In its most basic form, a power of attorney, or POA, is a legal document that gives another person the authority to make decisions on your behalf should you become unable to do so. This individual, also referred to as an agent, is responsible for carrying out your wishes and acting in your best interest. This legal document is an essential element of your estate plan. Without it, the handling of everything from medical decisions to financial assets will ultimately be left in the hands of the court — which can be a lengthy and costly process.
When choosing a POA, it’s important to know that not all power of attorney documents are built the same. In fact, there are multiple types of powers of attorney. Some handle specific affairs, such as medical and health care decisions, while others give the agent the general authority to act on your behalf in a multitude of situations. If you don’t understand this language in the context of the law, you could risk choosing the wrong agent or drafting a power of attorney document that doesn’t align with your specific needs.
Understanding a durable vs limited power of attorney
A durable power of attorney means the document will outlast your disability. In other words, the POA will remain valid should you become hurt, sick or cognitively impaired. A durable POA goes into effect once signed by you, the principal, and remains valid until you die or cancel it. The agent of a durable POA must act in your best interest, avoid conflicts of interest and maintain accurate records regarding your affairs.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A limited power of attorney is quite the opposite. It gives the agent the authority to act on your behalf in specific matters and may only be in effect for a certain period of time. In most cases, these documents are non-durable and are designed to expire once the agent has fulfilled the duties outlined in the document. For example, the agent of a limited POA may be assigned to only handle retirement accounts or close a business deal or sell property on your behalf. Once the task is completed, the document is no longer valid unless specified.
What is a springing power of attorney?
Another option when drafting your POA, is implementing a springing power of attorney. These types of POAs are unique in that they only take effect when a predetermined event occurs, such as mental incompetence. When that happens, the agent’s powers and responsibilities outlined in the document are activated.
This type of POA could be useful for those who have a history of dementia or Alzheimer's disease in their families. If you know that ahead of time, you can make a plan for who will make decisions on your behalf. Your estate planning attorney can help you draft the appropriate language for determining who has the power to declare you incapacitated and what needs to happen before your agent can exercise their authority.
What are the different types of POAs?
In addition to the different ways a POA can be structured, there are other powers your agent can have. One of the broadest forms of POA is a general POA. A general power of attorney gives the agent broad authority over several different situations. If you’d like, you can give the agent the power to handle everything from financial accounts to real estate affairs to signing documents on your behalf. In other words, you control how much authority your agents have. If you want them to continue to make decisions on your behalf should you experience cognitive decline, your general POA must be durable.
If you want a spouse, adult child or other loved one to be able to make medical decisions for you should you become mentally incapacitated, you’ll need to sign a medical power of attorney. Similar to a springing POA, a medical POA only goes into effect in the event you experience cognitive decline. This person can make decisions about your treatment, pay bills and even make end-of-life choices.
If you want a POA to solely manage your finances, you’ll want to implement a financial power of attorney. Typically, these agents handle retirement accounts, bank accounts, real estate, taxes, even making charitable donations. This agent should clearly understand your finances.
For spouses of active-duty members, a military power of attorney can be helpful. This legal document gives the spouse the ability to register a newborn, rent, buy or sell property in the service member’s name.
As you can see, there are various types of POAs available for different situations, but there are some general things you’ll want to keep in mind as you’re making your choice:
- Your agent should be someone you trust to have your best interest at heart. You should trust this person to be able to handle any matter that may come up, and your POA must include language to reflect that. For example, to make sure your assets don’t go through probate, you can give your agent the ability to change or designate beneficiaries.
- Your agent can also take care of court matters on your behalf and create a trust if your circumstances call for it.
- It’s also a good idea to make a list of alternate agents. This ensures that your estate is still taken care of if your agent becomes hurt, sick, moves, passes away or encounters a conflict of interest that prohibits them from acting on your behalf.
Ultimately, you determine how much power your agent has. What’s most important is that your POA document explicitly details those terms, so meet with an estate planning attorney. They can help you determine what kind of POA you need, discuss potential agents and ensure your POA includes all the necessary language needed to carry out your wishes.
Related Content
- Estate Planning: 10 Things You Should Know
- Why You Need an Advance Directive
- Five Mistakes to Avoid When Writing a Financial Power of Attorney
- How to Choose Your Power of Attorney When You’re Remarried
- Is Your Estate Ready if You Experience Cognitive Decline?
-
I'm want to give my 3 grandkids $5K each for Christmas.You're comfortably retired and want to give your grandkids a big Christmas check, but their parents are worried they might spend it all. We ask the pros for help.
-
If You're Not Doing Roth Conversions, You Need to Read ThisRoth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us?A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
I'm Retired and Want to Give My 3 Grandkids $5,000 Each for Christmas, But Their Parents Don't Want Them to Spend It All.
You're comfortably retired and want to give your grandkids a big Christmas check, but their parents are worried they might spend it all. We ask the pros for help.
-
I'm a Financial Planner: If You're Not Doing Roth Conversions, You Need to Read This
Roth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us? A Retirement Psychologist Makes the Case
A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
I'm a Financial Adviser: This Is How You Can Adapt to Social Security UncertaintyRather than letting the unknowns make you anxious, focus on building a flexible income strategy that can adapt to possible future Social Security changes.
-
The Stoic Retirement: Ancient Wisdom for Today’s Biggest Life TransitionA "Stoic retirement" doesn't mean depriving yourself. It's a character-based approach to life and aging that can bring calm and clarity.
-
11 Outrageous Ways To Spend Money in RetirementWhether you have excess cash to spend or want to pretend, here’s a look at 11 ridiculous ways retirees can splurge.
-
I'm a Financial Planner for Millionaires: Here's How to Give Your Kids Cash Gifts Without Triggering IRS PaperworkMost people can gift large sums without paying tax or filing a return, especially by structuring gifts across two tax years or splitting gifts with a spouse.
-
'Boomer Candy' Investments Might Seem Sweet, But They Can Have a Sour AftertasteProducts such as index annuities, structured notes and buffered ETFs might seem appealing, but sometimes they can rob you of flexibility and trap your capital.
