A power of attorney (POA) is a legally binding document that allows you to appoint someone to manage your property, medical, or financial affairs. Although it can be uncomfortable to think about needing one, a POA is an important part of any estate plan. Anyone over 18 can create a POA, and it's a common starting point for people who are ready to start formalizing plans for their future.
POA is typically used by those who cannot manage their affairs. This is generally due to an illness, aging, a disability, or simply being away for an extended period of time.
Each type of POA gives your attorney-in-fact—the person who will make decisions for you—a different level of control. Some POAs take effect immediately after signing, and others kick in if you become incapacitated.
In this article, we'll explore the role of an attorney-in-fact and the authority a POA grants. We'll also cover the different types of POAs and tips for crafting a legally binding document.
What does a power of attorney do?
The POA gives the attorney-in-fact (used interchangeably with "agent") the power to make decisions about your affairs. The type of POA you create dictates which affairs an attorney-in-fact has authority over until the contract expires or you die.
The decision-making power of an attorney-in-fact takes effect at different times, depending on which POA you select.
Note: No matter which type of POA you choose, it will become null and void when the principal—the person who creates the POA—dies. Upon their death, the Trustee of the Trust or executor of the will becomes responsible for carrying out their instructions and distributing assets.
What are the limits of a power of attorney?
No power of attorney is legally binding unless it's written and signed in accordance with your state's laws.
You must also be of sound mind when you sign your POA document, or it can't be upheld in court.
Any terms you feel need clarification can be outlined in your POA document. If you're unsure of how to do this or the best wording, enlisting the help of an attorney can simplify the process.
Attorney-in-fact vs. power of attorney: What's the difference?
A power of attorney is the document you use to stipulate who should manage your affairs when you're unable to, under what circumstances, and any specific wishes you want to be upheld.
An attorney-in-fact is a person you name in a POA document who will help manage your affairs when the POA goes into effect. Whether this is a short- or long-term situation, this person will be responsible for making decisions on your behalf as a fiduciary.
An attorney-in-fact does not need to be someone who practices law. They must only be:
- 18 or older
- Of sound mind
That said, hiring a lawyer to assist with the POA and your estate plan can help make the process less stressful for you and your loved ones.
How to set up power of attorney
A crucial part of estate planning is taking steps to set up a POA.
This is a seven-step process that includes the following:
- Selecting an attorney-in-fact
- Discussing responsibilities with the attorney-in-fact
- Choosing the right POA to suit your needs
- Writing the POA
- Ensuring the POA is legally compliant
- Filing it correctly
- Making updates as needed
1. Choose the right person
Your attorney-in-fact will be responsible for some important decisions both while you're alive. So it's important that you choose someone who has your best interests at heart and is responsible, trustworthy, and a strong communicator.
For many people, this person is a parent, adult child, or close family friend. Just be aware that if you choose a single family member, disputes may arise. On the other hand, if you select more than one person, it may take longer for them to agree on a decision.
To reduce the risk of disagreements and hurt feelings, only share your decision with the people who need to know. Otherwise, just be sure that you make your decision carefully and are willing to stand by it if others question your choice.
A common question is "Can I appoint multiple attorneys-in-fact?" Yes, you can assign two or more attorneys-in-fact a dual power of attorney. However, unless you designate specific responsibilities for each person, all agents will need to agree on every decision.
For that reason, it's usually best to select one agent and only resort to designating two if you must. If this does become necessary, ensure that the two are capable of working well together.
2. Discuss the responsibilities
Being assigned a POA might not be for everyone, so it's important to ask for consent before naming an attorney-in-fact. It's also important to think critically about whether or not the person you choose truly suits the role.
Here are some signs that the person you want to appoint isn't the right fit:
- Busy: If they're overscheduled as it is, they may not have enough time to check on you and ensure your living arrangements are safe and comfortable or that your affairs are in order.
- Irresponsible: If you can't rely on someone to follow through or stay organized, they may not do a good job of managing your money and paying bills on time.
- Grief-stricken: Overcome with emotion at the thought of losing you, they may not be able to stay calm and collected to make important decisions on your behalf.
- Indifferent: Do not choose an apathetic attorney-in-fact, or they might not catch serious issues like poor medical care or elder abuse.
Talk with your preferred choice about their responsibilities, the time commitment, and other things that are important to you that you will need them to uphold. Once they understand your wishes, they can decide whether or not they're capable of being your attorney-in-fact.
If they decline, move on to your next choice and have the same talk with them.
More questions to ask a potential attorney-in-fact
The attorney-in-fact is a fiduciary. A fiduciary must act responsibly, practically, and in a way that is fair to the person whose affairs they are managing. Anyone violating these duties can face criminal charges or be held liable in a civil lawsuit.
Some questions you can ask your prospective attorney-in-fact to ensure they're up for the job include:
- Do you have any questions about what your responsibilities would be?
- Do you have concerns about taking on any of these duties?
- Do you think you currently have time in your schedule to fulfill your responsibilities?
- If something does happen to me, do you think you will be able to focus on the tasks that you need to complete, or will you be overwhelmed by emotion?
- How would you deal with it if someone close to me tried to dispute your decision?
- Are you comfortable advocating for my wishes?
- Do you have any concerns about potentially managing my money and bills and your own simultaneously?
