- Introduction
- When do you need a power of attorney?
- Why is a power of attorney important?
- 4 main types of POA and how they work
- 1. Durable power of attorney (DPOA)
- 2. Springing power of attorney
- 3. General power of attorney (GPOA)
- 4. Limited or special power of attorney
- Disadvantages of using a power of attorney
- The bottom line
Powers of attorney: What they are and how they work
- Introduction
- When do you need a power of attorney?
- Why is a power of attorney important?
- 4 main types of POA and how they work
- 1. Durable power of attorney (DPOA)
- 2. Springing power of attorney
- 3. General power of attorney (GPOA)
- 4. Limited or special power of attorney
- Disadvantages of using a power of attorney
- The bottom line
A power of attorney (POA) doesn’t refer to a lawyer. Rather, a POA is a legal document that you (the principal) can use to delegate your wishes to a trusted agent who can act on your behalf in legal, financial, or health care matters.
This delegation of power is typically used when you’re incapacitated, perhaps because of an illness or injury, or because you’re away and need someone you trust to make decisions in your stead.
Key Points
- A power of attorney (POA) allows you to name an agent to act on your behalf in financial or other matters.
- You can set up different types of POAs for different needs, such as when you’re going to be away or if you become incapacitated.
- There are many types of POAs; they can be broad or highly specific, temporary or permanent, active immediately or activated by events.
The term “power of attorney” refers to both the legal document that designates the agent and their duties, as well as the agent who will act as your POA. For example, you might hear, “My sister is my power of attorney in this matter.”
When do you need a power of attorney?
A power of attorney comes into play when you’re absent or incapacitated. Although selecting the people who can fill these roles is often associated with estate or end-of-life planning, you can also set up certain powers of attorney to fill roles in different aspects of your life, as needed.
A power of attorney can be nondurable (that is, temporary), or durable.
- For example, you could set up a specific nondurable power of attorney to manage a business deal when you know you’ll be absent. Or you might grant power of attorney to a professional who can oversee your retirement plan.
- In the case of an emergency that leaves you unable to make decisions, a durable POA designates a proxy who will ensure that your financial or medical concerns are met when you can’t advocate for yourself.
Why is a power of attorney important?
Powers of attorney can give you greater flexibility in managing aspects of your life. Suppose you’re overseas for work or a military deployment; a short-term POA empowers someone you trust to pay your bills or manage your business.
More importantly, a POA ensures your specific wishes are carried out in certain circumstances. Without the protection of a POA in place, key decisions about your life or your health could fall to someone who’s familiar with a given situation (such as a doctor or court-appointed guardian). But there’s no guarantee they’ll know your true wishes, values, or priorities.
4 main types of POA and how they work
Powers of attorney come in different forms. They can be temporary or permanent, specific or broad. Some POAs become active, or “spring,” only under certain circumstances. Others can be implemented immediately. All powers of attorney expire when you die.
Once you select the individual and the role you’d like them to fulfill as your proxy, you can have the document drawn up by a lawyer, signed, witnessed, and notarized. Typically, a legal POA is recognized in all 50 states, but states follow different rules when setting up a POA.
Your lawyer will know the POA rules for the state where you live. One of the potential dangers of using DIY power-of-attorney documents found online is that boilerplate forms may not adhere to the specifics required by the state where you live.
1. Durable power of attorney (DPOA)
A durable financial power of attorney is common in estate planning. As the name suggests, a DPOA remains in place even when you’re unable to make decisions or advocate for yourself:
- You can set up a durable financial power of attorney to manage some or all aspects of your finances if you become incapacitated.
- You can set up a durable health care power of attorney (also called a medical power of attorney) who can make decisions about your medical care if you can’t. From consenting to treatment options to deciding on end-of-life care, a health care POA ensures your medical wishes are upheld.
2. Springing power of attorney
A springing POA remains dormant until a specified condition occurs (typically once you’re incapacitated, as declared by a doctor). Only then is a springing POA activated, granting the agent the authority to act on your behalf. This type of POA ensures the agent’s powers are invoked only when necessary, preserving your autonomy.
That said, a springing power of attorney may not be ideal for estate-planning purposes because it takes time to determine when this type of POA will become active.
3. General power of attorney (GPOA)
This broad POA grants the agent the power to act on your behalf in a wide range of legal and financial matters, including managing bank or investment accounts; signing contracts; overseeing property; and consulting with medical professionals.
A GPOA is typically nondurable, i.e., it expires once you’re incapacitated. You could have a durable GPOA, which allows a single individual to carry out all your wishes if you’re unable to make decisions, but it might be challenging for one person to administer.
4. Limited or special power of attorney
As it sounds, a special power of attorney is narrower in focus than the general POA. You may set up a limited POA to handle specific financial or legal transactions, such as selling a property, paying bills, reviewing a contract, and so on.
This role typically expires when the transaction is done, and it doesn’t continue if you’re incapacitated.
Disadvantages of using a power of attorney
As with any legal or financial document, using a POA has advantages and disadvantages. Although there can be significant advantages, it’s important to acknowledge that setting up a power of attorney can also make you vulnerable.
Ideally, when setting up a POA, you’ve selected a person you can trust. But in some cases, the agent you named to manage your finances could commit fraud or theft using the power and access granted to them by the POA.
Once you’re incapacitated, the person acting as your proxy in your medical or financial affairs is in charge. There’s no one overseeing them. That reality is something to bear in mind as you set up these critical documents and the responsibilities they entail.
The bottom line
Setting up a power of attorney for financial or health care matters can provide convenience and peace of mind. Ideally, the person you choose will act as your representative, following your wishes and instructions. And the people named for each POA can carry out those duties on your behalf—especially if you’re no longer able to express your wishes or make decisions.
There is, however, a risk that someone could abuse the decision-making power granted by a POA. That threat is why taking your time and thinking through these roles is important. It might be a good idea to ask the advice of a trusted third party to help you sort through your choices.