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Power Of Attorney: What Is It And When Do You Need One?

Dan Rafter9-minute read
October 23, 2020

A power of attorney, often known as a POA, is a legal document that allows someone else to make legal, medical or financial decisions on your behalf. Because this is such a powerful document, it is important to think carefully before assigning power of attorney to family members or friends.

That doesn’t mean you shouldn’t consider making this move. As you age, or if you are in poor health, assigning a trusted person with power of attorney over your legal, medical or financial affairs can help protect your savings and guide your future medical care.

If you don’t craft a power of attorney arrangement, you might lose control over how your estate is divvied up and how your life-and-death decisions are made.

What Is A Power Of Attorney?

As you get older or if your health is deteriorating, you might worry that you can no longer make sound decisions about how to spend your money, tackle your healthcare needs or make estate planning decisions. This is where a power of attorney arrangement comes in.

A power of attorney document gives you the right to grant another person the authority to make key decisions on your behalf if you are incapable, whether it be physical illness or mental incapacity, to make those decisions on your own.

In a power of attorney arrangement, the person granting the POA is known as the principal. The person to whom you grant POA is known as the attorney-in-fact or agent.

Say you are admitted to a nursing home and can no longer pay your bills. The agent in your power of attorney arrangement will make sure these bills are paid on your behalf. Or maybe you are physically ill and can no longer make decisions on the type of medical care you receive. Your agent or attorney-in-fact will be consulted by your doctors before any medical procedures are approved.

The agent in a power of attorney agreement is not required to be an attorney. Often, the agent is a trusted family member, friend or spouse. Again, there is no requirement that the agent in a power of attorney arrangement be a relative or even a friend.

3 Types Of Power Of Attorney

There are three types of power of attorney from which you can choose. It’s important to understand how these methods work. If you don’t, you might not understand exactly what power you are giving up in your power of attorney agreement.

Limited, or Special, Power Of Attorney

Under this arrangement, principals give their agents the authority to act on their behalf only in specific cases. For instance, you might be buying a home but you’re not able to attend your mortgage closing. You can grant a limited, or special, power of attorney to your real estate agent or real estate attorney to sign your closing documents on your behalf.

As the name suggests, a limited power of attorney is only activated by specific circumstances. The agents in this form of POA cannot make larger financial or medical decisions on your behalf.

General Power Of Attorney

A general power of attorney gives broader decision-making powers to your agent or attorney-in-fact. You might grant this power if you are going to be out of the country for a period of time and you want a trusted partner, business associate or family member to make broader financial and legal decisions on your behalf while you are gone.

You might also craft a document stating that this type of POA will automatically kick in if you become mentally or medically incompetent and are no longer able to make these decisions on your own. Your POA might state that it remains in effect until you are able to once again make your own decisions.

Your general power of attorney agreement, for instance, might give your business partner the ability to pay bills on your behalf, close business transactions in your name, make charitable donations, file tax returns or manage your real estate portfolio.

This is a lot of decision-making power to give up, which is why general power of attorney arrangements are typically only used in the case of medical or mental incompetence or for a limited period, such as during the days you’ll be out of the country or otherwise not able to handle your own financial or business matters.

Medical Power Of Attorney

A medical power of attorney allows your agent to make medical decisions on your behalf should you lose consciousness, become medically incompetent or are otherwise unable to make medical decisions for yourself.

If you slip into a coma, for instance, a medical power of attorney would give your agent the right to make decisions regarding your care until you emerge from the coma.

Again, this is a powerful document. Make sure you only give this power to someone you trust. Your agent could be making life-or-death decisions regarding your medical care on your behalf.

When Should I Consider Creating A POA?

It’s fairly easy to determine when you should create a limited power of attorney: You draft one of these arrangements when you need to sign papers or close a financial transaction, but you can’t attend the closing or transaction in person.

Maybe you have been deployed overseas by the U.S. Military. You might grant your real estate agent a limited power of attorney to sign closing documents on the home you are buying. Maybe you frequently travel. You might grant your attorney a limited power of attorney to pay your bills on your behalf when you are out of the country.

Deciding when to grant medical or general power of attorney is more complicated. These POAs are often included in estate plans. Often, a medical or general power of attorney lies dormant until a specific event occurs. For instance, you might grant your spouse or one of your children medical power of attorney. But that power isn’t active unless you are injured or become medically incapacitated. Once this triggering event happens, the medical power of attorney becomes active.

How Is Power Of Attorney Created And When Does It Go Into Effect?

If you are ready to create a power of attorney agreement, it’s important to work with an attorney who specializes in family law or estate planning. Attorneys can create power of attorney arrangements at any time. These arrangements often won’t go into effect until a triggering effect occurs.

For instance, your general power of attorney agreement might not kick in unless you have to leave the country for more than four months. The medical power of attorney arrangement you created might lie dormant unless you lose consciousness or are declared medically incompetent.

There are times when power off attorney agreements never go into effect. Maybe you are never declared medical incompetent. If that’s the case, your medical power of attorney arrangement might lie dormant until your death.

