Power of Attorney

What is a 'Power of Attorney'

A power of attorney (POA) is a legal document giving one person (the agent or attorney-in-fact) the power to act for another person (the principal). The agent can have broad legal authority or limited authority to make legal decisions about the principal's property and finance. The power of attorney is frequently used in the event of a principal's illness or disability, or when the principal can't be present to sign necessary legal documents for financial transactions.

A person appointed as power of attorney is not necessarily an attorney. The person could just be a trusted family member, friend, or acquaintance.

BREAKING DOWN 'Power of Attorney'

A power of attorney (POA) should be considered when planning for long-term care. There are different types of POA that fall under either a general power of attorney or a limited power of attorney. A general power of attorney acts on behalf of the principal in any and all matters, as allowed by the state. The agent under a general POA agreement may be authorized to take care of issues such as handling bank accounts, signing checks, selling property and assets like stocks, filing taxes, etc. A limited power of attorney gives the agent the power to act on behalf of the principal in only specific matters or events. For example, the limited POA may explicitly state that the agent is only allowed to manage the principal's retirement accounts. A limited POA may also be limited to a specific period of time e.g. if the principal will be out of the country for, say, two years.

Most POA documents allow an agent to represent the principal in all property and financial matters as long as the principal’s mental state of mind is good. If a situation occurs where the principal becomes incapable of making decisions for him or herself, the POA agreement would automatically end. However, someone who wants the POA to continue to remain in effect after the person’s health deteriorates would need to sign a durable power of attorney.

The durable power of attorney (DPOA) remains in control of certain legal, property, or financial matters specifically spelled out in the agreement, even after the principal becomes mentally incapacitated. While a DPOA can pay medical bills on behalf of the principal, the durable agent cannot make decisions related to the principal's health e.g. a decision on taking the principal off life support is not up to a DPOA.

The principal can sign a durable power of attorney for health care if he wants an agent to have the power to make health related decisions. This document, also called a healthcare proxy, outlines the principal’s consent to give the agent POA privileges in the event of an unfortunate medical condition. The durable POA for healthcare is legally bound to oversee medical care decisions on behalf of the principal.

Another type of DPOA is the durable power of attorney for finances, or simply a financial power of attorney. This document allows an agent to manage the business and financial affairs of the principal in the event that the latter becomes unable to understand or make decisions for himself. To the extent of what the agreement spells out as the agent’s responsibility, the agent has to carry out the principal’s wishes to the best of his ability. Some business or financial tasks include signing checks, filing tax returns, mailing and depositing Social Security checks, managing investment accounts, etc.

When the agent acts on behalf of the principal by making investment decisions through the broker or medical decisions through the healthcare professional, both institutions would ask to see the DPOA. Although the DPOA for both medical and finance can be one document, it is good to have separate DPOA for healthcare and finances. Since the DPOA for healthcare will have personal medical information of the principal, it would be inappropriate for the broker to have it, and the medical professionals don’t need to know the financial status of the patient either.

The conditions for which a durable POA may become active are set up in a document called the springing power of attorney. The springing POA defines the kind of event or level of incapacitation that should ensue before the DPOA springs into effect. A power of attorney can remain dormant until a negative health occurrence activates it to a DPOA.

A power of attorney can end for a number of reasons such as when the principal dies, the principal revokes it, a court invalidates it, the principal divorces his/her spouse who happens to be the agent, or the agent can no longer carry out the outlined responsibilities.

There are many good reasons to make a power of attorney, as it ensures that someone will look after your financial affairs if you become incapacitated. You should choose a trusted family member, a proven friend or a reputable and honest professional. Remember, however, that signing a power of attorney that grants broad authority to an agent is very much like signing a blank check - so make sure you choose wisely and understand the laws that apply to the document.