What You Need to Know About Powers of Attorney

Your estate plan is more than just your will or trust. When people think of an estate plan, they often focus on their will or trust, but there are other documents that make up your plan that you also need to pay attention to. One of those documents, arguably an essential document in any estate plan, is a Power of Attorney. The document gives someone else (sometimes called an "Agent" or "Attorney-in-Fact") the power to act on your behalf for financial and legal matters.

Before you just sign up for a form you find on a website that just mail-merges your information, it's important to understand how it works, the different types that are available, and what it means when you've signed the document.

What is a Power of Attorney?

It's a legal document that allows someone else to make decisions on your behalf. The person you choose can handle a range of responsibilities, including managing your finances, making medical decisions, or signing legal documents, depending upon which of these powers you grant to them.

These documents are commonly used in situations where someone is unable to act for themselves due to illness, disability, or absence. For example, if you travel frequently or have a medical condition that could impair your decision-making, a POA ensures that a trusted individual can manage your affairs smoothly.

Types of Powers of Attorney

There are a few different types of powers of attorney and, depending on what you're looking for, you may want to consider a specific power of attorney as opposed to a more generalized one.

1. General Power of Attorney

A general power of attorney gives someone broad powers to handle financial and legal matters on your behalf. This includes:

Managing bank accounts
Paying bills
Buying and selling property
Filing taxes

This is useful in situations where you need temporary or broad financial oversight. However, it usually becomes invalid if the principal becomes incapacitated.

2. Durable Power of Attorney

The next type to consider is a durable power of attorney, a document that remains in effect even if the principal becomes incapacitated. This type is beneficial for long-term planning as it allows the agent to continue handling affairs if the principal is no longer able to make decisions due to illness or injury.

3. Limited (or Special) Power of Attorney

When you sign a limited power of attorney, you are only granting your agent the authority to perform specific tasks or handle specific matters. For example, if you are selling real estate but cannot attend the closing, you can grant someone a Limited POA to sign documents on your behalf.

4. Medical Power of Attorney

When it comes to medical decisions, a medical power of attorney allows your agent to make healthcare decisions on your behalf if you become unable to do so. This can include decisions about medical treatments, surgeries, and end-of-life care. It is often used in conjunction with a living will or advance directive.

5. Springing Power of Attorney

When a power of attorney only becomes effective under specific conditions, usually when the principal becomes incapacitated, we call this a "Springing" power of attorney. This type is helpful if you want to retain control over your decisions for as long as possible while still having a plan in place for emergencies.

How Do You Create a Power of Attorney

Creating a power of attorney has a few steps, and it's one of those documents where the formalities are important in order for them to be enforceable.

Step 1: Choose Your Agent

Select someone you trust completely, as they will have significant control over your affairs. Consider choosing a backup agent in case your first choice is unable to serve.

Step 2: Determine the Type

Decide which type of power of attorney best suits your needs. If you need someone to manage your finances indefinitely, a Durable POA may be best. If you only need temporary assistance, a Limited POA could be more appropriate.

Step 3: Draft the Document

Trying to find a template online can be a challenge. When you use a mail-merging website, they are often "selling" you a form that you can download for free, and aren't giving you the proper instructions that are needed. As you are drafting the document, you'll need certain formalities, like:

Your full name and address
Your agent’s full name and address
The specific powers granted to the agent
The conditions under which the POA is activated
Signatures of the principal, agent, and witnesses (if required by law)

Working with an attorney can make sure that these formalities are followed (and the power of attorney is often included with the other estate plan documents you are having prepared).

Step 4: Sign the Document

Many states require a power of attorney to be signed in the presence of a notary public. Some may also require witnesses. Check your state’s laws to ensure compliance.

Step 5: Store the Document Safely

Keep the original document in a secure location and provide copies to your agent, attorney, and any relevant institutions (e.g., banks, healthcare providers). If you are incapacitated, it's important that the original can be located by your agent.

The Legal Implications of a Power of Attorney

Along with the benefits that it provides you, it's also important that you and your agent understand the responsibilities and risks that can come with a power of attorney.

Responsibilities of Your Agent

An agent under a POA has a fiduciary duty to act in the best interests of the principal. This means they must:

Follow the instructions outlined in the POA
Keep accurate records of financial transactions
Avoid conflicts of interest
Refrain from using the POA for personal gain

Limitations of a POA

A power of attorney does not give the agent unlimited power. The scope of authority is determined by the document, and any abuse of power can lead to legal consequences. Additionally, a POA automatically terminates upon the principal’s death, at which point the estate is managed according to the principal's will or state laws.

Potential Risks and How to Avoid Them

A POA can be misused, leading to financial exploitation. To minimize risks:

Choose a trustworthy agent
Set clear limitations on the agent’s authority
Require periodic reporting and oversight
Revoke the POA if you suspect misconduct

How to Revoke or Change a Power of Attorney

If you need to revoke or modify a POA, follow these steps:

Draft a written revocation statement
Notify your agent and any institutions relying on the POA
Create a new POA if necessary
Have the revocation notarized (if required by law)

Revoking a POA is especially important if you believe your agent is not acting in your best interest or if your circumstances change.

A Power of Attorney is a powerful tool for managing your affairs, but it must be used wisely. By understanding the different types of POAs, how to create one, and the legal implications involved, you can ensure that your interests are protected. Whether you need a POA for financial management, medical decisions, or specific transactions, careful planning and legal guidance can help you make the right choices for your future.

Need Help With Your Estate Plan?

If you would like help with your powers of attorney, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you to work with an estate planning attorney.