A power of attorney (PoA) is a valuable document for everyone to have. In fact, every person over the age of 18 should have at least two PoA, one for healthcare and one for financial matters. A health care PoA is also called a Health Care Proxy. We previously spoke about their importance in an earlier article. The reason why everyone should have these documents is that they provide protection for you in case of an accident or illness which leaves you incapacitated. No one likes to think about this type of situation happening to them, but avoiding such issues can lead to major problems. A health care proxy allows you to choose a person to make medical decisions for you when you cannot. A financial PoA allows you to appoint someone to handle your financial matters for you. Powers of attorney are not purely for incapacity planning however; there are many types and uses for them. This article will go over some of the basics of PoA, specifically those that deal with financial matters, to help you decide what is right for you.
We will start our discussion of PoAs with some definitions. We define a Power of Attorney generally as a legal instrument used to give legal authority to act for another person. The person who gives the authority is the principal. The person who receives the authority is the agent or “attorney-in-fact”. The principal signs the Power of Attorney and allows the agent to act on behalf of the principal. The agent has a fiduciary duty to the principal, meaning that they are required to act in good faith and in accordance with the principal’s reasonable expectations. You can also appoint a monitor to review the actions your agent does on your behalf. In practice, a principal rarely choses a monitor. When choosing an attorney-in-fact, it is very important to choose someone who is honest and reliable, and who knows your wishes.
There are also several varieties and options available of powers of attorney. These options can completely change the purpose of the PoA. The most significant option has to do with the duration of the document. In the area of financial powers of attorney, you can have a limited power, a general power, a durable power and a springing power.
A principal generally uses a limited, special, or nondurable power of attorney is for a specific purpose. For example, a principal might use these types of PoA for: a home or car closing, or to handle the principal’s affairs while the principal is out of the country. The PoA expires either when the transaction is complete or upon an expiration date specified in the contract.
A general power of attorney is very similar to a limited power of attorney. It is valid as long as the principal is able to make decisions. The principal is able to override the choices of the agent and can revoke the power at any time. The PoA expires when the principal is no longer able to make decisions for themselves or upon the principal’s death. While the limited power of attorney will detail the specific transaction that the agent is able to handle, the general power grants broader powers within a category of transactions. For example, a principal may use a general power of attorney to grant the agent the authority to handle all real estate transactions for the principal.
A durable power of attorney is similar to a general power of attorney in terms of the scope of authority granted. The difference with a durable power of attorney is that the authority does not expire if the principal is no longer able to make decisions. The document must specify that it is a durable power of attorney or it will expire upon the principal’s incapacity.
Another option is a “Springing” power of attorney. This type of power of attorney comes into effect when a specific event listed in the document occurs. This event is usually that a doctor declares the principal incapacitated. This type of power of attorney is often a valuable component of an estate plan that protects you in case of incapacity.
A financial power of attorney is a valuable part of anyone’s estate plan. A springing PoA can save you time and money should you become incapacitated. Should you become incapacitated without a power of attorney in place, a guardianship proceeding will be needed for your loved ones to manage your financial affairs. Powers of attorney are also useful for major transactions and when you are out of the country for an extended period of time. Everyone should have these documents in order to be prepared for an illness or accident. But, specifically, if you have a dangerous job, or if you are approaching a time where you may lose the capacity to sign legal documents, you should seriously consider getting a durable or springing power of attorney as soon as possible. If the principal has capacity issues when they sign the document, the document will be invalid.
In this series of articles, we will compare the different types of PoA documents, look at the potential issues that may arise, examine the specific authorities that can be given, and discuss more fully why you should have them.