Who Will Manage My Finances?

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Hopefully, you’ll always be able to handle your own assets and finances. If, however, you became incapacitated, how would your assets and finances be managed? What about your home? Your IRA? Your bank accounts? Depositing your checks? Arranging and paying for home care? Paying your bills? Filing and paying your taxes?

For most people, a financial power of attorney can be a very important tool for answering these questions. Financial powers of attorney come with many different titles, like “general power of attorney” and “power of attorney for asset and property management.” The title doesn’t matter very much. We like to call it a “durable power of attorney for financial matters” (DPAFM). In this article, we share what we think are the most important things you should know about the DPAFM. This article reflects the powers of attorney provisions of the California statutes; the statutes allow individualized DPAFM language to override the statutes at times.

The Basics

A DPAFM is a legal document. In it, you name another person (usually a trusted family member or friend) to handle financial affairs on your behalf, if you become incapacitated.

The individual who signs the DPAFM is called the “Principal,” and the individual authorized to act on the Principal’s behalf is called the “Attorney-in-Fact” or  “Agent.” Giving the Agent the power to act on the Principal’s behalf does not take away the Principal’s power to act. The Principal retains power over his or her assets as long as the Principal continues to have the mental capacity to handle his or her own affairs.

To use a power of attorney in incapacity planning, it must be made “durable.” Being durable means that it will remain in effect if the Principal becomes incapacitated. To be durable, a financial power of attorney must include one of the following,

  • The statement that “this power of attorney shall not be affected by subsequent incapacity of the principal” or
  • The statement that “this power of attorney shall become effective upon the incapacity of the principal” or
  • Similar language stating the Principal’s intent that the Agent will have authority under the power of attorney even if the Principal becomes incapacitated.
  • If a power of attorney is not durable, the Agent’s power to act for the Principal would end just at the time when the Principal is no longer able to manage his or her own affairs.

Powers Given to the Agent

A DPAFM can be general or limited. A general DPAFM gives the Agent broad powers to act on the Principal’s behalf; a limited DPAFM grants the Agent the power to act only in certain circumstances or for a certain period of time.

There are certain acts that an Agent may not take unless they are explicitly authorized in the DPAFM. For example, the Agent may not make gifts or make a loan to the Agent unless those powers are expressly stated in the DPAFM. The Agent may not amend or revoke the Principal’s living trust, unless the DPAFM expressly states that power. The Principal should be sure that the DPAFM clearly grants all of the powers desired to be given to the Agent.

The DPAFM gives the Agent the right to deal with assets owned by the Principal at the time the power of attorney becomes effective, and (unless the DPAFM provides otherwise) with assets the Principal acquires in the future.

DPAFMs and  Living Trusts

In general, a person who has a living trust should also have a DPAFM. If you create a living trust and become incapacitated, your successor trustee will manage the trust assets on your behalf. Assets not owned by the trust (for example, IRAs) would be managed under the DPAFM.

Note that, if you provide in your DPAFM that your Agent may amend or revoke your living trust, you need to include a similar provision in your living trust.

Choosing Agents

A DPAFM can give the Agent extensive power over the Principal’s assets. The Agent must be selected with care. Factors to consider include :

  • Whether the person can be trusted to handle the Principal’s financial matters in the Principal’s best interest; and
  • Whether the person has good financial skills; and
  • Whether the person will be available when needed.

We recommend that the Principal name a second and a third person to serve as successor Agents, to plan for the possibility that the Principal’s prior choices are unable or unwilling to act.

Naming Co-Agents

The principal can name “Co-Agents” – two or more Agents authorized to act at the same time. In that case, unless the DPAFM states that Co-Agents may act independently, the Co-Agents must act unanimously.

There are two exceptions to the unanimous action rule:

  • If a Co-Agent is unable to serve due to absence, illness or other temporary incapacity, the remaining Co-Agent(s) may act if the action is required to fulfill the DPAFM’s purposes or to avoid irreversible injury to the Principal.
  • If a Co-Agent’s position becomes vacant, the remaining Co-Agent(s) may act.

We normally recommend against naming Co-Agents, because of practical and logistical problems, and potential disagreements among Co-Agents leading to inaction.

The Agent’s Rights

In general, an Agent is not required to take on the role of Agent under the DPAFM. An Agent may refuse to do so for any reason, unless the Agent has agreed in writing to act.

Further, the Agent may act on the Principal’s behalf in some transactions, but refuse to act in others.

Unless the DPAFM provides otherwise, the Agent is entitled to pay himself or herself reasonable compensation for services performed on the Principal’s behalf and to reimbursement for reasonable expenses. In many cases where Agents are family members or friends of the Principal, Agents are not compensated.

