kossman relied upon this language:
The term [presently-exercisable general power of appointment] does not include a power exercisable in a fiduciary capacity or only by will.
Based on these carve-outs, Kossman argued that it was impossible for an attorney-in-fact to exercise a power of appointment. Thus, Kossman argued, there was no way the amendment of the trust itself could have been classified as the exercise of a general power of appointment.
But, the Court rejected this argument, instead noting that the cited statutory language prevented powers of appointment and powers of attorney from being coextensive. The Court stated that these carve-outs are simply intended to preserve the nonfiduciary nature of a power of appointment. In other words, “when exercising a power of appointment, the powerholder is acting in a nonfiduciary capacity.”
This does not mean, however, that a fiduciary cannot exercise a power of appointment. Instead, it just means that none the powers of an attorney-in-fact (or fiduciary in general) are automatically converted into a power of appointment. Instead, there must be an extra step authorizing an attorney-in-fact to exercise a power of appointment – an express grant of authority to exercise such a power whether by instrument or statute. And, as implied by the court, the mere fact that an attorney-in-fact holds a nonfiduciary power of appointment does not mean that an attorney-in-fact could act outside of the scope of authority and duties inherent in such instrument or statute.
Since Virginia statutory law did not prohibit a fiduciary from exercising a power of appointment, the Court turned its attention to the trust – especially the provision expressly prohibiting an attorney-in-fact from exercising any power of the settlor in a way that would constitute a general power of appointment in the attorney-in-fact. The Court noted that this language countered Kosmann’s initial argument to begin with (in that it contemplated the reality that the powers of an attorney-in-fact could be a general power of appointment), and was an expression of Brown’s intent that had to be strictly construed within the four corners of the trust instrument.
Continuing this reasoning, the Court concluded that while an attorney-in-fact is statutorily authorized to exercise powers of amendment, revocation, or distribution on behalf of a settlor, these powers can be expressly prohibited by the terms of the trust itself. In other words, the trust’s limiting language with respect to general powers of appointment superseded any broader authority that might be granted under law, or under the power of attorney itself.
Finally, while not expressly stated by the Court, the release of Brown’s power to revoke by Monroe (as attorney-in-fact) was credited as a factor in determining that there was, indeed, a general power of appointment. Before the amendment, Monroe stood to inherit the remainder of the trust. So, if the trust had remained revocable, perhaps this would not have been a general power of appointment – it was Monroe “locking in” her remainder that crossed the line into GPOA territory.
But it is also important to note that under the prior trust, Seamans was to receive this remainder if Monroe predeceased Brown (which she did). Instead, the amendment irrevocably cut off this contingent remainder by instead providing that Monroe’s remainder would go to her revocable trust if in existence, or if not then to her estate – which is truly what created the irrevocable change constituting a general power of appointment.
Thus, the Court affirmed the grant of summary judgment to Seamans.
Key Takeaways
Sometimes, powers of appointment are hidden and not express. As noted in the Court’s analysis, the powers of a fiduciary are not automatically included in the plain definition of a power of appointment. But, the circumstances of the power matter.
The unresolved question is in how, exactly, we arrive at those circumstances. The Court served up the facts relating thereto, but left us to reach some of our own conclusions on how a power of appointment – especially a general power of appointment - can be implied when a fiduciary can personally benefit from the exercise of their own fiduciary powers. This is a departure from express powers of appointment, which many of us are used to seeing in trust agreements.
While I will not get into the broader analysis of it, the Restatement (Third) of Property: Wills and Other Donative Transfers takes a fairly expansive view of powers of appointment and treats many fiduciary powers (to change ownership of property) as being powers of appointment. In fact, as cited in a footnote of the opinion, the power to amend or revoke a trust is counted among these powers that can be considered, in the Restatement view, as a power of appointment.
The significance of a power of appointment, however, is only truly “felt” by the fiduciary as powerholder when it is a general power of appointment. This has tax implications, and (depending on the state) creditor protection implications for at least a presently-exercisable general power of appointment. In effect, the property law trade-off for a power (of the fiduciary) to personally benefit from their authority is the treatment of the fiduciary as the outright owner of property – a merger, perhaps, of the legal and beneficial interests otherwise found in the trust.
This property ownership fiction can lead to a breach of fiduciary duty if and when exercised. For this reason, many trusts and statutory laws limit the creation of an “accidental” general power of appointment by virtue of fiduciary powers. This can be found through limitations, such as a 5x5 power, a limitation of personal benefit to an ascertainable standard, or the requirement of the consent of an adverse party.
Type of fiduciary matters as well. A trustee may owe duties of loyalty and impartiality to at least current and immediate remainder beneficiaries, and while a trustee may be included in this class these duties cannot be shed. A fiduciary can hold a nonfiduciary power of appointment, but if the power of appointment is exercised in a fiduciary capacity then fiduciary duties may still attach.
In other words, while a power of appointment itself is usually a nonfiduciary power, the status of the powerholder matters.
Which brings us full circle back to the equation above – that express fiduciary powers, coupled with personal benefit to the fiduciary (or their estate, or their creditors, or the creditors of their estate), without limiting factors such as an ascertainable standard or adverse party consent, leads to the creation of an implied general power of appointment.
And while breach of fiduciary duty did not come up in this case – presumably since the duties of the attorney-in-fact are owed to the principal (Brown), who was deceased and not a party to this litigation – it is hard to imagine a scenario where the coalescence of an implied general power of appointment would not violate fiduciary duties.
So, our key lesson here is one of caution. When drafting both durable powers of attorney and trusts, the interaction of duties and powers must be considered. This is exacerbated in the classic scenario where the same individual is, or could be, an (1) attorney-in-fact, (2) trustee, and/or (3) beneficiary.
Conclusion
This is only part of the story. For an express general power of appointment, the donor must intend to create such a power. This intent is often expressed through the class of appointees – if the powerholder is expressly excluded from the class of appointees, there is no general power. It is important to note, however, that the adverse effects of a general power of appointment vis a vis the powerholder exist regardless of whether the power is actually exercised. The exercise of a power that is otherwise a nongeneral power of appointment, in favor of the powerholder (or their estate, or creditors, or creditors of their estate), may be void unless saved by sufficient limitations or equitable remedies.
Contrast this with the situation highlighted herein, where it is the existence or exercise of a fiduciary power itself which leads to the general power of appointment. This creates somewhat of a chicken-and-egg situation, because instead of an express grant of power and definition of appointees, there is instead an express limitation of power sufficient to prevent the accidental creation of a general power of appointment by inception, or by exercise, through the fiduciary’s dual status as deemed powerholder and otherwise permissible appointee. The outcome is still the same, however – that the exercise of a fiduciary power in a manner that leads to an implied general power of appointment is void by the terms of the relevant instruments, or perhaps state law.
In this case, Kosmann appeared to miss this chicken-and-egg scenario - that it wasn’t the creation of an express power of appointment that created the issue, but the trust’s prohibition on stumbling backwards into an implied general power of appointment that instead rendered the trust amendment (and Kosmann’s appointment as trustee) void.