What Is Power of Attorney?
Power of attorney (POA) is a legal authorization that gives a designated person, termed the agent or attorney-in-fact, the power to act for another person, known as the principal. The agent may be given broad or limited authority to make decisions about the principal's property, finances, investments, or medical care.
- 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 decisions about the principal's property, finances, or medical care.
- The POA is often used when the principal can't be present to sign necessary legal documents for a financial transaction.
- A durable power of attorney remains in effect if the principal becomes ill or disabled and cannot act personally.
Understanding Power of Attorney
Power of attorney is most frequently used in the event of a principal's temporary or permanent illness or disability, or when the principal is unable to be present to sign necessary documents.
A power of attorney can end for several reasons, such as when the principal revokes the agreement or dies, when a court invalidates it, or when the agent can no longer carry out the responsibilities outlined. In the case of a married couple, the authorization may be invalidated if, the principal and the agent divorce.
There are many types of powers of attorney. A “durable” power of attorney takes effect when the document is signed while a “springing” power of attorney comes into effect only if and when the principal becomes incapacitated. A power of attorney may also be limited to medical matters, enabling the agent to make crucial decisions on behalf of an incapacitated person.
Most powers of attorney documents authorize 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 the principal becomes incapable of making decisions for themself, the agreement would automatically end.
A power of attorney for use in case of need might be considered by anyone planning for unexpected incapacitation or long-term care, no matter how remote such events appear to be. It might also be needed for someone expecting to be away from home and difficult to reach for some time. It can be a general or limited power of attorney.
A person who wants the power of attorney to remain in effect after the person’s health deteriorates would need to sign a durable power of attorney (DPOA).
Types of Power of Attorney (POA)
There are two key types of power of attorney (POA), one with general powers and one with limited powers.
A general power of attorney allows the agent to act on behalf of the principal in any matters, as allowed by state laws. The agent under such an agreement may be authorized to handle bank accounts, sign checks, sell property, manage assets, and file taxes for the principal.
A limited power of attorney gives the agent the power to act on behalf of the principal in specific matters or events. It might explicitly state that the agent is only allowed to manage the principal's retirement accounts.
A limited power of attorney may be in effect for a specific period. For example, if the principal will be out of the country for two years, the authorization might be effective only for that period.
A person appointed as power of attorney is not necessarily an attorney. The person could be a trusted family member, friend, or acquaintance.
Durable Power of Attorney (DPOA)
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., taking the principal off life support is not up to a DPOA).
Healthcare Power of Attorney (HCPA): The principal can sign a durable power of attorney for health care, or healthcare power of attorney (HCPA). if they want 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.
Financial Power of Attorney: 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, such as signing checks, filing tax returns, mailing and depositing Social Security checks, and managing investment accounts, in the event, the latter becomes unable to understand or make decisions. 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 their ability.
When the agent acts on behalf of the principal by making investment decisions through a broker or medical decisions through a healthcare professional, both institutions would ask to see the DPOA. Although the DPOA for both medical and financial matters can be one document, it is good to have separate DPOAs for healthcare and finances. Since the DPOA for healthcare will have the principal's personal medical information, 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 occur before the DPOA springs into effect. A power of attorney can remain dormant until a negative health occurrence activates it to a DPOA.
How to Setup a Power of Attorney (POA)
You can buy or download a power of attorney template. If you do, be sure it is for your state, as requirements differ. However, this document may be too important to leave to the chance that you got the correct form and handled it properly.
A better way to start the process of establishing a power of attorney is by locating an attorney who specializes in family law in your state. If attorney's fees are more than you can afford, legal services offices staffed with credentialed attorneys exist in virtually every part of the United States. Visit the Legal Services Corporation's website, which has a "Find Legal Aid" search function. Clients who qualify will receive pro bono (cost-free) assistance.
Many states require that the signature of the principal (the person who initiates the POA) be notarized. Some states also require that witnesses' signatures be notarized.
