What Is a Power of Attorney (POA)?
The term power of attorney (POA) refers to a legal authorization that gives a designated person the power to act for someone else. As such, a POA gives the agent or attorney-in-fact the authority to act on behalf of the principal. The agent may be given broad or limited authority to make decisions about the principal's property, finances, investments, or medical care.
There are two main types of POAs, financial and health care—both of which provide the attorney-in-fact with general or limited powers.
- A power of attorney is a legal document that gives one person the power to act for another person.
- The person who receives the authority is the agent or attorney-in-fact while the subject of the POA is 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.
How a Power of Attorney (POA) Works
A power of attorney is a legal document that involves the agent or attorney-in-fact, and the principal. It is used in the event of a principal's temporary or permanent illness or disability, or when they can't sign necessary documents. The principal must choose a POA who they trust to handle their affairs for them. Documents can be obtained online or through a lawyer. Both parties must sign the paperwork. A third party is usually required to witness it.
Most POA documents authorize the 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 themselves, the agreement automatically ends.
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 POA 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.
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.
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).
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.
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.
Types of Powers of Attorney
The two key types of POAs are financial and health care. We outline some of the main differences between these two and highlight some of the main types of financial POAs.
Health Care Power of Attorney (HCPOA)
The principal can sign a durable power of attorney for health care, or health care POA (HCPOA), if they want an agent to have the power to make health-related decisions. This document also called a health care proxy, outlines the principal’s consent to give the agent POA privileges in the event of an unfortunate medical condition.
The POA for health care is legally bound to oversee medical care decisions on behalf of the principal. As such, it kicks in when the principal can no longer make health-related decisions on their own.
Financial Power of Attorney
The financial POA is a document that 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 when and if the latter becomes unable to understand or make decisions. The agent must carry out the principal’s wishes to the best of their ability, at least to the extent of what the agreement spells out as the agent’s responsibility. A financial POA gives that individual a wide range of power over one's bank account, including the ability to make deposits and withdrawals, sign checks, and make or change beneficiary designations.
Financial POAs can be divided up into several different categories. These are the general power POA, limited power POA, and durable POA.
General Power POA
This POA 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. This type of POA 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.
Durable Power of Attorney (DPOA)
The durable POA (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, such as taking the principal off life support. When the agent acts on behalf of the principal by making investment decisions through a broker, the broker would ask to see the DPOA.
The conditions for which a durable POA may become active are set up in a document called the "springing" power of attorney. A 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. A springing power of attorney should be very carefully worded to avoid any problems in identifying precisely when and if the triggering event has happened.
A person appointed as power of attorney is not necessarily an attorney. The person could be a trusted family member, friend, or acquaintance.
How to Setup a Power of Attorney
You can buy or download a POA 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. 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 POA forms exist. Some POAs are short-lived while 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 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 a general POA. In other words, the principal cannot grant sweeping authority such as, “I delegate all things having to do with my life.”
- Specify Durability: In most states, a POA terminates if the principal is incapacitated. If this happens, the only way an agent can keep their powers is if it 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.
- Record It: 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.
- File It: 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.
You can start the process of establishing a power of attorney by locating an attorney who specializes in family law in your state. If attorney 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 "Get Legal Help" search function. Clients who qualify will receive pro bono (cost-free) assistance.
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 of 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. The 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 intra-family conflict by favoring some members over others.
Worst of all, when delivered into the wrong hands, a POA may create what is often called a license to steal. There are instances when the agent abuses their power and makes decisions about financial and medical matters for their own benefit rather than staying in line with the wishes of the principal.
Children have different characters, skills, and circumstances, and 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.
Factors to Consider
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.
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. This is especially true 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
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.
General Risks in Naming a Power of Attorney
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. Just like the document itself, 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 toCreate a Power of Attorney
There may come a time when you may become incapacitated and can't manage your own affairs. If you don't have a POA in place that enables a named agent to step in and do so, nobody may have the legal right to do so. For instance, nobody may have the right to take individual retirement account (IRA) distributions the parent needs for income, to borrow funds to pay medical bills, or deal with the Internal Revenue Service (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 it could be contested, leading to family conflicts.
You may choose to name one or more of your children as your POA(s). There are many different kinds of POAs and you 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.
Here are some things to consider:
- Start Small: A special POA can be used only to provide a convenience that you will value as a parent, such as one that enables your children to prepare and file your tax return and manage your dealings with the IRS.
- Safeguards: If you're concerned about how your affairs will be handled, make sure the POA requires 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 you can name two agents and require they agree on major transactions, such as the sale of a home.
- Consult Trusted Advisors: Trusted professional advisors, such as lawyers, accountants, and doctors, can help you understand the wisdom and necessity of adopting POAs. These documents can be valuable for you and the rest of your family. If you aren't comfortable granting broad powers at once, you can do so gradually. But don’t delay, or there may be costly consequences since the grantor must be mentally competent to create a power of attorney. If you lose the capability of managing your affairs, it's too late. At that point, court proceedings may be required.
Power of attorney can take effect immediately after signing the relevant documents, or it can be specified to begin at some point in the future.
What Does Having Power of Attorney Do?
A power of attorney is a legal status granted to somebody that allows them to act on your behalf. The person given a 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 a 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.
Can Next of Kin Override a Power of Attorney?
No. Next of kin or other family members do not have any legal authority to override or nullify an existing power of attorney.
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.
You can, in theory, name more than one individual to have POA, but this is not recommended as it can create conflicts and confusion.
The Bottom Line
Creating a power of attorney and specifying how it will operate even if you lose your ability to think or function ensures that you will have a plan in place for overseeing your financial affairs and health directives if and when you are unable to do so.Be sure to choose somebody you trust and who will be able to faithfully carry out their responsibilities on your behalf.