Durable Power Of Attorney

Durable power of attorney can be a useful tool if you are worried about suffering a medical emergency that could render you incapable of making your own decisions regarding your healthcare and finances. By creating a durable POA, you can eliminate any confusion when doctors and family members have to make quick decisions about your medical care or finances.

This power of attorney authorizes your agent to act on your behalf regarding your healthcare, and financial and business decisions. This power remains active even if you become incapacitated.

Your agent or attorney-in-fact can, under a durable power of attorney, manage your bank accounts and pay your bills, continue depositing money in your investments, make decisions on your medical care, handle business transactions, and oversee the buying and selling of real estate.

These are big decisions, so it is important to grant this power only to someone whom you trust will make decisions in your best interest. Many people grant durable power of attorney to their spouses or one of their children.

Springing Power Of Attorney

The Springing Power of Attorney document lists the specific set of circumstances that cause a POA to go active, or “spring” into effect.

For instance, a durable power of attorney might spring into effect if you should fall unconscious or slip into a coma. The power might become active if a doctor declares that you are incapable of making decisions on your own.

A Springing Power of Attorney document might also state if more than one doctor must declare you mentally incompetent. It might also name specific doctors who must make this determination.

What Is The Role Of State Law?

Creating a power of attorney agreement might be more complicated depending upon the state in which you live. Some states might require POAs to be registered with county recorders or specific banking institutions.

This is why it is important to work with an attorney familiar with family law in your state before you draft a power of attorney document.

What Are The Agent’s Responsibilities With POA?

Be careful when deciding upon an agent or attorney-in-fact. Those named as agents in POA agreements are legally required to act as fiduciaries of you. This means that they must keep your best interests in mind when making decisions on your behalf.

Remember, agents named in a general power of attorney have unlimited access to your finances and legal documents. Agents could very easily take advantage of this. Again, this is a reminder to only select agents whom you absolutely trust.

Are There Any Limits On An Agent’s General POA?

There are three actions that agents named in POAs can’t take on your behalf.

Marriage

In most U.S. states, your agent can’t sign a marriage contract on your behalf.

Change Or Create A Will

If you created a will before you were declared incompetent, your agent can’t change it. If family members question whether you really were competent when the will was created, they can take their concerns to court.

Vote

Your agent can’t vote on your behalf, but they can request an absentee ballot on your behalf.

How Do I Choose Who Should Have My POA?

Choosing the right person to wield power of attorney on your behalf is a challenging decision. You want someone you can trust, which is why many people name their spouses or one of their children in their POA agreements.

Trust isn’t the only factor to consider, you also want an agent who has the skills necessary to make important financial and healthcare decisions. And you don’t want to create a rift in your family. Consider whether granting one child power of attorney will cause resentment among those children who were not granted this authority. It’s important to discuss power of attorney with your family members and your attorney before you are declared incompetent.

Children should speak with their parents, too, about how finances and medical decisions should be handled. This will help ease some of the stress when a parent becomes incapacitated. If you are concerned about your parents’ well-being, make sure to learn about their finances – including the location of bank accounts and savings – before they become incompetent.

Power Of Attorney FAQs

Can I Change Or Revoke My POA?

As long as you are not declared incompetent, you can always change or tweak your power of attorney. It makes sense to review your power of attorney on a regular basis. You can then change this document if certain life changes – a divorce or a new marriage, for instance – warrant a partial redo.

Does The Agent Get Paid For Work Performed?

Agents usually do not receive payment for taking on power of attorney if they are a family member, spouse or friend. However, if you feel more comfortable working with an outside third party, you can pay an attorney or other professional to take on these duties.

Can I Appoint Multiple Or Joint Agents? 

You can create separate power of attorney agreements and assign a different agent to handle each one. You might have a medical power of attorney with your spouse as your agent. You might also have a general power of attorney governing your finances. For that power of attorney agreement you might name your attorney as your agent.

Having multiple agents might act as a check against poor decision-making. But it might also lead to disputes. It’s important to spell out in your POAs whether your agents have full authority in their specific area – finance, medical or business decisions, for example – or whether you want your multiple agents to decide issues jointly.

What If My Spouse Is My Agent And We Get Divorced? 

It’s natural to name your spouse as your agent in a power of attorney document. But what if you and your spouse get divorced? You could hedge against this by stating that the POA terminates if you and your spouse do end your marriage. In some states, this happens automatically.

If your POA doesn’t terminate automatically after a divorce, make sure you end the agreement once divorce proceedings begin.

What If I Regain My Competency?

A finding of competency by medical professionals will end a medical power of attorney agreement. You can then retake control over your financial and medical decisions.

Summary: Power Of Attorney: Choose Carefully

Creating a power of attorney agreement is an important way to ensure that your financial and health decisions are made by someone you trust. The key is to only bestow this power on someone you trust and who has the skill sets needed to make sound decisions on your behalf.

Of course, power of attorney agreements are just one aspect of estate planning and your financial health. Visit our library of finance articles to learn more about your personal finances.

Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, RocketMortgage.com and RocketHQ.com.