Sadly, preparing for your client’s potential incapacity is an integral part of estate planning. In doing so, one particularly useful tool is the financial power of attorney, which provides a trusted agent authority to transact business for your client. Here are a few basic requirements for creating this key document.
- The principal must be a “natural person.” Perhaps a bit obvious, but the power of attorney must be created by a “natural person” (i.e., an actual human being) with the capacity to contract. Prob C §§4026, 4120.
- The agent may be any legal “person.” Unlike the principal, the agent need only be a “person,” which includes an organization or a corporation. Prob C §§4014, 4200. Your client may designate multiple agents in one or more powers of attorney that must act unanimously, if they’re all available. Prob C §4202. But if your client grants inconsistent authority to multiple agents in two or more powers of attorney, the last-granted authority will generally control. Prob C §4130. A principal may also designate successor agents. Prob C §4203.
- The power of attorney must be properly executed. For a power of attorney to be effective, it must (Prob C §§4121–4122):
- Contain the date of execution;
- Be in writing and signed by the principal, or at the principal’s direction in his or her presence; and
- Be either acknowledged by a notary public or signed by eligible witnesses, (not an agent) who must witness the principal’s signing of the document or acknowledgment of his or her signature. (But to execute a Uniform Statutory Form Power of Attorney, the document must be acknowledged by a notary public—witnessing isn’t an option. Prob C §4402.)
- Include statutory language to create a durable power of attorney. If the purpose of creating the power of attorney is to ensure continuing management of the client’s assets in case of incapacity, the client should execute a durable power of attorney (i.e., a power that remains effective despite incapacity or becomes effective upon incapacity). To create a durable power of attorney, include language stating either (Prob C §4124):
- “This power of attorney shall not be affected by subsequent incapacity of the principal” or
- “This power of attorney shall become effective upon the incapacity of the principal.”
- Certain powers must be specifically granted. The agent is entitled to general powers and rights, such as the right to reasonable compensation for services rendered or expenses incurred, and the right to access confidential information on matters to be undertaken on the principal’s behalf. Fam C §297.5; Prob C §§4204, 4235. But other powers must be specifically granted, including the powers to (Prob C §4264):
- Create, modify, revoke, or terminate a trust;
- Fund a trust not created by the principal or other authorized person with the principal’s property;
- Make or revoke a gift of the principal’s property;
- Exercise the right to reject, disclaim, release, or consent to a reduction or modification of the principal’s shares in or payments from an estate, trust, or other fund (except for detrimental transfers, with court approval);
- Create or alter survivorship interests in the principal’s property;
- Designate or alter beneficiaries to receive any property, benefit, or contractual right on the principal’s death; or
- Make a loan to the agent.
Note that a power of attorney can never be used to execute, amend, or revoke a will. Prob C §4265.
These requirements are just the bare minimum for creating an effective financial power of attorney. Get extensive guidance, including ethical considerations, drafting tips, and sample provisions, in CEB’s California Powers of Attorney and Health Care Directives.
Other CEBblog™ posts on incapacity planning:
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