For persons who have decided that they need a Financial Power of Attorney (POA), the next step is to make sure that the document they create is legally valid under California law and that it is an accurate reflection of their intentions and preferences.
A Quick Overview
What is a Financial POA?
This is a legal document by which you, as the principal, appoints a person you trust, as your fiduciary, agent, or Attorney-in-Fact, to step in and handle your financial matters if certain conditions happen. This can cover instances when you get sick, are injured, or otherwise become incapacitated and are unable to act for yourself.
This essentially grants authorization to another person to handle your finances during a time when you are, for all intents and purposes, quite vulnerable. This obviously creates an imbalance where the person who is sick or injured can possibly be taken advantage of. This is why the law takes great interest in these kinds of fiduciary relationships – to prevent unauthorized activities and safeguard people’s personal finances.
And yet, the need for Financial POAs is also obvious. At a time when you are unable to, someone has to step in and pay the bills, pay your taxes, collect your income, and perform all the other related activities that don’t stop just because you are, for instance, laid up in a hospital.
In this article, we take a look at the various elements that make up a valid Financial POA in California, and how you can ensure that your document meets your specific needs.
The Capacity Threshold
In order to validly grant or delegate authority to someone else, you, as the principal, must first have legal capacity to do so.
In simple terms, this means that you understand what a Financial POA is, what it does, the type and scope of authority you are granting to your Agent or Attorney-in-Fact, and what it means to do so.
This is a threshold issue and test for validity. A person who lacks legal capacity cannot lawfully authorize another person to act on their behalf. This means that the principal of a Financial POA must, as a baseline, be able to understand the risks and the benefits involved in a Financial POA, and he must be able to communicate his decision with respect to the Financial POA.
Lack of capacity at the time of the execution of the Financial POA can present a lawful challenge to the validity of the Financial POA. If there is any doubt at all about your capacity, it may be a good idea to secure a written evaluation from a physician that proves your capacity – in order to forestall any future legal challenges.
Choose Your Agent Wisely
The person who would be acting on your behalf pursuant to the Financial POA goes by a number of different names. They may be called your Agent, fiduciary, representative, or Attorney-in-Fact.
In any case, they would be acting as your representative, pursuant to the authority you provided through the Financial POA document.
While the scope of what your Agent can do pursuant to the Financial POA depends entirely on the terms you set out in the document itself, most Financial POAs have a few things in common:
- The Agent has access to specified financial accounts and other assets
- They are authorized to perform transactions under your name, whether to pay out or to collect on your behalf
- They will be required to keep records and provide an accounting of the transactions performed pursuant to the Financial POA
Many people rely on family in these situations – a spouse, parent, child, or sibling. But trust must also be balanced with skills and a sense of responsibility.
It is not enough that they are your family. They should also know how to exercise the authority you grant them responsibly and efficiently. And while ideally there should not be any conflict of interest – if there were, you should be confident that they will prioritize their responsibility as your Agent as opposed to their own personal interests.
It is also good practice to name a successor agent. The successor agent is your back-up plan. If something happened to you and you become incapacitated, and you need someone to manage your finances in the meantime – should the person you selected and named in your Financial POA also be unavailable, then the next person you name (the successor agent) will be perfectly positioned to take on the responsibility.
Defining the Scope of the POA
One of the most important decisions when preparing a Financial Power of Attorney is determining exactly how much authority your Agent should have. Rather than granting authority without careful thought, you should clearly define the scope of the powers you intend to delegate. This ensures your Agent has the authority necessary to manage your affairs while avoiding powers you never intended to grant.
Under California Probate Code §4264, Agents or Attorneys-in-Fact cannot, unless expressly authorized:
- Create, modify or revoke a living trust
- Use the principal’s property to fund a trust not created by the principal
- Make or revoke gifts of the principal’s property to others
- Exercise the right to consent, reject or disclaim an inheritance, whether from an estate, trust, or other fund, on behalf of the principal
- Change survivorship interests in the principal’s property
- Change beneficiary designations
- Make a loan to himself or herself
These kinds of transactions change or alter the principal’s assets and estate plan significantly, therefore their exercise must be based on specific authorization granted under the terms of the Financial POA. They cannot simply be implied from a grant of general authority.
When Does the Financial POA Become Effective?
Immediately Effective
For some, it may be that they want their Agent to be immediately available even if the principal is not technically incapacitated. Maybe they are simply abroad, or busy at work, and cannot take the time to handle certain financial transactions. This type of Financial POA is usually immediately effective upon execution of the POA document.
For this type of POA, it doesn’t mean that the principal loses control over their assets. It simply means a delegation of authority for certain transactions – which authority can be withdrawn at any time.
For many estate planning attorneys, this latter approach is actually recommended because it ensures the availability of the Agent when emergencies arise.
The Springing POA
A springing POA, on the other hand, becomes effective only after a specified event – such as the principal’s incapacity.
When incapacity is the condition for the effectivity of the POA, there must be a finding from a physician about the principal’s capacity or lack thereof.
This type of POA, however, does present certain challenges. If an emergency happened and the principal is laid up in the hospital, whatever the reason, the principal’s family might need someone who would be able to act quickly.
Bills needing to be paid, transactions that need to be finalized, income that needs to be collected, hospital bills and fees that need to be defrayed – these are things that usually cannot wait for a declaration of incapacity or the resolution of any dispute regarding the Agent’s authority.
In these cases, a Financial POA that was effectively immediately upon execution may prove to be the most flexible arrangement.
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If you are ready to start preparing your Financial POA, we can help you. Reach out to our estate planning attorney today for a quick consultation.