The following provisos apply generally, nationwide, and everyone who needs to create a POA should be aware of them:
- There is no standard POA form for all 50 states; state law and procedures vary
- All states accept some version of the durable power of attorney
A few key powers cannot be delegated. These include the authority to do the following:
- Make, amend, or revoke a will
- Contract a marriage in most states, although a handful of states allow it
- Vote (but the guardian may request a ballot on behalf of the principal)
While the details may differ, the following rules apply coast to coast:
Put It in Writing
While some regions of the country accept oral POA grants, verbal instruction is not a reliable substitute for getting each of the powers of attorney granted to your agent spelled out word-for-word on paper. Written clarity helps to avoid arguments and confusion.
Use the Proper Format
Many variations of power of attorney forms exist. Some POAs are short-lived; others are meant to last until death. Decide what powers you wish to grant and prepare a POA specific to that desire. The POA must also satisfy the requirements of your state. To find a form that will be accepted by a court of law in the state in which you live, perform an internet search, check with an office supply store or ask a local estate planning professional to help you. The best option is to use an attorney.
Identify the Parties
The term for the person granting the POA is the "principal." The individual who receives the power of attorney is called either the "agent" or the "attorney-in-fact." Check whether your state requires that you use specific terminology.
Delegate the Powers
A POA can be as broad or as limited as the principal wishes. However, each of the powers granted must be clear, even if the principal grants the agent "general power of attorney." In other words, the principal cannot grant sweeping authority such as, “I delegate all things having to do with my life.”
In most states, a power of attorney terminates if the principal is incapacitated. If this happens, the only way an agent can keep their powers is if the POA was written with an indication that it is "durable," a designation that makes it last for the principal's lifetime unless the principal revokes it.
Notarize the POA
Many states require powers of attorney to be notarized. Even in states that don't, it is potentially easier for the agent if a notary’s seal and signature are on the document.
Not all powers of attorney must be recorded formally by the county to be legal. But recording is standard practice for many estate planners and individuals who want to create a record that the document exists.
Some states require specific kinds of POAs to be filed with a court or government office before they can be made valid. For instance, Ohio requires that any POA used to grant grandparents guardianship over a child must be filed with the juvenile court. It also requires a POA that transfers real estate to be recorded by the county in which the property is located.
Choosing a Power of Attorney
Like the property deed for your house or car, a POA grants immense ownership authority, and responsibility. It is a matter of life and death in the case of a medical POA. And you could find yourself facing financial privation or bankruptcy if you end up with a mishandled or abused durable POA. Therefore, you should choose your agent with the greatest care to ensure your wishes are carried out to the greatest extent possible.
It is critical to name a person who is both trustworthy and capable to serve as your agent. This person will act with the same legal authority you would have, so any mistakes made by your agent may be difficult to correct. Even worse, depending on the extent of the powers you grant, there may be a danger for self-dealing. An agent may have access to your bank accounts, the power to make gifts and transfer your funds, and the ability to sell your property.
Your agent can be any competent adult, including a professional such as an attorney, accountant, or banker. But your agent may also be a family member such as a spouse, adult child, or another relative. Naming a family member as your agent saves the fees a professional would charge, and may also keep confidential information about your finances and other private matters “in the family."
Naming Children as Power of Attorney
Parents who create POAs very commonly choose adult children to serve as their agents. Compared to naming one’s spouse as the agent, the relative youth of the child is an advantage when the purpose of the POA is to relieve an aging parent of the burden of managing the details of financial and investment affairs or provide management for an aging parent’s affairs should the parent become incapacitated.
In these cases, a spouse named as the agent who is near the same age as the person creating the POA may come to suffer the same debilities that led the POA’s creator to establish it, defeating its purpose. When the child is honest, capable, and respects the parent’s desires, this can be the best choice for a POA.
