Power of Attorney Definition

What Is a Power of Attorney?

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 legal decisions about the principal’s property, finances or medical care. The power of attorney is frequently used in the event of a principal’s illness or disability, or when the principal can’t be present to sign necessary legal documents for financial transactions.

A power of attorney can end for a number of reasons, such as when the principal dies, the principal revokes it, a court invalidates it, the principal divorces their spouse, who happens to be the agent, or the agent can no longer carry out the outlined responsibilities.

Conventional POAs lapse when the creator becomes incapacitated, but a “durable POA” remains in force to enable the agent to manage the creator’s affairs, and a “springing POA” comes into effect only if and when the creator of the POA becomes incapacitated. A medical or healthcare POA enables an agent to make medical decisions on behalf of an incapacitated person.

Key Takeaways

  • 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 power of attorney is often used when a principal becomes ill or disabled, or when they can’t be present to sign necessary legal documents for financial transactions.

Understanding Power of Attorney

A power of attorney should be considered when planning for long-term care. There are different types of POAs that fall under either a general power of attorney or limited power of attorney.

A general power of attorney acts on behalf of the principal in any and all matters, as allowed by the state. The agent under a general POA agreement may be authorized to take care of issues such as handling bank accounts, signing checks, selling property and assets like stocks, filing taxes, etc.

A limited power of attorney gives the agent the power to act on behalf of the principal in specific matters or events. For example, the limited POA may explicitly state that the agent is only allowed to manage the principal’s retirement accounts. A limited POA may also be limited to a specific period of time (e.g., if the principal will be out of the country for, say, two years).

Most powers of attorney documents allow 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 a situation occurs where the principal becomes incapable of making decisions for him or herself, the POA agreement would automatically end. However, someone who wants the POA to remain in effect after the person’s health deteriorates would need to sign a durable power of attorney (DPOA).

A person appointed as power of attorney is not necessarily an attorney. The person could just be a trusted family member, friend, or acquaintance.

Understanding the 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).

The principal can sign a durable power of attorney for health care, or healthcare power of attorney (HCPA), if he wants 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.

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 his ability.

When the agent acts on behalf of the principal by making investment decisions through the broker or medical decisions through the 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 DPOA 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 Power of Attorney Works

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.”

Specify Durability

In most states, a power of attorney terminates if the principal is incapacitated. If this happens, the only way an agent can keep his or her 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 much 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 in order 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.

Choosing a Power of Attorney

Like the property deed for your house or car, a POA grants immense ownership authority and responsibility. It is literally 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 of 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 very difficult to correct. Even worse, depending on the extent of the powers you grant, there may be dangerous potential 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 and take many other wrongful actions.

Children have different characters, skills, and circumstances, and 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:

  1. Trustworthiness: This is the single most important trait of any 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.
  2. 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:
  3. Managing everyday expenses of the family
  4. Receiving income from and paying expenses on real estate
  5. Controlling a financial portfolio
  6. Managing insurance and annuities
  7. Running a family’s small business
  8. 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.

But 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, has the ability to 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 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 own 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 his/her own finances and affairs
  • The child is engaged in intra-family conflicts that may result is using the powers received under the POA to favor some family members over others

Risks of Naming a POA

Be aware of the dangers of theft and self-dealing created by a POA, even when your agent is your own 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 clearly 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 he or she is 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 his or her own 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 to 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 of time, 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.

Start Small

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.

Have Safeguards

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.

Join Them

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

Trusted professional advisors, such as a lawyer, accountant, and doctor, can help persuade parents of the wisdom and necessity of adopting POAs.

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 his or her own affairs it is too late, and court proceedings likely will be necessary.

Special Considerations

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.

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