When and Why You Need One

What Is a Power of Attorney (POA)?

A power of attorney (POA) is a legal document that grants another person, called an agent or attorney-in-fact, the authority to make decisions on your behalf. Its uses are broad, from enabling someone to close a real estate sale for you while you’re abroad to appointing a health care proxy if you become incapacitated. Without a POA in place, a court may have to appoint someone to manage your affairs—a potentially costly, public, and emotional process.

Types of Power of Attorney

There are several types of powers of attorney, each designed for different situations and needs.

General Power of Attorney 

With a general power of attorney, an agent can do anything on behalf of the principal who signed the document. These tasks are wide-ranging, from managing bank accounts and payments to conducting real estate transactions. Given the powerful nature of these documents, principals may choose to place limits on the POA, such as establishing a time limit or only permitting certain actions.

Durable Power of Attorney 

Like a general power of attorney, a durable power of attorney also grants the agent wide-ranging responsibilities. However, the notable difference is that a durable power of attorney will stay in effect even if you, as the principal, become incapacitated, such as during a medical event. It basically takes effect as soon as it is signed and stays in place unless you revoke it (or upon death).

Special or Limited Power of Attorney 

Let’s say you don’t want to hand the keys to the kingdom to your designated agents. This is where a special or limited power of attorney comes into play. With these documents, you can elect an agent to perform specific tasks. For example, a family member can appear on your behalf to close a real estate transaction if you’re out of the country.

Springing Power of Attorney

Like its name suggests, this kind of POA takes effect upon the occurrence of a specific event or condition. One of the more common uses of a springing power of attorney is to elect an agent upon the principal’s physical incapacitation or if a doctor determines they can no longer manage their own affairs due to cognitive impairment.

When Do You Need a Power of Attorney?

Financial Management 

A POA plays a critical role in estate planning. Whether you own a business and multiple properties or live a simpler lifestyle, it ensures your financial affairs are handled if you become incapacitated. 

Having a springing POA in place in the event of mental decline will ensure the principal’s affairs are handled by a person they trust and avoid the potential hassles of court intervention, which can lead to family conflict. 

Health Care Decisions

Beyond ensuring that your wishes are followed at the end of your life, a power of attorney could also play an important role during emergencies. 

Let’s say a principal is incapacitated in a car accident. A POA ensures a trusted agent could quickly make health care decisions and take care of financial matters in their absence (assuming they’re elected to do both). Without an agent, family members may need to petition a court to appoint a guardian, which could be emotionally fraught, expensive, and time-consuming.

Legal and Business Matters 

Establishing a POA will ensure someone you trust handles your legal and business affairs according to your wishes in case you are incapacitated. Without these legal documents in place, family members can petition a court to elect a conservator to oversee a principal’s affairs if they are, say, in a coma. Conservators are under court supervision and may not fulfill an individual’s wishes as intended.

How To Create a Power of Attorney

Legal Requirements

The only legal requirements for creating a POA are that the principal must be 18 years old and of sound mind. You can find forms online, such as through the IRS or United States Courts, that allows you to elect a POA. 

Choosing an Agent

Deciding which person to choose as your POA is the most important part of the process.  The individual you elect can have extensive decision-making power on your behalf. It may be a family member such as a spouse or child. It’s important you trust them and their judgment. 

Here is advice from the American Bar Association (ABA): “There are no special qualifications necessary for someone to act as an attorney-in-fact except that the person must not be a minor or otherwise incapacitated. The best choice is someone you trust. Integrity, not financial acumen, is often the most important trait of a potential agent.”

Revoking a Power of Attorney

You can revoke a power of attorney anytime, provided you are mentally competent. According to the ABA, most states require written notice to the person named as your agent. Typically, a power of attorney can be revoked by putting your intent in writing (it may have to be notarized) or intentionally destroying the original document. It’s worth noting that all powers of attorney end upon the principal’s death.

Potential Risks and Considerations

The biggest risk with granting a power of attorney is that your elected agent does not follow through on your wishes or abuses their position. While this issue can be mitigated by setting limits within your POA, it’s essential to only designate an individual you fully trust to be your agent. 

A power of attorney can also set off family issues if there are disagreements over the choice of agent and how they conduct business. Open communication about your choices with family and loved ones can help prevent misunderstandings and potential disputes.

The Bottom Line

It’s often said to expect the unexpected. Anything can happen in life, including events that may leave you incapable of managing your affairs and making decisions. While you are still of sound mind, it’s best to put a power of attorney in place to ensure your wishes are followed in case you are incapacitated. 

The process of naming a power of attorney is generally inexpensive, straightforward, and invaluable for protecting your future. An attorney or estate planner can help you create these documents.