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The Complete Guide To Power of Attorney: What It Is, Why You Need It, How To Start

This comprehensive guide will teach you all about Power of Attorney. You'll learn what it is, why you might need it, and how to begin setting it up.
power of attorney

If you’re like most people, the concept of Power of Attorney (POA) might make you feel vaguely uncomfortable. Even if you don’t understand all that it entails, you know that it involves giving someone authority to act on your behalf, which can feel like a scary thing, especially if the decisions involved are big ones.

Your apprehension is certainly understandable. However, the reality is that establishing a Power of Attorney can actually be a tremendous protection for you, your family, and your estate.

In this guide, we’ll walk you through what Power of Attorney is, the many benefits it offers, and things to take into account when establishing POA.

What Is a Power of Attorney?

Power of Attorney (POA) is a legal document that allows you to give another person (known as your “attorney in fact” and often referred to as the “agent”) the authority to make decisions and perform tasks on your behalf. These tasks can include:

  • Making financial decisions
  • Tending to your personal and business finances
  • Selling or buying real estate
  • Making health care decisions
  • Making end-of-life decisions

The Power of Attorney document allows you to specify exactly what the other person may do on your behalf, while also allowing you to set limits on what they can do. For example, you can grant them Power of Attorney only for certain things, such as selling your home, but not for making medical decisions about your health.

A Power of Attorney is a way for individuals to maintain control and autonomy over their lives, while also knowing that if they become incapacitated for any reason, they have a safety net in place.

Types Of Power of Attorney

types of power of attorney

There are several types of Power of Attorney:

  • General
  • Limited
  • Durable
  • Non-Durable
  • Springing
  • Specific circumstances

General Power Of Attorney

A person who has been given General Power of Attorney has the authority to act on behalf of another person in all matters, within the boundaries of state law. This can include both personal and business matters, such as signing checks, selling property, filing taxes, making health decisions, etc. The broad nature of the General Power of Attorney means that it should be granted to a trusted individual who is close to the principal or the person who needs help.

Limited Power Of Attorney

On the other hand, Limited Power of Attorney allows you to grant certain powers or authority to another person, but only for specific purposes or time periods. For example, you may want someone else to sell your house for you if you become incapacitated and unable to do so yourself. In that case, you could grant them power of attorney for this purpose only.

Durable Power of Attorney (DPOA)

A Durable Power of Attorney is a power of attorney that remains in effect even if you become physically or mentally incapacitated. This individual can make some decisions related to legal, property, or financial issues, but cannot make health-related decisions. In other words, the DPOA can do things like pay medical bills for the principal but doesn’t have the legal authority to make decisions like removing the principal from life support.

Non-Durable Power Of Attorney

A Non-Durable Power of Attorney is a power of attorney that remains valid only as long as you are able to act in a capable manner. This means that if you become incapacitated, this POA is no longer in effect.

Springing Power Of Attorney

A Springing Power of Attorney goes into effect only under certain circumstances, usually when a physician declares you to be physically or mentally incapacitated. One of the significant limitations of a Springing POA is that it’s not always 100% clear at what point someone is considered incapacitated. For example, diseases like dementia progress over time, and it can be challenging to determine when someone has reached the tipping point.

Healthcare Power of Attorney (HCPA)

A Healthcare Power of Attorney is a type of DPOA specifically for health care. In addition to the powers granted by a DPOA, the HCPA grants additional powers to make health-related decisions for the principal. The HCPA does not take effect until a physician states that the principal has lost the capacity to make informed health care decisions.

Financial Power of Attorney (FPOA)

A Financial Power of Attorney is another type of DPOA that gives the attorney in fact authority to make financial decisions for the principal. This type of power of attorney can be used to pay bills, make investments, handle insurance policies, etc. In the event that the principal is unable to make these types of financial decisions, the attorney in fact is responsible to carry out the principal’s wishes to the best of their ability.

Before a healthcare or financial institution would allow an attorney in fact to act on behalf of the principal, they would request to see the DPOA. Although a single DPOA document can be used for both health and financial matters, it’s better to have a separate document for each one. This ensures that individuals at financial institutions don’t have access to the principal’s medical information, and vice-versa.

Benefits Of Power of Attorney

benefits of power of attorney

Establishing a Power of Attorney can have many benefits, especially for individuals who are aging or have disabilities. It’s a way to maintain autonomy over decisions about your life, even if you can’t make those decisions on your own. It gives you the assurance that someone you trust will be able to take care of your affairs if you can’t, and provides peace of mind for both you and your loved ones.

In addition, a Power of Attorney can also help to avoid possible family disputes down the road. If there is no Power of Attorney in place and the principal becomes incapacitated, it’s not uncommon for disputes between family members to arise over what should be done in various situations. Having a POA in place ensures that things will be done according to your wishes.