When there is more than one child, parents may struggle with the decision of who to select for the role of the agent. This is not a decision to be taken lightly. Your agent named under your POA acts with your authority, so costly financial mistakes resulting from carelessness or lack of financial understanding may be impossible to fix. The same is true of acts that create interfamily conflict by favoring some members over others.
Worst of all, when delivered into the wrong hands, a POA can create a veritable “license to steal,” giving your agent access to your bank accounts and the ability to spend your money or take other wrongful actions.
Children have different characters, skills, and circumstances, and a wise selection of children as agents, and of the powers given to them, can avert these dangers. The good news is that you can have multiple POAs naming separate agents and customize them for each child’s skill set, temperament, and ability to act on your behalf.
Consider these three key factors when choosing which child you want to give important powers to under a POA:
Trustworthiness: This is the single most important trait for an agent named under a POA. This includes not just honesty but also reliability in performing tasks that need regular attention, from managing an investment portfolio to paying bills, and diligence in acting according to your wishes.
Abilities of each child: Specific abilities of different children may make them best suited to take on particular roles in managing your financial affairs. You can use “limited” POAs to give different children defined and limited powers over different aspects of your finances. These may include the following:
- Managing everyday expenses of the family
- Receiving income from and paying expenses on real estate
- Controlling a financial portfolio
- Managing insurance and annuities
- Running a family’s small business
Multiple agents: More than one agent can be named by a POA, either with the authority to act separately or required to act jointly. Having two children separately authorized to manage routine items can be a convenience if one becomes unavailable for some reason while requiring two to agree on major actions like selling a house can assure family agreement over major decisions.
Say one child is a busy financial expert living in a distant city, while another works part-time and lives conveniently close by. You can have one POA that names the first to manage your investment portfolio and another that names the second to manage your routine daily expenses and pay monthly bills.
Naming multiple agents can cause problems if disputes arise between them. For instance, if two children are required to act jointly in managing an investment account but disagree over how to do so, it may be effectively frozen. So when choosing two children to act jointly as agents under a POA, be sure they have not only the skills for the task but personalities to cooperate.
Risks of Naming Children as Power of Attorney
Mistakes—and worse, acts of self-dealing—committed by your agent can be extremely costly. This is especially so with a durable POA that gives broad control over your affairs during a time when you are incapacitated.
You must be convinced that the agent will follow your instructions, can do so, and will pursue your wishes even over the objections of other family members if need be.
Never name a child to be your agent as a matter of “fairness,” to avoid hurt feelings or to preserve family harmony, if you lack trust. The powers are far too important to be granted other than on the merits of trustworthiness and ability. Beware of naming a child as your agent if:
- You experience difficulty, awkwardness, or resistance when explaining to the child the duties to be taken on as your agent under the POA
- The child may not be available to perform the duties, or not be reliable in doing so due to their concerns or distractions
- The child has a history of problems with gambling or substance abuse
- The child has serious debts or has been irresponsible in managing their finances and affairs
- The child is engaged in intra-family conflicts that may result in using the powers received under the POA to favor some family members over others
General Risks in Naming a POA
Be aware of the dangers of theft and self-dealing created by a POA, even when your agent is your child. To minimize the risk of such wrongdoing, in addition to the steps mentioned above, have your POA require your agent to report all actions periodically to an outside party, such as the family’s accountant or attorney. In other words, “trust but verify.” A capable attorney can draft your POA to include these safeguards under your state’s laws.
As family circumstances change, periodically review and update the POAs you have created. You can revoke a POA simply by writing a letter that identifies it and states that you revoke it, and delivering the letter to your former agent. (Some states require such a letter to be notarized.) It’s a good idea to also send copies to third parties with whom the agent may have acted on your behalf. Then create a new POA and deliver it to your new choice of agent.
A power of attorney can provide you with both convenience and protection by giving a trusted individual the legal authority to act on your behalf and in your interests. Adult children who are both fully trustworthy and capable of accomplishing your wishes may make the best agent under your POA. But don’t name a person the agent simply because they are your child. Be sure your agent is trustworthy and capable as a first requirement, whomever you name.
