If you have been looking into setting up or creating your estate plan, you may have come across something called a Financial Power of Attorney.
The basic definition of a Financial Power of Attorney is not hard to understand. It simply means a legal document by which you designated someone you trust to act on your behalf in managing your financial affairs, should it ever happen that you are unable to do so yourself.
In this article we take a closer look at the nuances of what it means to have this in your estate planning arsenal.
Do you really need a Financial POA?
The primary question is usually why? Why do you need a Financial POA?
If you were married, for example, and had full faith and trust in your spouse, you could entrust him or her with all the information necessary to carry on managing your finances if you are unable to do so. Or your parents or siblings, if you were not married. You just need to have a discussion with your selected person about what they should do about the various aspects of your financial life. If they agree, that should be enough.
But for most of us, we usually don’t think about these things while we are healthy and alive. Estate planning is about planning for the unexpected. We may believe that these are things you should do when you’re older and nearing the twilight of your life.
But the unexpected has a way of sneaking up on us. Accidents, injuries, unexpected illnesses – these can render us incapacitated, in one way or another. And then we find that we haven’t selected our financial representative, we haven’t had a discussion with them about these things. Or even if we had, they unfortunately find that unless they had a legal document supporting their authority as your Financial POA, they can’t really manage your finances the way you want.
Worst case scenario – conflict might ensue among our family members as to who should have authority to manage your finances. Spouses against in-laws, parents, children, or siblings. It happens more often than you may think.
So yes, you need a Financial POA. You need someone to pay your bills and manage your properties and assets while you remain incapacitated.
The Financial POA under California Law
The relevant law regarding Financial POAs in California is found in California Probate Code §§ 4000–4545.
Essentially, it involves two parties – yourself as the principal. You are the one creating the legal POA document by which you are delegating financial authority to your selected fiduciary.
In this instrument, you set down the terms of the powers delegated: what properties or assets you are entrusting to the care of the fiduciary; what the fiduciary can and cannot do; when they can start acting as your fiduciary; and when their authority terminates, if at all.
The second party is the fiduciary – which is a broad, general term referring to a person occupying a trusted position. Specifically for the Financial POA, the fiduciary is referred to as the Agent or as the Attorney-in-Fact. Hence the term Power of Attorney.
This does not mean that the fiduciary must be a lawyer, or that designating him as your representative under a Financial Power of Attorney makes him one.
The word attorney essentially refers to an advocate for someone. Attorneys at law are those who possess the requisite license and are overseen by the state bar. Attorneys-in-fact, by contrast, are those designated by someone to act on their behalf, to be their advocate, so to speak, to a very limited extent only, such as under a Financial Power of Attorney.
As a fiduciary occupying a position of trust, the person you select as your attorney-in-fact must be someone who possesses the skills needed to manage your finances, and who is, at the same time, trustworthy and reliable.
Making Your Financial POA Durable
When you think of something durable as something that withstands things like time or pressure, and you apply it to a Financial POA, you would not be very far off.
Most POAs generally terminate when the source of the authority being delegated also ceases. So when a person becomes incapacitated, their capacity to delegate authority to another also ceases.
A durable POA, however, contains language that expressly emphasizes its effectivity even if the principal subsequently becomes incapacitated. For instance: “This POA shall not be affected by subsequent incapacity of the principal.”
After all, a Financial POA intended to take effect upon the principal’s incapacity will not be much use if it loses effect once the principal loses capacity.
It is designed to act as a safety net or protective shield for the unexpected events in our lives. So for instance, if a person gets into an accident and has to be in hospital for a certain length of time, during which he is in no position to manage his affairs, he can at least rest assured that his bills will still get paid, that any income payable to him will still be collected, taxes are taken care of, and his accounts are managed and utilized, if necessary, for the support of the person’s medical needs and any needs of his immediate family.
Certain financial transactions also often need to be handled directly by the persons involved. Armed by a Financial POA that specifically covers relevant transactions, the Agent or Attorney-in-Fact can act on behalf of the principal and pursuant to his instructions.
Otherwise, the likely scenario is that family members may not have access to the person’s accounts, are unaware of any pending financial obligations that need to be taken care of, and are unable to act on behalf of the person because they don’t have any legally recognized authority. They may have to petition the court to grant them such authority – which of course will take time and money to do so. Not to mention possibly incite conflict among family members.
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A properly executed, durable Financial POA helps remove some of the uncertainties in our lives and allows us to prepare for the unpredictable. If you are looking to establish as Financial POA as part of your estate plan, a trusted estate planning attorney can help ensure that you are creating something that passes legal scrutiny, while at the same time creating one that meets your unique situation and needs. Reach out to us today and let us know how we can help.