Some common reasons why people give power of attorneys include:

  • Senior citizens who are starting to need more help managing their finances
  • People with disabilities who are not able to make certain decisions on their own
  • Parents who want to know that they will be able to make important decisions about their children’s lives if necessary
  • Aging adults who want to maintain some control of their affairs if they become incapacitated
  • People with Alzheimer’s Disease or other cognitive impairments

The core benefit of having a Power Of Attorney in place is peace of mind. It can be a tremendous relief to know that someone you trust will be able to make decisions for you if you’re not able to do so yourself. It’s also comforting for your loved ones to know that someone they trust is taking care of things on your behalf.

How To Establish Power of Attorney

establishing power of attorney

Now let’s talk about the specific steps involved in establishing a Power of Attorney. It should be noted that there is no standard procedure that is accepted in every state. There are differences in the steps involved depending on which state you live in, so make sure you know what specific things are required in your state. That said, there are some elements that will remain the same regardless of where you live and one of those items is filling out Form 2848 from the IRS.

Establish Your Power of Attorney In Writing

Even though some states accept a verbal Power of Attorney, it’s not a good idea to rely on this method. Verbal agreements are very difficult to enforce and can lead to disputes down the road. By putting everything into writing, you avoid confusion and disputes, and you make your wishes explicit.

Choose You POA Type

As we already noted, there are different types of Power of Attorney arrangements. You need to choose the one that best suits your needs, circumstances, and the powers you want to grant to the agent who will act on your behalf. It’s important to ensure that your POA is created in such a manner that it satisfies all the requirements of your state. Given the complexities involved, it’s probably best to work with an attorney to draft the document.

Identify All Included Parties

To establish a Power of Attorney, you need to identify all the individuals who will be included in the arrangement. This includes the person who will be giving power of attorney (the principal), and the person or persons who will be receiving it (the agent or agents).

Add Specific Powers To The POA

Within your Power of Attorney document, you need to specify what powers you are granting to the agent or agents. They can be as broad or limited as you want, but they must be clearly specified. For example, you might grant the agent/agents general power of attorney authority. Or you might give them authority to act with respect to specific discrete matters only, such as making health care decisions for you if necessary. It’s important that your POA document makes clear what powers are granted, so there is no misunderstanding later on.

Determine Durability of Power of Attorney

In most states, a non-durable Power of Attorney arrangement is terminated when you become incapacitated. This means that if you can no longer make decisions for yourself, the POA arrangement is no longer in effect.

The only way to prevent this from happening is to create a Durable Power of Attorney arrangement, which allows the agent or agents to continue to act on your behalf even if you become incapacitated.

Sign, Notarize, and File The Document

Once you have created a Power of Attorney document that meets all the requirements of your state, it’s time to sign, notarize, and file it with the proper offices if necessary. This provides added legal protection and ensures that your intentions will be carried out.

Depending on the type of POA, you may not need to formally record it with the county or file it with a public office. However, recording it with the county is standard practice and creates a formal record of the document. Research the state requirements for the type of POA you’ve created and then make sure to file it in the proper locations.

Who Should You Choose When Naming Power of Attorney?

choosing power of attorney

Before you name someone as your Power of Attorney, it’s critical to think through who would be best for the job. There is a huge amount of authority and responsibility that comes with being granted power of authority.

In the event of a medical POA, it’s a question of life and death. And if you grant someone durable POA and they mishandle things, you might find yourself facing insolvency. In light of this, you must select your agent with the greatest care to ensure that your requirements are fulfilled to the maximum extent.

The agent should be someone you trust implicitly and who is capable of handling difficult tasks. They should also be someone who will act in your best interests, even if it’s not always the easiest thing to do.

When choosing an agent, it’s important to be aware of the potential for self-dealing, which is where the agent takes advantage of their position to benefit themselves financially or otherwise. For example, they might use their authority to purchase property at a reduced price or make other financial deals that are not in your best interests. In light of this, you need to choose an agent who you know will act with integrity in all circumstances.

You can choose any capable person over the age of 18 to be the agent in a Power of Attorney agreement, including an attorney, accountant, spouse, or child. There are pros and cons to who you select.

Granting POA To A Professional: Pros and Cons

With financial matters in particular, it’s quite common to name a business professional, such as an accountant, lawyer, or financial planner as the agent in your Power of Attorney.

The primary advantage of this arrangement is that you are working with a (hopefully) impartial third-party who will carry out your wishes without having to navigate any sticky family dynamics.

The primary disadvantage is that you have to pay for their services, with some activities costing more than others depending on the complexity.

Granting Power of Attorney To A Child: Pros and Cons

It’s common for parents to grant Power of Attorney to one or more of their adult children. This has the advantage of saving you the fees a business professional would charge and eliminates any age-related issues if your spouse is approximately the same age as you. And, if the child is intelligent, honest, and cares about respecting your desires, it can provide an added layer of assurance.

Of course, there are also challenges that come with granting Power of Attorney to one of your children. If you have more than one grown child, you may find it difficult to pick only one person for this role. This has the potential to lead to conflict within the family depending on who you choose.