3. Choose the right type of POA
A general power of attorney is best for people who need someone to make a wide range of decisions. But for those who want to segment their care or limit the power of their chosen agent, there are numerous other POA options available, including:
- Durable
- Nondurable
- Springing
- Limited
- Health care or medical
- Financial
- Military
All of these POAs serve different purposes, which we'll cover more in-depth below.
4. Draft the document: Example of what to include in a power of attorney
Your power of attorney document should include essential components like:
- The date you created the POA
- Start date and/or expiration date
- Your name and your chosen agent's name
- The scope of the attorney-in-fact's authority
- A clause detailing your wishes
- You and your attorney-in-fact's signatures
5. Legalize it: How to make a POA legally binding
To make your POA legally binding, sign and execute your document according to the laws of your state. This usually involves signing in front of witnesses or having it notarized. Consider giving your attorney-in-fact a copy or letting them know where they can find a copy if needed.
Aside from these general legal requirements, you should also familiarize yourself with your state's specific POA requirements to ensure the document is legal—especially if you recently moved.
Can you make your own POA? You can draft your own power of attorney without the help of a lawyer. Many people do choose to DIY the general power of attorney. But if you expect it to be a more complex document or are unsure what to include, speak with a legal professional for guidance.
6. Document it properly
It is important for you to write out the POA correctly and file it away in a safe place, like a safe deposit box at the bank or a fireproof lockbox. Just be sure that your agent and loved ones know where to find it.
7. Make updates and changes
It's entirely possible that you may decide to update your POA to reflect the developments in your life. If you fall out of contact with someone you used to talk to every day, you get married, take on a more dangerous job, or your original attorney-in-fact no longer seems right—it might be time to make an adjustment.
Another key reason you may need to switch agents is a lack of communication. It's crucial for an attorney-in-fact to keep accurate records of all transactions they make on your behalf and to provide you with periodic updates to keep you informed. If you cannot review these updates yourself and they won't disclose the information to an approved third party, that's a big sign that it's time to reevaluate.
Some of the most common updates people make to their POAs are transferring power to a new agent or revoking authorization. Here's how you can do it too.
You can revoke power of attorney at any time and for any reason, so long as you're of sound mind. But to make it legal, you will need to follow the laws of your state.
Note: If you move across state lines, most states will acknowledge your POA, but you should talk to an attorney from your new state to be sure. You may have to update your POA after the move.
The types of power of attorney explained
Several types of POA exist, and each serves a different purpose. There are two general types that encompass a wide range of responsibilities and then, more specific, limited ones.
Here are some options (and more information on them in the next section):
Each type of POA has its benefits, so it's important to understand all of your options before making a decision.
Durable POA: The long-term solution
What is a durable POA? If you become incapacitated because of an illness or a sudden accident, a durable power of attorney document allows your attorney-in-fact to continue acting in your interest. This is simply a POA with a provision that allows your existing POA to continue making decisions for you after you can no longer communicate.
You can specify in your POA document whether you would like your agent to have authority once the document is signed or once a doctor declares you incompetent. You can also specify your preference for which doctor should have that authority to ensure they're a medical professional whose opinion you trust.
Key takeaway: A durable POA remains effective after you become incapacitated, regardless of whether it went into effect before that event.
Non-durable POA: Assistance when you need it
What is a non-durable power of attorney? A non-durable POA is typically given for a limited period of time (i.e., while you are out of the country) and ceases to be effective the moment:
- You die
- The document expires
- You revoke privileges
- You're declared mentally incompetent
Key takeaway: This POA can include any duties you choose, but it typically comes with a time limit and does not exist after incapacity.
Springing POA
What is a springing power of attorney? A springing POA activates as soon as you're declared mentally incompetent. This is the opposite of a POA that takes effect immediately upon signing.
One major drawback of a springing POA is that it can take time to get the written opinion of a doctor, which means that there could be delays in getting bills paid.
Key takeaway: If you're declared incapacitated or incompetent, this POA kicks in. Otherwise, it remains inactive.
General POA: Coverage across all major financial decisions
What is a general power of attorney? A general power of attorney authorizes an agent to take a wide variety of financial actions in place of the principal.
Key Takeaway: This is the broadest form of POA and a smart choice if you want assistance in making decisions on a wide variety of financial matters. Note that a general POA can be springing or immediately effective, and it can be durable or non-durable.
Limited POA: Get help with some agent restrictions
What is a limited power of attorney? Under a limited POA, an agent can only make decisions or take actions that were previously approved by the principal. As the principal, you can assign a single agent as many or as few responsibilities as you want.
Key Takeaway: This POA is a good option if you want to retain most of the control over your decisions and just want some support.
Healthcare POA: Establish a medical proxy
What Is a health care power of attorney (HCPOA)? Also commonly known as a medical POA, this document means your agent will be responsible for making health-related decisions for you when you no longer can. This form of POA is durable, meaning that it will remain upheld even if you become incapacitated.
The agent you select will operate as your proxy and will be required to follow your stated health care wishes that may appear in the health care POA or in a separate directive or living will.
Key takeaway: This document appoints an agent to make health care decisions for you when you can't.
Military POA: Keep your affairs in order while you're away
What is a military power of attorney? Service members can designate someone to handle matters at home for them while they're away at basic training or serving overseas. This is often an essential to-do before shipping out because they may have limited access to technology and may be unable to pay bills or manage their assets.
This POA should expire when their military enlistment contract does.
Key takeaway: This type of POA can help make sure that your finances and medical decisions are carried out if you aren't able to handle them while fulfilling your duties.
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