Key Takeaways
- A power of attorney is a foundational estate planning document that empowers a trusted person to make decisions about property, health care, and finances for another person.
- Powers of attorney are often created to prepare for a period of incapacitation or disability, or when the person creating the power of attorney is unable to be present to sign legal documents.
- Powers of attorney can bring peace of mind to families, because they can help ensure that one’s wishes are granted, even if they’re not in a position to make those decisions.
Overview
A power of attorney, or POA, is a legal document that grants authority to one person (agent or attorney in fact) to act on behalf of another person (the principal). The agent can be granted broad or limited legal authority to make decisions about the principal’s property, finances, or medical care, including:
- Making financial decisions, including gifting money
- Paying taxes
- Making health care decisions, including granting, withholding, or stopping medical treatments, services, or diagnostic procedures
- Recommending a guardian
Who should consider creating a power of attorney?
Every adult, no matter their age or circumstance, should consider creating a POA, specifically:
- Anyone concerned with how their financial and/or medical decisions will be made if they become incapacitated.
- Anyone who regularly engages in real estate transactions who may, at times, be unavailable for transaction signings.
- Anyone who lives or travels extensively overseas who wishes to appoint an agent to manage their affairs while they’re out of the country.
- Adult children who are the primary caregivers of their aging parents.
How does a POA work?
POAs come in several varieties. When deciding what type of POA to use, start by answering these two questions:
- When do you want your agent to “step into your shoes” (obtain the powers)? Immediately, at a specific time, or under a specific reason? This will determine if the POA should be durable or springing (see more below).
- What powers do you want to grant your agent (broad, limited, or very specific) and for how long? This will determine if the POA should be general or limited (see more below).
Types of powers of attorney
The two key types of powers of attorney are health care and financial POAs. Below is an explanation of the differences between the two, followed by a deeper dive into the various types of financial POAs.
Health care power of attorney. A health care POA (sometimes referred to as a medical POA) gives the agent the authority to make medical decisions for the principal if they are mentally or physically unable to make their own decisions.
Financial power of attorney. A financial POA gives the agent a wide range of power over the principal’s bank accounts, including the ability to make deposits and withdrawals, sign checks, and make or change beneficiary designations. Most financial POAs also grant the agent the ability to file tax returns and manage brokerage accounts for the principal.
A closer look at financial POAs
Financial powers of attorney come in four main types: durable, springing, general, and limited.
Durable power of attorney. A durable POA immediately gives your trusted person (the agent) the power to act on your behalf, even when you become incapacitated. “Even when you become incapacitated” is what makes it durable. With a non-durable power of attorney, your agent’s power ends at your incapacitation. It is for this reason that most POAs used for estate planning purposes are durable. In most states, courts will presume a POA is durable unless specifically stated otherwise. In order to avoid confusion or delay, it is recommended to state in the document whether the POA is durable or not.
Springing power of attorney. A springing POA only “springs” into action when a specific condition is met. Until then, you maintain all control. Because it can be difficult and time consuming to prove that a condition has been met (e.g., incapacity), most estate planning attorneys do not recommend the use of springing powers of attorney for clients planning for incapacity.
General power of attorney. A general POA is broad and provides extensive powers to the person you appoint as your agent, as allowed by state laws. These powers usually include:
- Financial transactions
- Safety deposit box access
- Entering into contracts
- Filing tax returns
- Purchasing life insurance
- Purchasing, selling, or managing property
Additional powers that may be granted the agent include making gifts, making transfers to a revocable living trust, or maintaining and operating business interests. Powers that cannot be granted through a POA include creating, amending, or revoking a will, voting, and contracting a marriage (in most states).
Limited power of attorney. A limited POA grants the agent power to act on your behalf in specific matters or during a specified time period. For example, limited POAs are often used in situations where the principal will be out of the country for a specified amount of time but needs someone to manage their affairs while out of the country. In this situation, the POA may only be valid during a predetermined period of time.
Who should be appointed as agent? The selection of an agent for a POA should be done with extreme care, consideration, and with the assistance of a licensed attorney. The person selected will have tremendous power over the principal and can bind the principal in legal and financial matters through their actions. Therefore, it is highly recommended that the person chosen to become an agent be trustworthy, dependable, and responsible.
Creating a POA
The requirements for a valid POA differ from state to state. Some states offer statutory POA forms for their residents to use. These statutory POAs generally give the agent broad powers over the principal but also allow the principal the opportunity to limit or expand the powers granted to the agent. Anyone considering the creation of a POA, whether using a statutory POA or not, should consult with a local attorney to ensure their POA is valid in their jurisdiction and that their goals are met by the execution of the document.
Bottom line
Powers of attorney are foundational estate planning documents that everyone – no matter your wealth level or family circumstance – should considered drafting, because they can help ensure your wishes are met if you’re not capable of making financial or health care decisions. Because of the complexity and optionality afforded POAs, we recommend starting a conversation with your legal advisors as soon as possible to help ensure your goals met.