Additionally, if your child has a history of making poor decisions, this could be cause for concern. You need to be sure that the child you choose will act responsibly and in accordance with your wishes when it comes to financial and medical decisions.

If you think it necessary, you can create multiple Power of Attorney documents for different scenarios, and you can name one or more of your children as agents in the ones best suited for them.

When considering whether to grant one of your children Power of Attorney, take these things into consideration:

  • Trustworthiness –  This is the most important characteristic you should look for in an agent. This includes honesty and integrity, and it also includes reliability. You need someone who will stay on top of things like paying bills, managing investments, and ensuring that your wishes are carried out.
  • Capability – Your agent should be someone who is capable of handling all the tasks assigned to them in the POA document. If one of your children has very little financial investment experience, it’s probably not a good idea to give them the authority to make investments on your behalf.
  • A Clear Understanding Of YOUR Wishes – If your child is someone who tends to see things differently from you, this could lead to conflict when they have the authority to make decisions on your behalf. In addition, if they have a history of acting impulsively or putting their interests before yours, then it might not be wise for them to give them Power of Attorney.

It is possible to name multiple children as agents with the authority to act separately or jointly. This can be helpful if one becomes unavailable or if you want to require joint agreement before large decisions can be made, like selling property.

However, it also can cause problems if there are major disagreements between multiple agents. For example, if you require two of your children to act jointly when making financial investments and they disagree over the best course of action, then your investments are essentially frozen. All this to say, if you are going to name two or more of your children as agents and require them to act jointly, it’s really important that they have the ability to work together effectively.

Minimizing Risks With Granting Power of Attorney

minimize risk

No matter who you name as agents in POA documents, there is always some risk involved. The authority granted with Power of Attorney means that self-dealing or mismanagement is always possible, even if unlikely.

Here are some ways you can minimize the risks:

  • In your POA, require the agent(s) to regularly report all actions taken on your behalf to a third party, such as your accountant or lawyer.
  • Review and update your POA as circumstances change. You can terminate a POA simply by writing a letter specifying that you revoke it and then having the letter delivered to the former agent.
  • If you do revoke a POA, it’s a good idea to notify any outside parties the former agent may have interacted with.

In a perfect world, these risk prevention measures wouldn’t be necessary. But we don’t live in a perfect world and it’s important that you take measures to ensure the financial and medical decisions made on your behalf will reflect your wishes and not those of someone else.

Working With Your Parents To Establish Power of Attorney

working with your parents to establish power of attorney

As your parents get older, you may need to talk with them about the importance of establishing a Power of Attorney.

Understandably, your parents may be hesitant to give others power over their affairs for a number of reasons. Maybe they don’t like feeling as if they’re losing control over their lives or finances. Or maybe they feel like they can handle things on their own and don’t want to lose any of their independence. Or maybe they simply don’t like to think about the fact that they are aging.

These fears and hesitations are certainly understandable. Nevertheless, it’s important to help your parents understand the value of creating a Power of Attorney. If you find yourself encountering resistance, consider raising the following points.

Explain The Dangers Of Not Having a POA

If your parents don’t have a POA, they could become incapacitated and no one will be able to act on their behalf. If, for example, they need to take distributions from their IRA to pay medical bills or receive income, not having a POA in place may mean that no one has the legal right to take the distributions.

A court will need to appoint someone in order to make decisions for them. This process can take weeks or even months, is costly, and could be contested by various family members.

Start Small and Slow

You can start by suggesting the creation of a relatively small POA whose sole purpose is to make your parents’ lives more convenient. For example, a POA that allows you to pay their bills for them or file their taxes with the IRS. Once they see how helpful it can be to have you take care of these simple tasks, they might be open to having POAs that grant broader authority down the road.

Put Protections In Place

There’s a good chance your parents are apprehensive about an agent abusing the authority granted to them through a POA. This is a valid concern. To help assuage their fears, you can suggest various protections that can be included in the POA:

  • Put a cap on how much an agent may spend without their permission
  • Require the agent to periodically report all their activity to a third-party
  • Limit the POA to a period of time so it automatically expires after a certain date
  • Name two agents and require them to act jointly on any major decisions

Bring In Outside Counsel

Bringing trusted, third-party advisors into the conversation can help your parents see the value of establishing a Power of Attorney. For example, including your family attorney or financial advisor as part of the conversation may help them understand the legal and financial implications of not having a POA in place.

The important thing is to start the conversation sooner rather than later. The more time your parents have to think about it and weigh the options, the more likely they are to establish a Power of Attorney that meets their specific needs.

Final Thoughts

final thoughts on power of attorney

Establishing a Power of Attorney can be a tremendous benefit to both you and your loved ones. It allows you to have a trusted individual in place who can take care of your affairs if you are unable to. This individual can ensure that all your wishes are expressly carried out and that you can continue to live life on your terms.

If you don’t have a Power of Attorney document, consider meeting with an attorney as soon as possible to begin the process of drafting one.

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