What is a Power of Attorney (POA)?

Attorney writing on a paper

As part of your estate planning, you may be asked about having a power of attorney (POA). It’s important to understand what this legal document is and how it can impact your life now and in the future. In fact, it is often more than just a single document with ordinary power. The following is a guide to help you understand this complicated term as you make critical decisions about your financial affairs.

What is a Power of Attorney?

A power of attorney is considered a legally binding document that designates a person to select someone to manage their affairs if they are unable to do so. It is often drawn up as part of estate planning purposes, but it can be created at any time. The person who draws up the power of attorney is known as the principal and their assets are the principal’s estate.

Some POAs go into effect as soon as you sign them while others only have power after a certain event takes place. The attorney-in-fact, also known as the agent, is the person you choose to make decisions with a POA.

The POA loses its power when you die. At that point, whoever is appointed as your executor or personal representative in your will takes over managing the estate and handling affairs. They will be appointed as part of the probate estate in court proceedings.

Who is the Agent of the Power of Attorney?

The agent is the attorney-in-fact or the one who makes decisions for you. They have a fiduciary relationship with the principal, which means they manage the affairs for someone else. They must be responsible in their role to make decisions in the best interests of the person, including for financial transactions. The agent can be held criminally liable if they violate their duties. They can also be sued in a civil lawsuit.

You can choose anyone who is over the age of 18 to be your attorney-in-fact. They must be of sound mind and willing to take on this role. You don’t have to choose an attorney, but you do have the option. It’s also helpful to work with an estate attorney when creating the POA.

Limits of a Power of Attorney

A power of attorney only takes effect as stated in the document and ends with the principal’s death. This may happen when the person signs the document or at a later time, such as when they are incapacitated. However, it isn’t in effect before it is signed.

The POA is void if it is determined that the person wasn’t of sound mind when the principal signed it. They will need to follow the state law where they live to ensure the POA is legally binding in a court of law if it should be contested. Most laws require a notary to be present for the signing or to sign in front of witnesses.

Types of Power of Attorney

Several types of Power of Attorney exist, which can make creating a POA more challenging. You must decide if you want one person to serve for all or a different person for each type. Before making that decision, you should understand what each type of POA does and when they are in effect.

Durable Power of Attorney

Patient in a hospital bed

A durable POA is one of the most important and comes into effect if you’ve been mentally incapacitated from an injury or illness. It can be in effect as soon as you sign the document. You may give the attorney-in-fact power to continue to act on your behalf while you’re incapacitated. They can take care of real or personal property and manage your financial matters. They may also take care of health decisions if you are unable to do so. A durable POA provides enduring power even after you are mentally incapacitated.

You are also allowed to decide which doctor is able to declare you incompetent. A non-durable power of attorney loses its effectiveness when you have been declared incapacitated.

Springing Power of Attorney

A springing power of attorney goes into effect when a doctor declares you physically incapacitated or mentally incompetent. You can designate the doctor you want to have that role in the springing POA.

A springing POA is a broad term that can define other power of attorney documents, such as medical power of attorney. However, it can be difficult to prove that you’re mentally incompetent even if you suffer from mental health conditions, such as dementia.

General Power of Attorney

General power of attorney is one that can take effect for a short period of time. It may be in effect while you’re out of town or undergoing major surgery. The attorney-in-fact manages your entire estate with broad powers when the general POA is in effect.

The agent may handle business issues and make financial decisions, including hiring professional help to manage the estate with a general POA. They may settle claims and conduct other business with this power. They can also make health care decisions for the principal.

Limited Power of Attorney

This type of power of attorney is the opposite of the general power of attorney. The document limits the attorney-in-fact to specific tasks or decisions. They may handle certain affairs for a specified time.

An example would be giving a limited POA to someone to sell real estate or other property for you while you’re out of the country. They only have the limited power to act for you on decisions that are relevant to the sale of this property.

Medical Power of Attorney

Doctors wearing scrub suit in an operating room

A medical power of attorney is one of the best-known POAs. It is also referred to as a durable healthcare power of attorney. This document allows your agent to make medical decisions on your care. The medical POA takes effect when you are mentally incompetent or physically incapacitated.

