Common English law recognizes that agents are sometimes needed in business and commerce. The president of the Ford Motor Company, obviously, couldn’t be anywhere. He needs an agent to run the business. Also, someone who is on vacation abroad and is unable to sign a contract can appoint an agent to sign the very important letter.
But under common law, an agent no longer has the ability to act when Principal paralyzed (the “principal” is the one who gives power). If the principal has dementia and cannot sign the agreement, neither can the agent. The agent cannot have more power than the principal.
Now, if you haven’t figured it all out, we’re all going to feel the effects of aging — if we’re lucky. The symptoms are well recognized and do not require explanation. One symptom that is very difficult to accept is memory loss; the ability to think as clearly as when we were young. While this is not always disabling, it is during this natural aging process that people often need help. But common English law is of little help if a person is in a coma, or has dementia.
This is the Enduring Power of Lawyers.
But because the powerless is clearly in dire need of agency assistance, most jurisdictions now recognize a “durable” power of attorney (“DPOA”). A DPOA is “durable” because it applies even when the “principal” is mentally incapacitated.
While a perpetual power of attorney only authorizes an agent to act as long as there is no incapacity, the DPOA solves this problem by allowing a trusted agent, or candidate, to act. even if the principal has no legal capacity – or in other words when the person is unable to legally make decisions on his or her own behalf because of a mental disability.
In California, DPOA must have a special wording to be “durable”. It must state, as provided for in the California Probate Code 4124, that: “This power of attorney shall be effective on the incapacity of the principal”, or wording to that effect.
Some Benefits of DPOA
DPOA has special benefits; In fact, I would go so far as to state that almost anyone with a formal real estate plan should consider owning one. Here are some of the benefits:
- Often one can avoid adult conservatories. The main benefit of having a DPOA is that it can often replace a formal conservatory, which is often an expensive litigation that requires continued court oversight. So, if a person is under a disability and has a properly worded DPOA, his or her agent may be able to write checks, manage finances, or take actions related to that person’s inheritance plans (such as funding a trust) without special court oversight. .
- It can be effective quickly. A DPOA can be effective immediately, or nearly so, without going through a lengthy process in the Probate Court.
- It must be accepted in another state. A valid DPOA must be received in another state. California has a special law, Endorsement Code 4053, that specifically recognizes valid DPOAs executed in other states. However, with some states, this may not be the case if the document provides a power of attorney that is not authorized in that state. However (and this “but” is big!): The IRS doesn’t make it easy to identify a power of attorney prepared by an attorney. There are hurdles set out in certain Treasury Regulations [See, for instance, Treas. Reg. §601.503] and the IRS practice of making it difficult for agents to sign tax forms. [IRS Deskguide (Publication 1514)]. However, California taxpayers with a valid and properly executed power of attorney should have no problem with the California Franchise Tax Council signing state tax forms.
- DPOA is flexible. Special authorizations, or “powers”, may be added to or limited in the governing agreement. Specific provisions are up to the principal.
Of course not everything is perfect…
While very useful, DPOA isn’t perfect by any means. One of the main problems is the possibility of abuse.
While conservatory is a huge legal process, at least there is judicial oversight. The DPOA has no oversight and violations have occurred, too often. While conservators have to go through many legal hurdles, there is no active court oversight or “circle” for agents under the DPOA. For example, California requires conservators to provide court-approved accounting for their financial activities. It also requires that conservators be bound. But without a special court order, there is no such requirement for mere agents.
Court proceedings can be filed, but that is often impractical. While the court process can instituted to compel (for example) agents to surrender the books or to revoke the agency’s authority, this is very rarely done. There is a big difference between a court-supervised conservatory, and petitioning the court.
After all, who will petition the court? Remember: The principal is mentally incompetent! Comatose people generally can’t petition probate to hold their agents accountable!
Of course, there are risks, and they can be overcome (but not completely) through well-designed documents and some sensible precautions. DPOA may not be suitable for everyone. However, everyone should at least consider DPOA as an element of his legacy plan. An effectively designed DPOA can “round off” a comprehensive plan, and fill in gaps that aren’t covered by trusts and wills.
Disclaimer: The information in this article is not legal advice, and its use does not create an attorney-client relationship. Any liability that may arise from your use of or reliance on this article or any link from this article is expressly disclaimed. This article is not to be acted upon as if it were legal advice, and is subject to change without notice, or may include outdated or dated information, or information irrelevant to your jurisdiction. If you need legal services, you should consult a lawyer.