The Agent’s Duties

The Agent has a number of duties that help ensure the Principal’s interests are protected. These duties include :

  • The Agent must act solely in the Principal’s interest and avoid conflicts of interest.
  • The Agent is required to keep the Principal’s assets separate and distinct from the Agent’s assets. This can be done by the Agent holding the Principal’s assets in the Principal’s name or in the Agent’s name as “attorney-in-fact” for the Principal.
  • The Agent is required to deal with the Principal’s assets “prudently” (the way a prudent person would deal with the assets of another).
  • An Agent who has special skills or expertise must observe an even higher standard of care applicable to persons with those special skills or expertise.
  • Once the Agent has begun a transaction on the Principal’s behalf, the Agent is required to complete the transaction.
  • To the extent reasonably practicable, the Agent must keep in regular contact with and communicate with the Principal, as well as follow the Principal’s instructions. The Agent may disobey the Principal’s instructions if the Agent receives court approval.
  • The Agent must keep records of transactions made on the Principal’s behalf and must provide the Principal with an accounting of transactions if the Principal requests one. There are additional circumstances when the Agent is required by law to provide an accounting.
  • When the Agent’s authority is terminated, the Agent must deliver the Principal’s assets to appropriate persons (and, upon request, copies of records of transactions made on behalf of the Principal).

When Does a DPAFM Take Effect?

A DPAFM can be either “immediate” or “springing.” An immediate DPAFM becomes effective at the time it is signed, while a springing DPAFM becomes effective on the happening of a specified event in the future (such as the Principal becoming incapacitated). An immediate DPAFM allows the Agent to act on the Principal’s behalf without having to prove that the specified event has occurred.

Making a DPAFM effective immediately, of course, also gives the Agent immediate power over the Principal’s assets.

How Long Does a DPAFM Continue?

The DPAFM is a tool for dealing with incapacity during the Principal’s lifetime. It terminates automatically at the Principal’s death.

The DPAFM will last throughout the Principal’s lifetime, unless the DPAFM limits its duration or the Principal terminates the DPAFM.

Although a DPAFM can remain in effect until the Principal’s death, if the document was not recently executed some financial institutions and other third parties may be hesitant or unwilling to accept it. For example, a third party may be concerned about whether the DPAFM may have been revoked or whether the Principal may have died. Although there are legal steps an Agent can take to require the third party to accept the DPAFM, this can take time and added expense. For this reason, we suggest that the DPAFM be updated at least every three years.

Revoking a DPAFM

As long as the Principal has legal capacity, the Principal can revoke the DPAFM by a written document or by any other means stated in the DPAFM.

In practice, however, a DPAFM may be difficult to revoke. Written notice of the revocation should be given to all third parties who have received copies of the DPAFM. And the original and all copies should be retrieved from the Agent. The revocation should also be recorded with the County Recorder where the original document was recorded and where the Principal owns real property.

If a Principal designates his or her spouse as an Agent, and the marriage is subsequently dissolved or annulled, the Principal’s naming of the former spouse as Agent is automatically revoked.

Other Legal Requirements

In addition to the durability language, a DPAFM must meet the following requirements:

  • At the time of signing, the Principal must have “capacity” (basically, must understand what the document does). In order for an Agent to be qualified, the Agent must also have capacity.
  • The document must be in writing and must include the date of signing.
  • The DPAFM must be signed by the Principal; or by another adult in the Principal’s name, and at the Principal’s direction, and in the Principal’s presence.
  • Generally, the DPAFM must either be acknowledged before a notary or be witnessed by at least two witnesses (neither of whom may be an Agent). If using the “Statutory Form,” the Principal’s signature must be acknowledged before a notary.

Document Forms

There are three principal DPAFM document forms:

  • Attorney-drafted and customized documents.
  • The “Statutory Form Power of Attorney,” which copies the form set forth in Section 4401 of the California Probate Code.
  • Other pre-printed forms often found in stationery and office supply stores, or in “do-it-yourself” software kits.

The usability and quality of pre-printed and software forms varies. Because of frequent problems we see when people have created DPAFMs on their own, and the potentially great negative impact when a DPAFM is defective, we recommend that people use a knowledgeable attorney for preparation of their DPAFMs.

For bank accounts, you might want to execute your bank’s financial power of attorney form, in addition to your broader DPAFM. The bank forms will apply to specified accounts within the same bank. Practically speaking, many banks are easier for Agents to deal with when the Principal has used the bank’s form of financial power of attorney.

Wrapping Up

Creating a DPAFM is a valuable part of planning ahead for the possibility of incapacity. Once a person has become incapacitated, it is too late for them to create a DPAFM.

Great care should be taken in the selection of each Agent, because in the wrong hands a DPAFM is a “license to steal.”

A well-prepared DPAFM can pave the way for careful management, and avoid the need for costly court intervention.

In other words:

  • Do it carefully!
  • Do it now!