A power of attorney (POA) is a legal document in which the principal (you) designates another person (called the agent or attorney-in-fact) to act on your behalf to make decisions in specified matters or in all matters. It can also refer to the individual designated to act in this way.

Key Takeaways

  • A power of attorney (POA) is a legal document that gives an individual, called the agent or attorney-in-fact the authority to take action on behalf of someone else, called the principal.
  • The agent can have either extensive or limited authority to make legal decisions about the principal's property, finances, or health care, depending on the terms of the POA.
  • A POA is often used in the case of a principal's illness or disability, or when the principal is going to be out of the country for a long period of time and won't be available to make legal decisions.
  • A POA can be established by an individual, provided it is notarized and witnessed, or with the help of an attorney; it can be canceled by destroying the old document and making a new one or by informing all parties that it is no longer valid.

How Power of Attorney (POA) Works

Special circumstances may trigger the need for a POA for any person over the age of 18. For example, military personnel may create a POA before they deploy overseas, (especially if they are leaving behind their families) so that someone can act on their behalf should they become incapacitated.

Incapacity isn't the only reason you might need a POA, though. Younger people who travel a great deal might set up a POA so that someone can handle their affairs, especially if they have no spouse to do so in their absence.

However, the most common time to establish a POA comes when someone, usually in retirement, is elderly—or if a person faces a serious, more long-term health crisis that cannot easily be navigated.

If you are not able to act on your own behalf due to mental or physical incapacity, an agent may be called upon to make financial decisions to ensure your well-being and care. These may include paying bills, selling assets to pay for medical expenses, as well as taking steps for the purpose of Medicaid planning. You can detail the scope and extent of what you wish your agent to do in the power of attorney.

Some of the most important features of a POA is the authorization to make banking transactions, real estate decisions, deal with government or retirement benefits, and healthcare billing. Under a POA, these powers may be limited or expanded depending on the principal's needs and intentions.

Setting up a POA

Here's how it works: You select someone you trust to handle your affairs if and when you cannot. You could establish a POA that only happens when you are no longer capable of handling your affairs yourself—or one that goes into effect immediately so your agent can act for you in your absence. Your spouse, by the way, does not automatically have your power of attorney over property that is in your name only.

A POA will define what the agent can do on your behalf, and in what circumstances. Some powers of attorney are limited. For instance, the POA could merely empower someone to represent you at a real estate closing in a distant town. Also, note that even when a general POA contains no such limiting language, it usually only operates while the person conveying the power, called “the principal,” has full capacity.

Anyone can set up a POA. One way is to find a template online that satisfies the requirements of the state in which you live, and execute it properly (it will need to be notarized and you may need witnesses). Given the legal complexities, however, it may be prudent to have an attorney draw up your POA, especially if you plan to have both a medical and a regular durable one.

To set up a legally binding POA, the principal must have sufficient mental capacity when the document is drawn up. This means that he or she must fully understand the nature and effect of the document.

The POA can be canceled or revoked at any time simply by destroying the original document and preparing a new one, or by preparing a formal revocation document informing all concerned that the POA is no longer a valid instrument. Again, here is where an attorney may be useful.

Types of POA include conventional, also known as a limited power of attorney, durable, which lasts for a lifetime unless you cancel it, springing, which only comes into play for specific events, and medical, also known as a durable power of attorney for healthcare.

What Happens If You Lack One

POAs are not just reassuring; they may become the instruments that protect your financial and realty interests, your health, and even your manner of dying. If you are incapacitated and have no POA designee to take the wheel, your family will likely be forced into costly and time-consuming delays.

But principals have to set up a POA for themselves. A family can't "get" a POA when they suddenly realize that Great Uncle Albert can't handle his affairs. If Uncle Albert didn't have the foresight to establish a POA, a court will have to appoint a guardian or conservator. And when a court does this, neither Uncle Albert nor his family has any control over who is appointed. In some states, the guardian is required to post a bond and file a detailed inventory and accounting of the person's relevant assets. The entire affair is more complicated, more costly—and more public —when a POA is not already in place.

