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What Is Power of Attorney?

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Key takeaways

  • Power of attorney is a legal document that allows someone else to act on your behalf. 
  • There are several different types of power of attorney, including financial power of attorney and health care power of attorney. 
  • Appointing powers of attorney is an important part of estate planning that can help protect your wealth and well-being. 

When you think about estate planning, some of the first components that come to mind might be a will or a trust. But there are other important pieces you may want to put into place that you’ll need even before you’re gone. Power of attorney is one of them.  

What is power of attorney?  

A power of attorney (POA) is a legal document that allows someone else to act on your behalf. It can ensure that your medical, financial and legal wishes are carried out if you are still living and become unable to make decisions for yourself. When selecting individuals to act as powers of attorney, you’re in control of who you appoint and how much responsibility you’ll give them in managing your affairs.  

Setting up a power of attorney is an essential part of estate planning. If you neglect it and aren’t able to make important life decisions on your own, a court might appoint someone to do it for you—and you may not agree with their choices. It could also create stress for your loved ones. There are also some situations where you may want power of attorney even if you’re not incapacitated. Let’s take an in-depth look at what you need to know about power of attorney.  

How does power of attorney work?  

Power of attorney is a legal document. By signing one, you’re giving someone else the authority to act on your behalf in certain situations. (More on this shortly.) This person is called the agent, and they can be anyone you choose—your spouse, your adult children, your adult grandchildren or a trustworthy friend. You can even appoint two people, known as a dual power of attorney.  

The person or people you appoint can oversee legal, financial or medical matters—or a combination of all three. You can designate the same person to fulfill multiple roles or choose different people to handle different aspects of your life. And changes can be made to your power of attorney if:  

  • You’re of sound mind and want to change or revoke your power of attorney. 
  • Your agent no longer wants the responsibility.  
  • If your loved ones disagree with your POA agent or feel they aren’t acting in your best interest, they can petition the court to revoke them.  

What are the different types of power of attorney? 

The most common types of power of attorney people select are financial power of attorney (someone who can make financial transactions on your behalf) and medical power of attorney, also sometimes referred to as a “medical proxy” (someone who can make decisions about your medical care). Each of these types of power of attorney can be helpful if you become unable to make decisions for yourself, but there are also situations where you might want a power of attorney to act on your behalf even if you’re of sound mind and able to make your own decisions.  

Perhaps you’d like someone to complete a real estate transaction on your behalf if you are not present to sign all documents in person. Or maybe you want someone to file your taxes for you. In these instances, you might set up a nondurable POA. With a nondurable POA, you select someone to act on your behalf, but that responsibility goes away if you become incapacitated.  

A durable power of attorney is more likely to meet your needs for estate planning. With a durable POA, you select someone to make decisions on your behalf even after you’ve become incapacitated.  

POAs can also be: 

  • General: This allows the agent to act on your behalf across many areas of your life. For example, you might give them the authority to make legal, financial and property decisions. 
  • Limited: This type of POA gives the agent less power. Their authority can be limited in any way you choose. For example, you might establish a limited POA so that someone else can file your tax return for you—but that person can’t buy or sell securities on your behalf.  
  • Springing: This type of POA will only take effect if a specific predetermined event happens. For instance, you might only want a financial power of attorney if you become incapacitated.  
  • Dual: With a dual power of attorney, you give equal responsibility to two people. If the two people are not able to agree on a decision, a court may get involved.  
common types of power of attorney

What are some things a power of attorney can’t do? 

Powers of attorney can give your agent a lot of leeway when it comes to making legal, financial and health care decisions, but there are limitations. Generally speaking, a power of attorney does not allow an agent to:  

  • Change your will  
  • Move money from your bank account to theirs without your consent 
  • Transfer their power of attorney privileges to someone else without your consent 
  • Make any decisions on your behalf after you’ve passed away 

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Why should you set up power of attorney? 

Having different powers of attorney can help protect your wealth and well-being. If you become incapacitated or develop a condition that interferes with your mental ability, your POA agent can make critical life decisions that you’re unable to make on your own. POAs can be especially important if you:  

  • Have a high-risk job or participate in risky hobbies 
  • Are aging and think you’ll need help managing your finances or medical care 
  • Are traveling for an extended period and need someone to handle your affairs from afar 

How do you get power of attorney? 

The requirements and rules around power of attorney can vary from one state to another. To make sure you’ve correctly completed and filed the necessary forms, it’s best to work with a legal professional when establishing powers of attorney.  

Your power of attorney is one piece of your larger estate plan—one that’ll include important instructions of what should happen to your money and belongings when you’re gone. Your estate planning attorney can help you put plans into place and give you peace of mind that your wishes will be honored. When estate planning, a financial advisor is another great resource, as they can make recommendations for how to best pass down the legacy you’ve built. 

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