You may be able to include what you want to happen if you are on life support and other end-of-life decisions. Even though a medical POA is different from a living will, it is often looked at in the same way for health care decisions. Many times, the living will and medical POA are combined into what is known as an advanced health care directive.

Financial Power of Attorney

A financial POA allows your agent to make financial decisions for you if you are absent. It may also be used if you are no longer mentally competent to make those decisions on your own. They can access your bank account and other resources as part of the financial management of your estate. They should follow your investment strategy as they manage your investments while also taking care of any real property you own.

Military Power of Attorney

The military power of attorney is used for those who are on active duty. It often takes effect when the soldier is deployed. This document allows the spouse or another person to access bank accounts, file taxes, or make other financial decisions.

Choosing One or Multiple Agents

When developing your power of attorney, you’ll want to decide on who will act as your agent. You can select one person to act as your agent in all matters, or you can choose different people for various roles.

Some estate owners will give each of their children a different role. One family member may act in financial matters while another adult child will take care of medical decisions. The challenge with multiple agents is that it can introduce conflict to the situation and may delay decisions that need to be made. You can also choose to allow the multiple attorneys-in-fact to act jointly in all decisions under a general POA. Just be aware that this option can slow the process down if anyone disagrees with the others.

The challenge with having just one agent is that they may not have time to manage all your affairs along with their own. If they become incapacitated, it can be detrimental to your estate. If you decide to appoint one person as an agent, you can designate someone else as a backup or successor agent.

How to Select the Right Agent

When considering who will act as your agent for a POA, you’ll want someone you trust. They should know you well enough to make decisions the way you would if you were able. They need to take their responsibility seriously and not abuse the power they have.

If you or a loved one suspects that your agent is not carrying out their fiduciary duties, you should consult with a law firm. This situation may be a criminal or civil matter.

Revoking a Power of Attorney

As long as you are still of sound mind and physically able, you have the legal authority to revoke your power of attorney. You can change it with new attorneys-in-fact or set up new terms to change the agent’s power. You must provide written notice to the agent that they are relieved of their duties.

You will need to follow the laws for revocation for your state to make it legal. You will also need to record the revocation just as you recorded the original power of attorney.

Disputing a Power of Attorney

A power of attorney can be disputed. Many times, a POA is disputed on the basis that the person wasn’t of sound mind or that they were unduly influenced and didn’t have the mental capacity to sign the document. A dispute can arise because the person didn’t meet the requirements of their state to sign the document.

A written confirmation of mental incompetency will be necessary if the document doesn’t state the requirements for determining competency. In some situations, a dispute may have to be decided by the court.

When Should You Create a Power of Attorney?

Person in formal attire writing on a document

As you learn about what a power of attorney is and what it can do, your next question might be when you should create a POA for yourself. There is no set time or phase in your life when this should be a priority. Rather, it depends on your individual situation and needs.

Many families begin to think about these decisions as their parents get older. They worry about what will happen if they become unable to make decisions for themselves. If you’re in this situation, you can sit down with your parents and discuss a durable POA with them. If you understand the information, you can present it to them in a way that isn’t overwhelming. You can also set up an appointment with an estate attorney to answer their questions.

For people with larger estates or a business, they may want to think about setting up a durable POA earlier to protect their best interests. They would want someone to be able to manage their business if they become incapacitated for a period of time.

Others may want to make sure they have a POA if they plan to travel overseas or be away from their business or home for a length of time. In some cases, a person may need an ongoing durable POA for another person to act on their behalf in business matters if they have a large company or multiple businesses.

Reasons to Create a Power of Attorney

Most people don’t think about a power of attorney as part of their normal routines. If they are involved in estate planning, it will probably come up, but otherwise, it’s often not considered. However, there are some situations and events that may trigger the idea of creating a POA. Here are some common reasons you may decide to set up a power of attorney for yourself or a loved one.

  • Chronic illness – If you have a terminal illness, you may worry about the time when you won’t be able to manage your affairs. With a non-terminal chronic illness, the concern may be of focusing on your health instead of worrying about other matters, such as managing your business.
  • Upcoming surgery – you may be concerned that your business can go on without delays while you’re sedated and recovering from surgery. You may also have some concerns about complications from the surgery that would render you incapable of managing your estate.
  • Regular traveling – if you travel a lot for business or to get away, you may want someone to have the ability to manage your affairs while you’re away.
  • Mental impairment – you may have been diagnosed with some form of dementia and worry about caring for your affairs as the disease progresses.
  • Financial struggles – if you are having difficulty managing your finances, you may want to give someone the authority to help you by taking care of financial obligations.

