Powers of Attorney (POAs) are important legal documents that determine the management of assets in the event of illness or incapacity. A power of attorney designates an agent, or attorney-in-fact, to act on your behalf. Here’s everything you need to know about a power of attorney.
When Do You Need a Power of Attorney?
Generally, you create a power of attorney during the estate planning process. The purpose of the POA is to give an individual control of your assets and financial affairs in the event you become incapacitated or no longer of sound mind.
Here are some instances where a power of attorney can be used:
- Naming an agent to act on your behalf during business transactions
- Naming an agent to file a lawsuit on your behalf
- Naming an agent to collect debts on your behalf
What Are the Types of Power of Attorney?
The two main types of POAs are medical and financial. Both can provide a broad or narrow scope of authority depending on the specifications of the document.
Medical Power of Attorney
A medical POA, also called a health care power of attorney, allows an individual (agent) to act on your behalf if a medical situation leaves you incapacitated and unable to make health care decisions.
Financial Power of Attorney
A financial POA is a legal document that authorizes another person to engage in business transactions on your behalf, like signing checks, filing tax returns, and managing investments. Authorization to start these duties typically begins at a specified time for specified reasons. For instance, if you are going to be out of town and need some financial transactions
There are three categories of financial POAs:
- General POA. The agent works on various financial matters, including handling bank accounts, managing investments, selling real estate, signing checks, and filing taxes. The general POA must comply with state laws. This POA is no longer valid if you become mentally unsound or incapacitated. (I thought that that’s what it was for?)
- Limited POA. In this POA, the agent is limited to acting on your behalf for a specific circumstance during a set period. For example, if you are out of the country for a year, the agent can act on your behalf with the financial transactions you defined.
- Durable POA. A durable POA will remain in effect over your legal, financial, and real estate matters even when incapacitated. This POA explicitly says it is durable, and the agent appointed on your behalf will be in charge until you pass away unless you formally revoke it. In the context of a durable POA, sometimes a document called a springing POA is set up to set the guidelines for the trigger event that will lead to the durable power of attorney to take effect. A durable power of attorney can remain dormant until an event pushes it to go into effect.
How Do You Set Up a Power of Attorney?
State laws vary when setting up a power of attorney, and you may want to consult an attorney to ensure your POA is set up correctly. There is no standard form of a POA. In general, though, a valid POA has the following elements:
- It’s in writing.
- The effective dates are listed.
- All parties are identified.
- There is a description of authority given.
- It is signed.
- It is witnessed and notarized.
- It’s recorded with the county.
- It’s filed with the local government agency.
How Long Does a POA Last?
A POA can be revoked. Some types of POAs have an end date listed. If you become incapacitated, all POAs will be revoked unless they are durable powers of attorney. All POAs terminate at the time of your passing.
Choosing Your Agent for a POA
When choosing an agent on your behalf, be careful whom you choose, ensure you’re comfortable with this person, and trust them to make the right decisions. You can choose anyone to be your POA but don’t make this decision lightly. All agents have the fiduciary duty to work in their best interests. You want to make sure you choose the person you are confident will work with your wishes and goals.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.