One common component of an estate plan is a power of attorney for financial management. The following are some often asked questions that address various aspects of a power of attorney.
1. What is a power of attorney for financial management?
A power of attorney for financial management is a document in which a person, the principal, designates an agent, the "attorney-in-fact, to act on his or her behalf in one or more financial transactions. In this situation, the agent binds the principal to the transactions entered into by the agent. Thus, the agent is not acting for themselves. Instead, the agent is acting on behalf of the principal. The agent is thereby not personally liable for the transactions entered into by them but instead the principal.
For example, Peter is in the process of selling his house to Bridget but needs to attend a funeral for his late Aunt Desdemona in New York City on the closing date. Peter designates Allen as his agent to execute the necessary paperwork to effect the sale of Peter’s home at closing. Here, Allen’s actions would bind Peter to sell his home to Bridget. Peter could not assert that he was not bound to sell his home to Bridget, even though he did not sign the closing documents.
2. Why would I need a power of attorney?
If you were to ever become incapacitated for whatever reason, a car accident for example, somebody would need to assume responsibility on your behalf to manage your financial affairs. Your incapacity is unfortunately not a valid legal reason to postpone paying your bills during the duration of your incapacity. Thus, your mortgage payment, credit cards and utility bills would not be put on hold if you were in a coma at the hospital. A power of attorney is thereby written to guard against unexpected and sudden incapacity because it provides an agent to serve on your behalf should you ever become unable to manage your own financial affairs.
Consequently, if you do not have a power of attorney and become incapacitated, then a court-supervised conservatorship would be required to manage your estate. A conservatorship is widely-regarded as expensive, time-consuming and cumbersome besides being open to public inquiry.
3. What does durable and non-durable mean in terms of a power of attorney?
A durable power of attorney allows the agent to act on the principal’s behalf despite the fact that the principal is incapacitated. In order to properly draft a durable power of attorney, California law requires that the following statements, or something substantially similar, be included in the durable power of attorney:
- This power of attorney shall not be affected by subsequent incapacity of the principal.
- This power of attorney shall become effective upon the incapacity of the principal. Prob C § 4124.
4. When does a power of attorney become effective?
A power of attorney may become effective immediately or spring into action later on. In an immediate power of attorney, the principal grants the agent the authority to act on the principal’s behalf the moment the power of attorney is property executed. Whereas in the case of a springing power of attorney, the agent’s ability to act springs forth upon the occurrence of a specified event such as the principal’s incapacity.
5. How do I create a power of attorney?
First, the power of attorney must be in writing. Prob C §§4022, 4124. Second, the principal needs to define what powers they are granting to their agent. For instance, this power could include the authority to open up a bank account, sell real property or trade stocks. Third, in order to be properly executed, the document needs to contain at least:
- The date of its execution;
- Is signed either (1) by the principal or (2) in the principal's name by another adult in the principal's presence and at the principal's direction; and
- Is either acknowledged before a notary public or signed by at least two witnesses who meet the requirements of Prob C §4122.
- The California statutory form. Prob C §4401;
- Pre-printed power of attorney forms often found in stationery stores;
- Attorney-drafted forms.
California law says that a natural person having the capacity to contract (think not crazy) may execute a power of attorney. Prob C §4120. All persons are competent to contract hold minors, persons of unsound mind and persons deprived of civil rights. CC §1556.
7. What can the agent do?
If the principal grants the agent a general power of attorney, the agent may essentially do anything that the principal could do. Prob C §4261.
8. What can the agent not do?
Surprisingly, an agent cannot amend the principal’s will. Prob C §4265. However, the agent may create, modify or revoke a trust if certain conditions are met. Prob C §4264.Furthermore, an agent may not perform acts that require the principal's personal attention. CC § 2304. An example of this would be where the principal has a unique talent, such as in music, and attempts to designate an agent to act in their place. For instance, if Tom Petty and the Heartbreakers, Metallica, Tool or Pink Floyd, tried to designate some awful band (use your imagination) as their agent to play their concerts for them, this would thankfully not work.
Moreover, the agent may not accept a second agency that puts the agent in a position that is adverse to the principal’s interests of the first agency. Prob C §4232. This would be a crystal- clear example of a conflict of interest. For example, if Peter selected Allen to be his agent to sell his home and simultaneously the buyer, Bridget, attempted to appoint Allen to be her agent in negotiating the same transaction, Allen would be barred from representing Bridget.
9. Who may serve as the agent?
In order to be eligible, the agent must have the capacity to contract. Prob C §4200. Consequently, all persons are capable of contracting except for minors, persons of unsound mind and persons deprived of civil rights. CC §1556; Fam C §§6500-7143; CC §§38-41. Thus the following people, at this moment in time, would arguably be ineligible to act as an agent: Justin Bieber, Charlie Sheen and Bernie Madoff.
10. Can I revoke a power of attorney later on?
Yes, a principal may revoke a power of attorney in accordance with the terms of the power of attorney or by a writing. Prob C §4151(a)(1)-(2).
11. Does a power of attorney eventually terminate?
Yes, a power of attorney will eventually terminate for a number of reasons. The power of attorney could be terminated due to
- Death of the agent. Prob C §4152(a)(9);
- Agent’s resignation. Prob C §§4152, 4207;
- Agent’s incapacity to act. Prob C §4152(a)(7);
- Dissolution of marriage where the ex-spouse was the agent. Probate Code §4154(a);
- If a power of attorney is not durable, it terminates on the principal’s incapacity. CC §2356(a)(3);
- Restoration of capacity in the case of a springing power of attorney;
- Principal’s death. Prob C §4152(a)(4).
Yes, in California it is called an Advance Health Care Directive. In other states, the document is known as a living will.
13. Does California recognize a power of attorney executed in
Yes, a power of attorney validly executed in another state or jurisdiction is valid and enforceable in California regardless of whether the principal is a domiciliary of California. Prob C § 4053.
14. Who should I select as my agent?
Simply stated, a principal should select somebody who is knowledgeable and trustworthy. Unfortunately, I have come across countless stories of agents acting unscrupulously that left the principal in financial ruin. The key then is for the principal to perform their due diligence in making their decision.
15. How much does a power of attorney cost?
If you want to download the power of attorney provided for in Prob C § 4401, the printing cost is the only expense. A pre-printed form from Office Max or Staples is usually around $10. Finally, an attorney might charge a few hundred dollars or more to draft a power of attorney depending on the complexity.
You get what you pay for...........