What Is a Power of Attorney and How Does It Work?

In this article...
  • A power of attorney document gives a designated person the power to act on your behalf. Read on to learn more about these legal documents and how they work.

When it comes to estate planning, wills and trusts get most of the attention. Although these arrangements are important, you may also need to create a power of attorney agreement to ensure you have at least one person ready and able to act on your behalf should you become incapacitated due to an accident or illness.

Keep reading to learn more about what power of attorney is, why it's important and how it can be used to protect your interests.

Power of Attorney Overview

A power of attorney designates at least one person to serve as your agent or attorney-in-fact. When the power of attorney is in effect, your agent has the authority to make decisions on your behalf. The extent of their authority depends on the type of power of attorney you signed.

Durable Power of Attorney

A durable power of attorney gives your agent the power to act on your behalf. It also contains a clause that continues the agreement even if you become incapacitated.

General Power of Attorney

General powers of attorney give agents broad authority to make decisions on behalf of their principals. For example, a general power of attorney typically gives an agent the authority to manage a principal's finances or open bank accounts in the principal's name.

A general power of attorney doesn't have a durable clause, so the arrangement ends as soon as the principal dies or becomes incapacitated.

Springing Durable Power of Attorney

A springing durable power of attorney is similar to a regular durable power of attorney, except it isn't effective until a certain event occurs. For example, a springing power of attorney document may contain a clause indicating it will go into effect once the principal is no longer able to manage his or her own affairs.

Limited Power of Attorney

General and durable powers of attorney are very broad; the limited power of attorney, in contrast, gives the agent a limited amount of power. With this type of arrangement, the agent is only allowed to carry out specific duties.

For example, a limited power of attorney may specify that an agent is allowed to sell a piece of real estate on behalf of the principal. The limited power of attorney is also known as the special power of attorney.

Health Care Power of Attorney

The health care power of attorney gives your agent the authority to act if you become incapacitated and can't make decisions regarding your medical care. Your agent serves as a health care proxy, or the person authorized to communicate with doctors and other medical professionals about the treatment you receive.

If you're critically ill, your agent is responsible for ensuring that your wishes are fulfilled when it comes to the use of ventilators, feeding tubes and other life-support techniques.

Choosing an Agent

If you decide to set up a power of attorney agreement, it's important to choose an agent you trust. Depending on the type of power of attorney you select, your agent may have the authority to manage your financial matters, buy and sell property on your behalf, open and close credit accounts and carry out other activities that have a major impact on your life.

You should choose someone you trust to make decisions based on what's in your best interests. In many cases, this is a family member, but you can also choose a trusted friend.

You're allowed to appoint more than one person to serve as your agent; however, remember that multiple agents may not be available at the same time should you become incapacitated and need them to make decisions on your behalf. You'll have to decide if you're okay with a majority of the agents making a decision even if other agents aren't available.

Even if you're comfortable appointing a single agent, it's important to name a successor. If something happens to your agent, or your agent is not available when needed, the successor will be able to step in and make decisions on your behalf.

For example, if your designated agent isn't mentally competent, the successor will be responsible for handling your financial affairs and carrying out other terms of the POA.

Powers Granted to Attorneys-in-Fact

The rules for power of attorney documents vary from state to state, so it's important to speak to an attorney in your area to learn the ins and outs of creating a power of attorney in your jurisdiction.

Depending on where you live, you may be able to give your agent some of the following powers:

  • Create or amend a trust
  • Transfer assets to other people or organizations
  • Give monetary gifts to family members and friends
  • Make charitable donations on your behalf
  • Sell real estate or valuable personal property

How Long Does a Power of Attorney Last?

A durable power of attorney allows a person to act on your behalf until you pass away or revoke it. Other types of POA documents need to be renewed to ensure they remain valid.

These agreements are typically valid for a specific period of time; unless you renew the power of attorney as required, it will eventually expire.

Power of Attorney Templates

Templates are available to help you create your own power of attorney documents, but you should consider meeting with an attorney to discuss your wishes and have the POA drawn up by a professional.

The POA is a legal document with far-reaching implications. If it isn't drafted correctly, it could have negative consequences for you or your agent. Without extensive legal knowledge, it's easy to overlook terms that should be included in the POA to protect you and your attorney-in-fact.

An attorney can also help you determine if you need additional protection in the form of a will or trust. Seeking legal advice is especially important if you have a high net worth or a complicated financial situation. It may cost money to have an attorney draw up the POA papers, but the extra peace of mind is priceless.