Every estate plan should consider potential incapacity. In California, one of the primary vehicles used to plan for an individual’s incapacity is a durable power of attorney for financial management (DPOA) (the other is an advance health care directive for health care decisions, see Being Prepared Is Ageless: Everyone Should Have an Advanced Health Care Directive). Let’s look at the pros and cons of using a DPOA.
A DPOA has many advantages:
- It’s economical to create. Attorney fees for drafting, counseling, and supervising the execution of a DPOA are generally less than the attorney fees associated with the alternatives, such as a conservatorship of the estate.
- It can be used to dispose of assets at death or avoid probate. The DPOA can authorize the agent to create or fund a trust. This is useful when discussion of complex trusts is beyond the understanding of the principal or the principal is unwilling to discuss the matter, as may be the case with less sophisticated clients.
- It can be put into effect quickly. A DPOA can be created in an emergency, even when death is imminent, by expressly authorizing the agent to e.g., fund gifts, make tax decisions, transfer assets to a revocable trust, disclaim property. For the DPOA to be effective, the principal must have capacity when he or she executes the document.
- It can eliminate the need for a court-supervised conservatorship. A court conservatorship is costly, time-consuming, cumbersome, and open to the public.
- It can have an unlimited duration and doesn’t need to be periodically renewed. Formal periodic review of a well-functioning principal-agent relationship can be unnecessarily expensive and time-consuming. But keep in mind that informal periodic review can be useful to revisit the appropriateness of the DPOA and the designated agent, and many custodians and other third parties require a “fresh” DPOA (within the past 2 years) before honoring it.
- It’s flexible. A DPOA can be designed to fit a vast array of situations, and the scope, duration, and selection of agents can vary according to the situation. As long as the principal retains capacity, he or she can revoke the DPOA and execute a new DPOA to reflect his or her needs, desires, and choice of agents at that particular time.
- It allows for a trial-run. If a principal who still retains capacity wishes to test an agent’s capabilities in managing his or her situation and isn’t pleased with the agent’s performance, he or she can revoke the instrument, generally with little effort or expense.
- It’s private. Neither the principal’s assets nor his or her intentions are disclosed, except as needed to third parties dealing with the agent on specific matters.
- Ownership stays in the principal’s name. Under a DPOA there is no formal transfer of title of the principal’s assets into the agent’s name. See, e.g., Corp C §702(e).
- No court review or approval. No formal court review is required for a DPOA to be effective. However, a relatively simple statutory procedure to obtain court review of the agent’s actions (or court removal of the agent) is available if necessary (Prob C §§4540-4545).
Sound good? Not so fast, there are also disadvantages to using a DPOA:
- To be effective, a third party must accept the DPOA as valid. Third parties sometimes refuse to accept a DPOA, particularly if it is not a “fresh” DPOA (executed within the last 2 years), or they question the intention of the agent bringing the document to them. Many banks and brokerage firms require that a DPOA be executed on the organization’s own form and won’t accept attorney-drafted forms. Title companies sometimes challenge real property transfers made under a DPOA or, years later, refuse to issue title insurance for the property.
- The principal or the agent may not fully understand the DPOA. Because of the relative ease of its execution, the parties may not understand its serious legal ramifications. This can present future problems, e.g., if a third person later challenges an agent’s authority by claiming that the principal didn’t understand the nature of his or her acts.
- An agent may not make authorized gifts to himself or herself without specific authority in the DPOA. Gifts or other benefits from the principal’s estate made to the agent will cause problems when the agent is considered a “disqualified person” under Prob C §§21350-21356, because such gifts are then invalid unless an exception applies.
- No accounting is required. An agent without a duty to account may become careless with his or her authorized powers or may make decisions without the principal’s best interests in mind. In these situations, the only alternative is to compel an accounting in court.
- It’s not court supervised. Although the lack of court supervision of a DPOA is generally an advantage, if it’s being misused or abused, it can be a severe disadvantage. If the agent isn’t acting in the principal’s best interests, the agent’s improper acts may go undetected until serious damage has been done.
- The principal retains full legal capacity to act to his or her detriment. For example, a principal may still legally gift his or her house away or spend extraordinary sums of money on sweepstakes contests and raffle tickets. Faced with the task of providing responsible financial management in such difficult circumstances, an agent may be forced to resign. In such a situation, a conservatorship may be preferable because a conservatee has no legal capacity to enter into contracts or convey property.
As you try to determine whether a DPOA is appropriate for your client—or whether an alternative to a DPOA may be better—turn to CEB’s California Powers of Attorney and Health Care Directives. Also check out CEB’s program Powers of Attorney and Health Care Directives, available On Demand.
Related CEB blog posts:
- Who’s Got the Power (of Attorney Papers)?
- 10 Steps for Developing and Implementing an Estate Plan, Part II
- Is a Conservatorship Needed?
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