Power of Attorney: What is it?
This sounds much more complicated than it is. A power of attorney (POA) is a legal document that allows one person to act on behalf of another. The person setting up the POA is called the principal and the person given the power to act is called the attorney-in-fact. The scope of the attorney-in-fact can be limited to a single act or can be broad. For example, I can create a POA that allows my neighbor to pay my cable TV bill (limited scope) or that gives my neighbor all my legal power (broad scope).
There are four types of POA and each has its own purpose.
1) General POA
A General POA grants certain rights—as limited or as broad as you wish—to an individual that enable them to act on your behalf. The General POA is valid and enforceable until any one of the following four things occurs:
- The attorney-in-fact dies.
- The principal revokes the POA.
- The principal dies.
- The principal becomes disabled or incapacitated.
2) Durable POA
At this point you may be wondering why a POA is so important. Perhaps you are saying, “I don’t rent my house and I’m not going on a sabbatical.” While you may not be in a situation where you need a General POA, you will probably need a Durable POA. The word “durable” means long-lasting and able to withstand wear. Unlike a General POA, which voids when the principal becomes disabled or incapacitated, a Durable POA does not terminate when the principal becomes disabled or incapacitated; it survives the disability.
3) Springing POA
When you create General or Durable POA, it becomes enforceable immediately. In other words, if you sign a General or Durable POA today that gives your best friend the ability to write checks from your bank account, your friend can immediately begin writing checks from your account. If your goal is to give your friend the ability to pay your bills if you become incapacitated, do you really want to grant him this power before you become incapacitated?
In this situation, you need a Springing Durable POA. A Springing POA “springs” into existence only after a specified event occurs. You choose the triggering event; it can be almost anything but most people choose disability or incapacitation as their trigger.
4) Healthcare POA
The Healthcare POA is different from the other POAs in that the other POAs tend to focus on the management of property and the Healthcare POA grants the attorney-in-fact the ability to make health care decisions on behalf of the principal if he is legally incompetent.
Like the other POAs, the Healthcare POA specifically addresses the decisions the attorney-in-fact can make for the principal—usually the decisions are related to medical treatment, medication, discharge, blood transfusions, etc. State laws vary considerably in how much decision-making power you can grant in the POA.
Don’t confuse a “Living Will” with a Healthcare POA. A Living Will is a document that focuses exclusively on the extent that the attorney-in-fact can terminate treatment and/or life support. Regardless of your view on how much and what type of life sustaining support you want, your wishes on this subject should be recorded. You still need to have a Healthcare POA in place to name an attorney-in-fact who can make other medical-related decisions on your behalf.
Who needs it?
A General POA is typically used to grant someone a specific power—cashing checks or buying and selling investments—or a broader power for a limited period of time.
The General POA can be extremely helpful if you are out of town or busy, but is not an essential document. A Durable POA, however, is absolutely essential. The world doesn’t stop when you become incapacitated; you still have a mortgage, credit card bills, and property taxes. If you’re not able to pay these bills, who will? Even with ample money available, someone must have the ability to write checks against your account.
If you’re single, you will definitely need someone to manage your affairs if you become disabled and incapacitated. A Durable POA will give them the ability to help you in a time when you can’t help yourself. Marriage doesn’t let you off the hook; depending on your state of residence, there are some transactions that require signatures from both spouses. Don’t leave your spouse powerless at a time when she needs as many resources as possible.
Older individuals and those prone to incapacity (e.g., history of strokes or Alzheimer’s in the family) must also have a Durable POA.
The only question is whether to have a Durable POA or a Springing POA.
Remember, a Durable POA gives the attorney-in-fact the power to act on your behalf immediately whereas the Springing POA is only effective if you become incapacitated. A few states still do not recognize a Springing POA, so in those states the only solution is a Durable POA. If your state allows a Springing POA, it almost always makes more sense to choose a Springing POA.
A Healthcare POA should also be part of your estate toolbox.
It requires you to answer some tough questions and to get clear on sensitive subjects. If you don’t answer these questions now, you might force a loved one to answer them for you. They will not be sure they are making the decision you would have chosen and their doubts may haunt them for the rest of their life.
In short, everyone should have a POA—married, single, with children or without, young, or old; you need a legal document that gives someone you trust the power to take care of you and your affairs.
Incapacity is difficult enough for you and your loved ones—make it easy for them to help you.
With any type of POA, make sure you absolutely trust the individual you name your attorney-in-fact since he or she will be acting on your behalf. Depending on the powers you list in the POA, this person may have access to your bank and investment accounts and may be able to make a life and death decisions for you.
Giving one person the legally authority to act on your behalf on all matters is not always prudent. We diversify investments to mitigate and spread risk and sometimes it is also smart to diversify among several attorneys-in-fact to mitigate risk. For example, if you create a POA in the event that you become incapacitated, you might grant a friend—with a strong finance background—the ability to deposit checks and to make buy or sell decisions within your investment accounts. You could then grant your brother the power to write checks from your bank account and to transfer funds from your investment accounts to your bank account. In doing so, you maximize the financial education and experience of your friend but avoid giving her carte blanche.
Married couples often, and understandably so, name each other as their attorney-in-fact. While this is normally the smart decision, it’s not good enough on its own. If both you and your spouse become incapacitated in an auto accident, your POA will not be enforceable. It is critically important to name successor attorneys-in-fact if the primary attorney-in-fact (e.g., your spouse) is unable to perform the task.
One of the drawbacks with a Springing POA is first defining the springing trigger and then determining if it has occurred. The named trigger is typically disability and incapacity but these two terms alone are not precise enough for a POA. Have an estate attorney with experience drafting POAs help you write the language to avoid any ambiguity in the definition of your activating trigger.
As with any estate planning document, make sure you review it regularly—at least annually and immediately following a major life change or transition. Select one day a year to review all of your estate documents and put it on your calendar—then keep the appointment.
How much should it cost?
Use an estate-planning attorney to draft a POA. This is especially true if you are creating a Durable or Springing POA. The language must be worded precisely; otherwise, the document may not have the necessary legal authority when you need it. Depending on the type of POA you require, drafting it should cost somewhere between $250 and $750.
The proceeding blog post is an excerpt from The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week!, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.