What Is a Power of Attorney (POA)?

What Is a Power of Attorney (POA)?

Let me explain what a power of attorney, or POA, really is. It's a legal authorization that lets an agent or attorney-in-fact act on behalf of someone called the principal. You, as the principal, can give this agent broad or limited authority to handle your property, finances, investments, or even medical care.

POAs come in financial or health care varieties. Both types let the attorney-in-fact have general or limited powers.

Key Takeaways

A power of attorney is a legal document that gives one person the power to act for another. The person receiving the authority is the agent or attorney-in-fact, and the subject is the principal. This agent can have broad or limited authority over the principal's property, finances, or medical care. Importantly, a durable power of attorney stays in effect if the principal becomes ill or disabled and can't act personally.

How a Power of Attorney (POA) Works

A POA is a legal document that binds the agent and the principal. You use it if the principal faces temporary or permanent illness, disability, or can't sign documents. Both parties must sign it, and usually, a third party witnesses it.

Most POA documents let the agent represent the principal in property and financial matters while the principal's mental state is sound. The agreement ends automatically if the principal becomes incapable, unless it's a durable POA, which continues even after incapacitation.

A POA can end for reasons like the principal revoking it, dying, a court invalidating it, or the agent being unable to fulfill duties. For married couples, divorce can invalidate it.

Important Considerations

If you want the POA to stay in effect after your health declines, sign a durable power of attorney (DPOA). It remains in force if you become mentally or physically incapacitated, but it ends upon your death. Without the durable designation, it voids if you become mentally incapacitated.

There are many reasons to create a durable POA—it ensures someone handles your financial affairs if you're incapacitated. But granting broad authority is like signing a blank check, so be cautious.

Types of Powers of Attorney

A durable POA starts when signed and continues if the principal becomes incapacitated. A springing POA activates only upon incapacitation. Some POAs are limited to medical matters, letting the agent make decisions for an incapacitated person. The main types are financial and health care.

Health Care Power of Attorney (HCPOA)

You can sign a durable health care POA (HCPOA) to give an agent power over your health decisions. Also called a health care proxy, it outlines your consent for the agent to act in unfortunate medical situations. It activates when you can't make decisions yourself.

Financial Power of Attorney

A financial POA lets an agent manage your business and finances, like signing checks, filing taxes, depositing Social Security, and handling investments if you can't. The agent must follow your wishes as outlined. It can give wide power over bank accounts, including deposits, withdrawals, checks, and beneficiary changes. Financial POAs include categories like general, limited, durable, and springing.

General POA

This allows the agent to act in all matters permitted by state law, such as handling bank accounts, signing checks, selling property, managing assets, and filing taxes.

Limited POA

This gives the agent power for specific matters or events, like managing retirement accounts, and it might last for a set period, such as two years if you're out of the country.

Durable POA (DPOA)

A DPOA stays in effect for specified legal, property, or financial matters even if you become mentally incapacitated. It can handle medical bills but not health decisions like ending life support.

Springing POA

This defines events or incapacitation levels that activate it. It remains dormant until a health issue turns it into a DPOA. Word it carefully to avoid disputes on when it triggers.

Fast Fact

The agent in a POA doesn't have to be an attorney—it can be a trusted family member, friend, or acquaintance.

How to Set Up a Power of Attorney

You can buy or download a POA template, but ensure it's for your state since requirements vary. No standard form exists for all states, but all accept some durable POA version. Certain powers can't be delegated, like making a will, amending it, revoking it, contracting marriage in most states, or voting—though a guardian can request a ballot.

Some rules apply everywhere. Put it in writing—oral grants aren't reliable. Use the proper format: decide powers, prepare a state-specific POA. Delegate clearly, even for general POAs—avoid vague terms. Specify durability to keep it active during incapacitation. Notarize it, as most states require. File it if needed, like for guardianship or real estate in some states. Filing creates a record, even if not required.

Tip for Setting Up

Start by finding a family or estate law specialist in your state. If fees are an issue, use Legal Services Corporation's site for pro bono help.

Choosing an Agent

A POA gives immense authority, so choose carefully—it's life and death for medical ones, and could lead to financial ruin if abused. Name someone trustworthy and capable. They can be any competent adult, like a professional or family member. Family saves fees and keeps matters private.

Parents often pick adult children for their youth and to manage affairs during incapacity. But if you have multiple children, it can complicate things. You can have multiple POAs, customizing for each child's skills, like one for everyday expenses, another for real estate, portfolios, insurance, or business.

Choosing Multiple Agents

You can name multiple agents to act separately or jointly. Separate authority helps if one is unavailable; joint for major decisions ensures agreement. But disputes can freeze actions, so choose cooperative people. A general POA gives full authority; special limits to subjects or times.

Tip for Multiple Agents

If one agent is a distant financial expert and another nearby part-timer, use separate POAs: one for investments, another for daily bills.

Risks and Precautions

Review and update POAs as family changes. Revoke by writing a notarized letter to the agent and third parties, then create a new one. POAs provide convenience and protection by letting a trusted person act for you. Choose wisely, not just relatives. Consult professionals like lawyers or accountants. Don't delay— you must be competent to create one. If incapacitated without it, court may appoint a guardian, which is costly and slow.

Require agents to report actions to a trusted third party, or name two requiring agreement on big transactions. Without POA, no one can handle IRAs, loans, or IRS matters for you.

Common Questions

Can somebody with POA do anything? No, authority is as established, and they have a fiduciary duty to act in your best interests. Can next of kin override? No, but they can petition court if the agent fails duties. How to revoke? Expressly revoke it, or it ends on date, incapacity (unless durable), or death. Who can I name? Any competent adult you trust, like spouse, family, friend, or lawyer.

The Bottom Line

Creating a POA ensures a plan for your financial and health affairs if you can't manage them. Choose someone trustworthy to carry out your wishes faithfully.