A few years ago, we had a client who came to us after her husband had a stroke and became incapacitated. Although they had a Revocable Living Trust-based Estate Plan, they had not created a Durable Power of Attorney. The husband was retired and the couple’s main source of income was the husband’s retirement account.
Because retirement accounts are assets that are not placed into a Trust, the wife was unable to access the husband’s retirement accounts. Even though she was co-Trustee of their Trust, she was now in a position where she was cut off from her primary source of income and unable to pay for her spouse’s medical care without it.
In the end, our client had to seek a Conservatorship to access the retirement funds. She could have saved $5,000 and 3 months of time in obtaining a Conservatorship if she had had a Durable Power of Attorney naming her as her husband’s agent.
A Power of Attorney (POA) is a document that authorizes someone else to handle certain matters on your behalf. A Durable Power of Attorney continues to be valid even if the creator becomes mentally incompetent. This is different from a traditional Power of Attorney which becomes defunct when the creator loses mental capacity.
A Durable Power of Attorney is a helpful incapacity planning tool. This document ensures that your finances will be taken care of if you become incapacitated for any reason. Having A Durable Power of Attorney in place reduces the confusion and uncertainty that family members often face when a family member has a medical emergency or begins to lose mental capacity.
Many clients who have created a Revocable Living Trust ask us why they would also need a Durable Power of Attorney. As demonstrated in the story above, one of the most compelling reasons to create a Durable Power of Attorney is the possibility of incapacity.
If you have a Revocable Living Trust, it’s true that your Successor Trustee can step in to take control over the assets of your Trust if you become incapacitated. But some assets, like life insurance and retirement accounts, cannot be titled into a Trust. If you become incapacitated and want someone to access these assets, your loved ones will need a Durable Power of Attorney.
General Durable Power of Attorney (aka Financial Power of Attorney): This is the most common type of Durable Power of Attorney. This document authorizes your “agent” (aka attorney-in-fact) to act on your behalf in a wide range of business matters. A few examples include filing tax returns; buying and selling real estate; paying bills; and managing bank accounts. Often the document will allow the principal (creator) to designate exactly which tasks the named agent has permission to perform on their behalf. The principal can also choose whether the document takes effect immediately or becomes effective only after you are incapacitated.
Springing Power of Attorney: This is type of Durable Power of Attorney does not “spring into effect” until the principal (creator) becomes incapacitated. This allows you to avoid giving your agent immediate authority. In California, a Springing Power of Attorney usually includes this phrase: “This power of attorney shall become effective upon the incapacity of the principal.”
While generic forms can be found on the Internet, we strongly recommend that you only create this powerful document after counseling with an experienced Estate Planning attorney. Giving another person control over your finances is a major act of trust and unfortunately, we do see situations where this power is abused by family members. If you suspect someone is abusing a Power of Attorney, know that it is possible to take legal action to have them removed.
That being said, here is how to legally create a Power of Attorney as outlined in the California Probate Code, starting at Section 4000.
- The principal must have the same legal capacity to enter into a contract; namely, they must be at least 18 years old and “of sound mind”.
- The Durable Power of Attorney” must be signed by the principal in front of a notary public or two qualified witnesses. If you are authorizing your agent to handle real estate matters, it should be notarized so that it can be recorded.
The agent should bring a certified copy of the Durable Power of Attorney with them when they conduct business as your agent. When they sign documents on your behalf, they should sign their name and then indicate that they’re signing as power of attorney. It’s helpful to ask about the preferred format before signing a given document.
A Durable power of attorney ends if:
- You die.
- You revoke it. You can revoke your document at any time, provided you have the mental capacity to do so.
- You get divorced and your spouse was your agent. In California, if your spouse is your agent and you get a divorce, your Durable Power of Attorney is automatically terminated. It is a smart idea to create a new Power of Attorney upon filing for divorce.
- A court invalidates your document. This is rare, but if a court concludes that you lacked mental capacity to create your Power of Attorney or that you were the victim of undue influence or fraud, they can declare the document invalid.
- Your named agent is unable to serve. If your named agent is dead, incapacitate or otherwise unable to serve, your Power of Attorney will not work well. An easy solution to this is to name sufficient alternate agents within the document as backup to your first choice.
You should revoke the Power of Attorney in writing using a Notice of Revocation and notify the former agent and the financial institutions that your agent has dealt with in the past.
An Estate Planning attorney can prepare the Notice of Revocation on your behalf. This document should include your name, state that you are of sound mind, and your wish to revoke the Power of Attorney. It should include the name of your agent and the date the document was executed.
After signing the Notice of Revocation, attach your new Power of Attorney if you have one. Send these documents to your former agent and any institutions that your former agent had dealt with on your behalf. If possible, get back any copies of the revoked Power of Attorney from your former agent.
So that’s it! Everything you need to know about Powers of Attorney. If you or someone you know needs a Power of Attorney, feel free to contact us.