If any of these situations describes you, it’s best to have legal documents drawn up by a law firm to protect you and your estate.

When Does a Power of Attorney End?

The POA document may remain in effect until the person dies or changes it. However, other events can also put an end to the power of the POA. For instance, a couple is married and the spouse is listed as an agent. If they divorce, the spouse loses their authority to act as an agent.

The POA may specify conditions of termination, such as when a task is fulfilled or the person returns from travel. At this point, the power of attorney is no longer in effect when the conditions are met for termination.

If the authority of the agent has been terminated for some reason and no replacement agent has been named, the POA document is terminated. Another situation where the POA may be void is if a guardian has been appointed for the person who created the power of attorney.

Challenges with a Power of Attorney

While a power of attorney is a necessary document in many cases, it doesn’t come without some added challenges. First, you may be concerned about how other family members will react when you have selected someone to be your agent. Even if you choose the eldest adult child to be the agent, the other kids may not agree with your decision. If you decide to split it up between multiple children to act jointly, they may disagree about what’s in your best interest.

Decisions can be delayed with an agent either because they can’t agree with other agents or they are tending to their own affairs. You want to choose someone who will have the time to manage your estate.

Another concern is selecting someone who will be trustworthy. It can be quite tempting to abuse the power given to an agent for their own benefit. While this is a criminal offense, they can be confident that they won’t get caught.

Choosing an Agent Outside the Family

You don’t have to select a family member to be the agent of your POA. You can select a friend or a professional as third parties to fulfill this role. Accountants, banks, other financial institutions, attorneys, and trust companies can take on the job as agents. They will likely charge a fee for this service, so keep that in mind.

You can select a professional based on the type of POA document you have. For instance, a financial power of attorney may benefit from having an accountant as an agent.

Financial Concerns with a Power of Attorney

Several financial issues must be considered with a power of attorney. First, you’ll need to consider fees if you hire a professional to be the agent or attorney’s fees when the document is created. You’ll also need to choose someone you can trust to make good decisions with your financial affairs in your best interests.

While the person acting as your agent or attorney-in-fact doesn’t assume any personal liability for your debts, they are responsible for handling your finances in a responsible way. They should keep the principal’s property separate from their own, which can be challenging if they are related to you. They should keep good records and document any expenditures and credits.

Do You Need a Lawyer to Create a Power of Attorney?

Generally, it’s not required to hire a lawyer to create a power of attorney. You can find forms online and can have a notary witness the signature or other witnesses as required by your state for legal documents. However, you may want to seek legal advice from an attorney to ensure you consider everything for your POA. They can discuss with you the need for a general power of attorney or limited power of attorney based on your situation and concerns.

A lawyer will know the laws that govern your state for POAs and can advise you on what needs to be done to make the document legal. You will want to be detailed about what the agent can and cannot do to ensure that your wishes are honored with the powers granted. Also, be aware that not all online POA forms have the clauses and wording you need and may not be recognized as a legal document.

Many people choose to have a durable power of attorney created when they set up their estate plan with an attorney. The attorney can go over financial matters and ensure the document meets all requirements for legal status.

What Happens When You Don’t Have a Power of Attorney?

As long as everything is going along smoothly, there are no worries about not having a POA. However, an unexpected injury or illness can lead to the need for a power of attorney when it’s too late. Without a POA in place, no one can automatically assume the role – even your spouse. They have no legal authority to make financial or medical decisions.

Even if you need to talk to an insurance company about medical bills or a doctor about your care, they will have to give permission. If they are unconscious or incapacitated in some way, you may have to go through a court proceeding to get the authority to act on their behalf.

The court would need to assign guardianship or conservatorship to someone. This step can be expensive and time-consuming as well as contested by others who aren’t in agreement.

Don’t leave your assets, medical care, and other decisions in limbo if you should be unable to make those decisions yourself. Seek legal advice if you have more questions about what is power of attorney and how it affects you.

Talk to an attorney for legal advice and find out how to create your own power of attorney as part of estate planning to protect yourself and provide peace of mind for your loved ones.