A power of attorney is a legally binding document—not an individual—that allows you to appoint someone to manage your real property (real estate), personal property, or medical or financial affairs for you, according to the Consumer Financial Protection Bureau.1 In other words, it gives someone else the authority to make the decisions you would normally make, in the event you can no longer make them.
The person creating the POA is called the “principal.” The person being appointed with decision-making power is called an “agent.”
POAs are typically used by those who cannot manage their affairs, either due to mental incapacity or physical absence. This may be short-term (for example, due to illness or travel) or long-term (like with a severe brain injury or a coma), depending on the type of POA.
In the legal sense, someone is considered incapacitated if they lack the ability to make rational decisions according to the Legal Information Institute of Cornell Law School.2 This can be due to an illness, declined mental state, a disability, or simply being away for an extended period of time.
For more information about the importance of having a POA in place, our Reviews Team spoke with Amanda Dorio, Esq. She practices in the areas of wills, trusts, estates, probate, and trust administration and is licensed to practice law in Florida and Wisconsin. Dorio shared that a “[POA] is a vital legal tool that empowers a trusted individual to manage your financial matters in case you can’t. It’s a smart way to ensure that your financial affairs are handled smoothly during unexpected situations rather than facing potential delays and complications without one.”
What does a power of attorney do?
A POA allows you to grant someone, also known as an agent, the authority to make your decisions for you.
A POA creates a “fiduciary relationship” between you and your agent. A fiduciary relationship is when one person is legally obligated to act in the best interests of another person. That means they’re responsible for making decisions for you, in the way you would want those decisions to be made.
Who needs a power of attorney?
POAs are typically set up for older adults engaged in the estate planning process. They are commonly included in estate planning bundles, so if you don’t yet have a will, you can get both of these documents at the same time.
If you want to create a power of attorney for a parent or loved one, you’ll want to do it as soon as possible. Once that person is declared incapacitated, they won’t be able to create a power of attorney. Instead, a judge will have to formally appoint a guardian to care for them.
Power of attorney limitations
You can set a limitation on either the scope or duration of the agent’s authority when you create a POA.
For example, a springing POA is limited because it won’t take effect unless you become incapacitated. A non-durable POA is limited by placing an expiration date on your agent’s authority. A financial POA limits the agent’s scope of authority to only financial decisions. No matter what type of POA you create, the agent’s authority will expire once you die.
Though your agent has complete decision-making authority over the affairs included in your POA, they are still required to act in your best interest.
For example, your agent will never be able to:
- Write your will or change it
- Transfer funds from your bank account to their own (without your consent)
- Make decisions after your death (unless they’re appointed to do so in your will)
- Transfer the POA power to someone else without your consent
Risks of a power of attorney
The main risk of having a power of attorney is your agent may make the wrong decisions on your behalf. Make sure your agent understands exactly what your wishes are and why they are important to you.
In rare cases, a POA can be abused by an agent who tries to take advantage of their power over your affairs, which is a crime, according to the National Center on Elder Abuse.3 That’s why it’s so important to choose an agent you completely trust to act responsibly.
To minimize this risk, you can craft a POA that includes certain safeguards such as:
- Naming multiple agents to act jointly
- Naming multiple agents to be responsible for particular decisions
- Naming a successor agent in case your initial agent passes away or otherwise can’t perform the responsibilities you’ve granted them
- Requiring the agent to approve decisions with a trusted probate attorney or accountant