POAs differ depending on when you want the authority to start and end, how much responsibility you want to give your agent, and the laws in the state where you live. There is no uniform POA common to every state. States have different requirements for establishing a power of attorney—Pennsylvania’s statute, for instance, makes the legal assumption that a power of attorney is durable (see below), and make sure to be informed on whether sure durability is added to or specifically stated in the POA.

Using an attorney to draw up the POA will help ensure that it conforms with state requirements. Since a POA may be questioned if an agent needs to invoke it with a bank or financial services company, you should ask an attorney about prior experience in drafting such powers. You want to select someone not only familiar with state requirements, but also with the issues that can arise when a power is invoked. Why? So the attorney can use language that will make clear the full extent of the responsibilities that you wish to convey.

Four Types of POAs

There are several types of POAs, as well as various degrees of responsibility that you can delegate.

Conventional POA

This starts when it is signed and continues in force until you become mentally unable to make coherent decisions. It is important to state exactly what authority you are giving your agent. It could be something very specific, like giving your attorney the power to sign a deed of sale for your house while you're on a trip around the world. Called a "limited power of attorney," it can be quite common in everyday life; it is what gives money managers the authority to buy and sell investments for their clients' IRAs, for example. Or you could specify a much broader range of powers, such as access to your bank accounts (what's known as a "general power of attorney").

Durable POA

A durable POA begins when it is signed but stays in effect for a lifetime unless you initiate the cancelation. Words in the document should specify that your agent's power should stay in effect even if you become incapacitated. Durable POAs are popular because the agent can manage affairs easily and inexpensively.

Springing POA

This POA comes into play only when a specific event occurs—your incapacitation, for instance. A springing power of attorney must be very carefully crafted to avoid any problems in identifying precisely when the triggering event has happened.

Medical POA

A medical POA, or durable power of attorney for healthcare decisions, or health care proxy, is both a durable and a springing POA. The springing aspect means that the POA takes effect only if specific conditions take place. As long as the principal is conscious, and of sound mind and body, the medical POA will not be triggered. Some medical POAs are written to end when the principal recovers from the incapacitating condition. You can have different POAs for different situations and appoint different agents to hold them as well.

A Will Is Not a POA

Do not expect your will to serve as a substitute for a power of attorney. A will designates the distribution of your property after death. POAs support the continuation of critical financial and/or health-related decisions that you would want or need to be made if you are unable to make them yourself.

However, you can have a living will in addition to a healthcare POA. A living will usually addresses specific issues and wishes related to medical treatment if you have a terminal condition, or to dying (such as the extent to which lifesaving measures should be used).

A living will does not always deal with other important medical issues, however, such as whether you would decline dialysis or a blood transfusion. These are the kinds of concerns that can be directly articulated in a durable power of attorney for healthcare decisions.

Who Should Have Your POA?

The risks of naming someone your agent or attorney-in-fact through a POA are obvious. It must be someone you trust without hesitation. Depending on how you worded your POA, the person you select will have access to and be able to make decisions about your health, home, business affairs, personal property, and financial accounts.

It is useful to contact each institution you do business with to be certain that your POA authority will be honored. Some banks and financial institutions have their own forms to complete.

You may name more than one person to act as your agent and ask that they work together. However, bear in mind that they may not always have the same view of what needs to be done. You should also appoint a successor agent, in the event that the agent you originally chose cannot serve in that capacity when the need arises. 

Signing a POA does not deprive you of control over your personal affairs. It is a contingency document that becomes a powerful instrument only when it is needed.

The Bottom Line

Choosing someone to hold your power of attorney and specifying that it will operate even if you lose capacity ensures that you have a plan in place for administering your financial and personal affairs if you are ever unable to do so.

This gives you more control over how that process will be handled should the need ever arise. If you move to another state, your power of attorney should remain effective; however, the American Bar Association recommends that you use such a move to update your power of attorney. The power expires upon your death.