A power of attorney is a legal document you create that gives someone else legal authority to act on your behalf. Depending on the type of POA, you could give someone limited power or general power to make decisions and take actions for you.
This guide explains more about what a power of attorney is, how you create one and why you might need one.
What Is a Power of Attorney?
A power of attorney is a legally binding document that names someone to act as your attorney-in-fact or your agent. You specify in the legal document what authority you are transferring to your attorney-in-fact.
Your power of attorney may go into effect immediately or at a designated future time. It can provide broad authority to your attorney-in-fact or it can give your attorney-in-fact limited authority to act on your behalf in a certain way, such as managing real estate you own if you become incapacitated.
When Do You Need a Power of Attorney?
Powers of attorney are commonly created during estate planning. You may wish to create a power of attorney so you can decide who will manage your assets and make financial decisions on your behalf if you become incapacitated and are no longer of sound mind and able to make your own decisions.
You may also create a power of attorney for other reasons, though. Some examples could include the following situations:
- Naming an agent to act on your behalf in certain business transactions
- Naming an agent to help you collect debts owed to you
- Naming an agent to file a lawsuit on your behalf
- Naming an agent to buy and sell investments on your behalf
- Naming an agent to help you apply for government benefits on your behalf
If you need to give someone formal legal authority to take binding legal action on your behalf or tp make legal decisions for you when you are unable to do so for any reason, a power of attorney can help you to do that.
Types of Powers of Attorney
When you create a power of attorney, you need to decide what level of authority to vest in your agent. There are different kinds of powers of attorney that you can create depending how much power you wish to transfer. Here are some of the most common types.
General Power of Attorney
General power of attorney is a comprehensive grant of authority. It applies for as long as you live and remain of sound mind. There is no limiting language, so your agent or attorney-in-fact can act on your behalf in all matters.
Limited Power of Attorney
A limited power of attorney is much more restrictive than a general power of attorney. This is used when you grant someone authority for a limited, specific purpose rather than generally granting them authority.
For example, you might want your attorney-in-fact to have legal authority to sign documents transferring ownership of your investments while you are out of the country.
A limited power of attorney includes language specifying the limits on the authority you are granting to your attorney-in-fact. For example, it might specify that the POA is in effect only for a month while you are away and that the POA only enables your attorney-in-fact to manage a particular type of investment.
Durable Power of Attorney
A durable power of attorney is one that remains in effect even if you become incapacitated. It differs from a general power of attorney, which becomes inactive when you become mentally unsound and unable to make decisions on your behalf.
This type of POA must have language that clearly indicates it is meant to be durable. If you do that, the grant of authority to your agent remains in effect for life unless you formally revoke it.
A durable power of attorney can be used when you are creating an incapacity plan or an estate plan.
Springing Power of Attorney
A springing power of attorney is a grant of authority that goes into effect when a specific triggering event occurs. For example, you could specify that your attorney-in-fact gets the authority to act on your behalf only if you become incapacitated.
A springing durable power of attorney is an ideal tool to allow someone to act for you only if you become mentally unable to act on your own accord.
Medical Power of Attorney
A medical POA is a durable power of attorney which gives your attorney-in-fact authority to make healthcare decisions on your behalf. This is more commonly called a health care proxy or advance directive. If you want to ensure you get to decide who makes choices about your medical care when you cannot speak for yourself, creating a medical POA is important.
A medical power of attorney can be made in conjunction with a living will, which is another estate planning document that allows you to specify in advance what kinds of medical procedures you would prefer to accept or reject. The POA gives someone the ability to make medical decisions when you are incapacitated which your living will does not address.
Requirements for Creating a Power of Attorney
State rules differ slightly but there are some general requirements that apply in order to create a valid POA. For example, you typically must meet these requirements:
- You must put your POA in writing
- Your must specify the date you created the POA, the date it expires (if applicable), the name of your attorney-in-fact and a description of what authority you are granting
- You need to sign your POA
- You may be required to have the POA witnessed and notarized
It is typically a good idea to work with an experienced estate planning lawyer or business attorney to help you to draft a legally valid power of attorney. You do not want to find out after the fact that you didn’t properly grant authority to your attorney-in-fact as often it will be too late to correct the issue.
You also want to make sure that you discuss your wishes and the grant of authority with your attorney-in-fact before creating your POA so you are both on the same page.
Choosing an Attorney-in-Fact
Choosing an attorney-in-fact is one of the most important parts of creating a power of attorney.
Your attorney-in-fact or agent is going to be the one who acts on your behalf, so you should select someone whom you trust and believe will make the decisions you would have made if you were able to do so.
Your attorney-in-fact has a fiduciary duty to act in your best interests. This is the highest duty owed under the law. But you still want to ensure that you’ve selected someone in whom you have the utmost confidence because you don’t want problems to arise when you are incapacitated and unable to resolve them.
What Happens If You Don't Create a Power of Attorney?
If you do not create a power of attorney, you will not have the ability to select someone who can make decisions for you when you become unable to act on your own. This can become a huge problem if you develop a physical or mental problem that prevents you from managing your personal, financial, or medical affairs.
If you have not created a power of attorney, your loved ones may need to go to court and initiate a guardianship proceeding if you have become incapacitated. The court may appoint someone to manage your financial affairs or to make medical decisions for you. The appointed person may not be someone you would have chosen or someone who will act in the way you prefer.
You don’t want to leave things to chance, as you never know when something could render you unable to take actions on your own life decisions. Work with an estate planning lawyer to create a power of attorney as soon as possible.
Frequently Asked Questions (FAQs)
How powerful is a POA?
A legally valid power of attorney gives your attorney-in-fact the authority to act on your behalf. Your chosen agent or attorney-in-fact has full legal authority to act for you within the limits of the POA you create. As a result, this is a very powerful document.
However, you can choose how much authority you give to your agent. You could, for example, make a limited POA that gives authority to your agent only for a specific purpose or specific time period. Or you could make a springing power of attorney that goes into effect only if you become incapacitated.
What are the disadvantages of power of attorney?
There are several possible disadvantages of power of attorney.
- First, you must think ahead and create one before you become incapacitated or need someone to act for you.
- Second, the POA could be challenged if there are questions about whether the grant of authority was made while you were of sound mind.
- Third, if you don’t draft your POA properly, it may not be in effect when you need it (for example, if you don’t include the proper language making it durable).
Many of these disadvantages can be overcome by working with a skilled lawyer to help you draft your POA.
How long is a power of attorney good for?
A power of attorney is good for life, or until you take steps to rescind the grant of authority, if you have made a durable power of attorney. You can also make a limited power of attorney that is good for a set period of time. If you make a power of attorney without specifying a time deadline or without specifying that it is durable, it will remain in effect until you become mentally unsound.
