A power of attorney is a legal document that gives one person the authority to act on behalf of another person in financial, legal, or medical matters. The person who grants the authority is called the principal. The person who receives the authority is called the agent or attorney-in-fact.
A power of attorney is one of the most important documents in any estate plan. It ensures that someone you trust can manage your affairs if you become unable to do so yourself due to illness, injury, or incapacity.
How a power of attorney works
When you sign a power of attorney you are giving your agent the legal authority to make decisions and take actions on your behalf. Depending on the type of power of attorney those actions might include managing bank accounts, paying bills, filing taxes, selling property, or making healthcare decisions.
The scope of that authority depends entirely on what the document says. A power of attorney can be broad — giving the agent authority over almost everything — or narrow, limiting authority to a specific transaction or time period.
Types of power of attorney
There are several types of power of attorney, each serving a different purpose:
- General power of attorney — gives the agent broad authority to manage financial and legal matters. It becomes invalid if the principal becomes incapacitated.
- Durable power of attorney — similar to a general power of attorney but remains in effect even if the principal becomes incapacitated. This is the most commonly used type for long-term planning.
- Limited or special power of attorney — grants authority for a specific task or time period, such as selling a house or managing finances while the principal is traveling abroad.
- Springing power of attorney — only takes effect under specific circumstances, such as when a doctor certifies that the principal is incapacitated.
- Healthcare power of attorney — also called a medical power of attorney or healthcare proxy, this gives the agent authority to make medical decisions on behalf of the principal if they are unable to do so themselves.
Durable vs general power of attorney
The key difference between a durable and a general power of attorney is what happens if the principal becomes incapacitated. A general power of attorney automatically becomes invalid at that point. A durable power of attorney remains in effect, which is why it is the preferred choice for most estate planning purposes.
For most people creating an estate plan a durable power of attorney for finances and a separate healthcare power of attorney together provide comprehensive coverage.
What an agent can and cannot do
An agent under a power of attorney has a legal duty to act in the principal’s best interest. Depending on what the document allows an agent may be able to:
- Manage bank and investment accounts
- Pay bills and taxes
- Buy or sell real estate
- Apply for government benefits
- Make medical decisions
However an agent generally cannot:
- Change the principal’s will
- Transfer assets to themselves unless explicitly authorized
- Act against the principal’s best interests
- Continue acting after the principal’s death — a power of attorney ends at death
When a power of attorney takes effect
Most powers of attorney take effect immediately upon signing. A springing power of attorney takes effect only when a specific triggering event occurs, such as a physician certifying incapacity. Immediate powers of attorney are generally preferred because springing powers can create delays in urgent situations.
How to create a power of attorney
Requirements vary by state but generally include:
- The principal must be at least 18 years old and of sound mind at the time of signing
- The document must be signed by the principal
- The signature must be witnessed and in most states notarized
- Some states have specific forms that must be used
How to revoke a power of attorney
A principal can revoke a power of attorney at any time as long as they are mentally competent. To revoke it the principal should create a written revocation document, notify the agent, and notify any banks, institutions, or individuals who were acting on the agent’s authority. If the power of attorney was recorded with a county recorder the revocation should be recorded there as well.
Why a power of attorney is important
Without a power of attorney if you become incapacitated your family may need to go to court to establish a guardianship or conservatorship to manage your affairs. This process can be expensive, time consuming, and stressful. A properly executed power of attorney avoids this entirely by ensuring someone you trust already has the legal authority to act on your behalf.
Key terms to know
- Principal — the person who grants authority through the power of attorney
- Agent or attorney-in-fact — the person who receives authority to act on the principal’s behalf
- Durable — remains in effect if the principal becomes incapacitated
- Incapacity — the inability to make or communicate decisions due to illness or injury
- Revocation — the cancellation of a power of attorney
- Notarization — the process of having a document certified by a notary public
- Guardianship or conservatorship — a court-supervised arrangement for managing an incapacitated person’s affairs when no power of attorney exists
Sources
- USA.gov — Estate Planning
- American Bar Association — Public Resources
- National Institute on Aging — Getting Your Affairs in Order
This article is for general informational purposes only and does not constitute legal advice. Laws vary by state. Consult a licensed attorney for guidance specific to your situation.