Getting Your Parents to Create a Power of Attorney
If you are the child as opposed to the parent in this situation, you face a different set of obstacles.
Parents often are reluctant to give others power over their affairs. Moreover, a POA applies to individuals, not couples, so the challenge is to convince each parent to create a POA. If you have a parent who is reluctant to do so, try the following ideas to persuade them.
Warn of the dangers of not having POAs. If a parent becomes incapacitated and unable to manage their affairs without a POA in place that enables a named agent to step in and do so, then nobody may have the legal right to do so. For instance, nobody may have the right to take IRA distributions the parent needs for income or to borrow funds to pay medical bills or deal with the IRS concerning the parent’s taxes.
It then will be necessary to go to court to seek to be named as a conservator or guardian for the parent, a course that may prove costly and slow—and could be contested, causing family conflicts.
Suggest customized POAs for their needs. There are many different kinds of POAs, and a person can have more than one. While a general POA enables the agent to act with the authority of the POA’s creator in all matters, a special POA can limit that authority to a specific subject, such as managing an investment account, or to a limited period, such as while the creator of the POA is traveling abroad.
Convince your parents by crafting one or more POAs to meet a parent’s specific wishes.
You can begin by suggesting a special POA to be used only to provide a convenience that the parent will value—such as one that enables you to prepare and file the parent’s tax return and manage the parent’s dealings with the IRS. A parent who benefits from one POA is more likely to then become open to using others.
Appeal to Them
Ask parents to create POAs for the sake of everyone in the family—including the children and grandchildren—who may be harmed by the complications and costs that result if a parent is incapacitated without a durable POA in place to manage the parent’s affairs.
The creator of a POA may, and should, be concerned about the risk that the agent will abuse the powers received under it. Insure against this by having the POA require that the agent periodically report all actions taken to a trusted third party whom family members agree upon, such as the family’s lawyer or accountant. Or have them name two agents and require they agree on major transactions, such as the sale of a home.
Persons of all ages gain valuable protection from having a durable POA, as one can become unexpectedly incapacitated at any stage of life. One way to encourage a reluctant parent to create a durable POA is to create one for yourself and ask your parents to join you by doing the same.
Consult Trusted Advisors
Obtaining POAs from your parents can provide valuable benefits to both them and the entire family. If they are reluctant to grant broad powers at once, you may still be able to convince them to do so gradually. But don’t delay, or there may be costly consequences.
A person must be mentally competent to create a power of attorney. Once a parent loses the capability to manage their affairs it is too late, and court proceedings likely will be necessary.
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.
What does having power of attorney do?
Power of attorney (POA) is a legal status granted to somebody that allows them to act on your behalf. The person given POA may have either broad or narrow legal authority, depending on how it is spelled out in the POA document, to make legal decisions about one's property, finances, or medical directives.
Can somebody with power of attorney do anything they please?
No. The scope of legal authority granted by POA is laid out when it is established. Furthermore, the person that is granted power of attorney has a legal fiduciary duty to make decisions that are in the best interests of the person for whom they are representing.
What is a durable power of attorney?
Making a power of attorney "durable" means that it remains in force even if the person they are representing becomes mentally or physically incapacitated. An example of this would be if the principal goes into a coma or suffers amnesia. A durable power of attorney, however, does not persist after the client's death. If the power of attorney is not designated as durable, and the client becomes mentally incapacitated, the authority is voided.
How can I revoke power of attorney I have given to somebody?
Power of attorney can be terminated if you expressly revoke it. It may also have a set termination date or duration of time for which it is in force. If you become mentally incapacitated it will also cease unless it is a durable power of attorney. If you die, all powers of attorney cease.
Who can I name to have power of attorney?
You can technically name anybody to have POA, so long as it is done under your free will and you are mentally competent. It should be somebody trustworthy and capable, such as a spouse, close family member, or friend. You may also designate your lawyer to have a POA.