The Risk Manager, Fall 2018

KRS 457, Uniform Power of Attorney Act (2006), took effect July 14, 2018. It is an adaptation of the Uniform Power of Attorney Act approved by the Uniform Law Commission. It introduces comprehensive standards, procedures, and guidance on powers of attorney (POA) for lawyers, principals, agents, and third parties. To risk manage this new law, we recommend that all Kentucky lawyers study KRS 457 in its entirety. Follow that by reading Sara Johnston’s excellent analysis of KRS 457 in her article in the July/August 2018 issue of the KBA B&B, Kentucky Powers of Attorney: No Longer Powerless. The purpose of the following analysis is to identify the risk management considerations that KRS. 457 presents.

Primary ethics rules to consider in mastering this new law are:

Competence

Kentucky Rule of Professional Conduct SCR 3.130 (1.1), Competence, provides:

A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

Comment (5) to the Rule provides in part: Competent handling of a particular matter includes inquiry into and analysis of the factual and legal elements of the problem, and use of methods and procedures meeting the standards of competent practitioners. It also includes adequate preparation.

In short, you have to know what you are doing. Incompetence is malpractice. To assure competence in advising on and preparing POAs, Kentucky lawyers must do the study and research recommended above as part of POA risk management.

Communication

SCR 3.130 (1.4) (b), Communication, provides:

(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

The comment to the rule gives this guidance:

Explaining Matters

(5) The client should have sufficient information to participate intelligently in decisions concerning the objectives of the representation and the means by which they are to be pursued, to the extent the client is willing and able to do so.

KRS. 457 replaces prior POA vague guidance with detailed requirements. Lawyers must know who their client is when rendering POA legal advice. Is the client the principal, the agent, or a third party? Each requires explanation of the law in a different context.

Client is the Principal

In addition to discussing a principal’s purpose for the POA, the following parts of the law are among those that should be explained:

  • Definitions – KRS 457.020
  • What “durable” means – KRS. 457.020 and KRS. 457.040
  • How the POA is executed – KRS 457.050
  • When the POA is effective KRS 457.090
  • How a POA is terminated KRS. 457.100
  • Agent’s duties – KRS 457.140
  • Reimbursement and compensation of the agent – KRS 457.120
  • Agent’s liability – KRS. 457.170
  • Rules for the acceptance of and reliance on a POA – KRS 457.190

Client is the Agent

In addition to general information about the purpose and effect of a POA, agents should be counseled on:

  • When the POA is effective – KRS 457.090
  • How the agent accepts the POA appointment – KRS. 457.130
  • Agent’s duties with stress on the fiduciary duties of acting loyally for the principal’s benefit and acting so as not to create a conflict of interest that impairs the agent’s ability to act impartially in the principal’s best interest – KRS 457.140
  • Rules for the acceptance and reliance on a POA – KRS. 457.190
  • Reimbursement and compensation of the agent – KRS 457.120
  • Agent’s liability – KRS 457.170
  • When the agent’s authority is terminated – KRS 457.100
  • Coagents and successor agents – KRS 457.110
  • Exoneration of the agent – KRS 457.150

Client is a Third Party

KRS 457 is designed to fix the problem of third parties refusing to accept valid POAs. Lawyers advising banks and other entities that are often presented POAs should explain the law on:

  • Acceptance and reliance upon acknowledged POA – KRS 457.190
  • Liability for refusal to accept an acknowledged POA – KRS 457.200
  • Laws applicable to financial institutions and entities – KRS 457.220

Incapacitated Principal and SCR 3.130(1.14) Client with Diminished Capacity

KRS 457 deals with incapacitated principals in three places:

KRS. 457.020 Definitions for chapter.

As used in this chapter:

(5) "Incapacity" means inability of an individual to manage property or business affairs because the individual:

(a) Has an impairment in the ability to receive and evaluate information or make or communicate decisions even with the use of technological assistance; or

(b) Is:

  1. Missing;
  2. Detained, including incarcerated in a penal system; or
  3. Outside the United States and unable to return.

KRS 457.050 Execution of power of attorney.

(1) A power of attorney must be signed in the presence of two (2) disinterested witnesses by the principal or in the principal’s conscious presence by another individual directed by the principal to sign the principal’s name on the power of attorney. If signed in the principal’s conscious presence by another individual, the reason for this method of signing shall be stated in the power of attorney.

KRS 457.090 When power of attorney effective.

(3) If a power of attorney becomes effective upon the principal’s incapacity and the principal has not authorized a person to determine whether the principal is incapacitated, or the person authorized is unable or unwilling to make the determination, the power of attorney becomes effective upon a determination in a writing or other record by:

(a) A physician, an advanced practice registered nurse, a psychologist licensed or certified under the provisions of KRS Chapter 319, or a person licensed or certified as a social worker or an employee of the Cabinet for Health and Family Services who meets the qualifications of KRS 335.080(1)(a), (b), and (c) or 335.090(1)(a), (b), and (c), that the principal is incapacitated within the meaning of KRS 457.020(5)(a); or

b) An attorney-at-law or a judge that the principal is incapacitated within the meaning of KRS 457.020(5)(b).

In evaluating a client’s suspected incapacity, consult SCR 3.130(1.14) Client with Diminished Capacity. The rule provides detailed guidance in making this determination.

Summing Up

KRS 457 includes many requirements and standards that pose malpractice risks. What follows are some of the key risk management considerations:

  • The agent as fiduciary is a significant upgrading of the role of an agent in POAs. It exposes the agent to a greater degree of liability and their lawyers to malpractice claims if they fail to advise the agent accurately.
  • Principals must understand that a POA is durable unless specifically declared otherwise in the POA. Document the file.
  • The requirement for two disinterested witnesses to sign the POA must be carefully observed. Omitting it is another malpractice exposure for lawyers. Query: Who is a disinterested witness – someone from your office? We suggest you call the KBA Ethics Hotline for clarification.
  • Carefully cover (and document) as appropriate for the client:
    • who must accept acknowledged POAs;
    • liability for improperly refusing a POA;
    • and agent liability.
    • Unlike prior law, KRS 457 is silent about whether an agent is automatically authorized to make gifts of real or personal property without express authority from the principal. Good risk management is for the principal to explicitly provide in the POA whether an agent is allowed to make gifts.
    • All POA forms and boilerplate used in your practice must be reviewed and updated. It is doubtful that old forms will satisfy this new law. Using them after July 14, 2018 could be malpractice.
    • POAs executed before July 18, 2018 remain valid. KRS 457.060(2) provides “ A power of attorney executed in this state before July 14, 2018, is valid if its execution complied with the law of this state as it existed at the time of execution.