What is a power of attorney?
March 7, 2023 9 min read
A power of attorney (POA) is a legal document that enables one person to make decisions or take action on behalf of another person.
Read on to learn how a power of attorney works and about the two main types: financial POA and health care POA.
- A power of attorney authorizes someone else to make financial or medical decisions for you when you’re unable to make them.
- You don’t need to hire a lawyer to set up a power of attorney.
- When establishing a power of attorney, it’s wise to pick a trusted relative or friend to hold that power.
- As long as you’re mentally capable of making the decision, you can revoke a power of attorney at any time.
Power of attorney definition and how it works
A power of attorney is a legal document that lets someone act on behalf of another person regarding financial and medical matters. For example, a POA may give an adult child the authority to act on behalf of a parent to do things like handle bank accounts or provide guidance regarding medical care.
In a POA, someone can give broad or limited authority to another person, such as a spouse, adult child or sibling, to make decisions on their behalf. A POA can grant decision-making capabilities to more than one person.
Typically, someone establishes a POA when they’re still able to handle their own financial and medical matters in the event that someday they’re unable to manage their affairs. In order to set up a POA, the person granting decision-making authority must be mentally competent. And in order to hold POA authority, a person must be an adult and must not be incapacitated.
A lawyer isn’t required to create a POA.
The main parties in a power of attorney
The two main parties in a POA arrangement are the:
- Principal: The principal is the person who assigns authority to someone else to handle their financial and medical matters if they aren’t capable of making such decisions on their own.
- Agent or attorney-in-fact: The agent—often called an attorney-in-fact—is the one who’s been given the authority to act on behalf of the principal. Two or more people can share attorney-in-fact duties through what’s known as a dual power of attorney. However, legal experts recommend naming just one attorney-in-fact.
Types of power of attorney
Two primary types of POA are available: financial power of attorney and health care or medical power of attorney—sometimes known as a health care proxy.
Financial power of attorney
A financial power of attorney gives permission to the attorney-in-fact to deal with financial matters on behalf of the principal. A financial POA typically covers tasks such as:
- Signing checks: An attorney-in-fact generally can sign checks for the principal. For instance, an attorney-in-fact may be able to endorse a check from the federal government that’s written to the principal.
- Making deposits and withdrawals: Acting on behalf of the principal, an attorney-in-fact typically can make bank deposits and withdrawals.
- Changing beneficiaries: A POA may enable an attorney-in-fact to change the principal’s beneficiaries.
- Filing tax returns: An attorney-in-fact generally can file tax returns for the principal.
- Making investment decisions: Under a POA, an attorney-in-fact normally can make investment decisions for the principal, such as buying or selling stocks.
Health care power of attorney (HCPOA)
A health care power of attorney (HCPOA), also known as a medical power of attorney, lets a person—the principal—designate another person to make health care decisions if the principal is unable to do so. It remains in effect until the principal becomes incompetent or the document is revoked.
Under an HCPOA, health care decisions can’t be made for the principal until their physician certifies that the principal is incompetent. The decisions must follow the principal’s wishes, including their religious and moral beliefs. Broadly speaking, these decisions refer to treatment or diagnosis of a physical or mental condition.
Health care proxy vs. power of attorney
A health care proxy, sometimes called a durable medical power of attorney, is a legal document that lets the principal name another person to make medical decisions on their behalf when they’re unable to make those decisions. For example, the proxy may allow the designated person to give the go-ahead for medical treatment or surgical procedures.
Although this varies from state to state, a proxy usually takes effect only when a doctor declares that the principal is incapacitated.
While a health care proxy and power of attorney are similar, some states don’t treat health care proxies the same as POAs. New York, for example, does not view a health care proxy as a power of attorney. Rather, the state refers to a POA as a document that applies only to financial matters.
General vs. limited vs. durable power of attorney
Within the broad category of POAs are three specific types: general power of attorney, limited power of attorney and durable power of attorney.
General power of attorney
A general POA grants broad authority to an attorney-in-fact to make decisions for the principal. All of the permitted activities must be listed in the POA document, though. An attorney-in-fact may, for example, be able to open and close bank accounts in the principal’s name.
A general POA goes into effect right away and expires when the principal becomes incapacitated, dies or revokes it.
Limited power of attorney
A limited POA gives an attorney-in-fact the ability to carry out specific actions or covers a certain period of time. For instance, a limited POA might restrict the attorney-in-fact to selling the principal’s home.
Durable power of attorney
A durable POA lets the attorney-in-fact keep managing the principal’s affairs if the principal becomes incapacitated or until they revoke the POA.
Most POAs are durable.
Springing power of attorney
A springing POA, a type of durable power of attorney, allows the attorney-in-fact to act on behalf of the principal only if the principal becomes incapacitated or disabled.
Limitations of a power of attorney
While a power of attorney can grant broad authority, there are limitations about what the attorney-in-fact can do. These limitations apply to:
- Failing to act in the principal’s best interests: For instance, someone who holds the power of attorney isn’t supposed to buy a certain stock if the principal opposed investing in that company.
- Changing the principal’s will: An attorney-in-fact cannot alter the principal’s will. However, some states may let an attorney-in-fact create a new trust for the principal or make changes to an existing trust.
- Making decisions after the principal’s death: Because a power of attorney expires when the principal dies, the attorney-in-fact can’t make any decisions after that happens.
- Changing the POA: An attorney-in-fact can’t change a POA. However, the principal can revoke the POA at any time, as long as they’re of “sound mind.” Also, people other than the principal can take legal action to challenge a POA.
- Choosing another agent: An attorney-in-fact can’t assign their power to anyone else.
Can a power of attorney transfer money to themselves?
Generally, an attorney-in-fact can’t transfer any of the principal’s assets to themselves. However, a transfer may be allowed if the principal authorizes it.
Who can override a power of attorney?
If the principal is capable of making the decision, they can override the power of attorney. A judge can also override a power of attorney, typically through a guardianship or conservatorship.
How to choose a power of attorney
It’s best to choose a trusted person, such as a relative or friend, to be granted your power of attorney. Make sure that whoever you appoint is clear about your wishes and preferences.
Choosing a power of attorney for a family member
In some cases, it may be necessary to set up a power of attorney for a family member, such as a parent or other relative.
State laws vary when it comes to naming a power of attorney for someone else. But a POA agent generally must be a mentally capable adult. Oftentimes, adult children obtain power of attorney for an aging parent who’s no longer able to make decisions on their own.
How to set up a power of attorney
You can set up a power of attorney on your own using POA templates that can be found online. However, some people may prefer to tap the expertise of an estate attorney to create a POA.
POA requirements vary from state to state, but certain steps typically must be followed:
- Use the correct written form. Make sure the form is valid in the state where you live.
- Identify the principal and agent(s). A key part of creating a POA is identifying the principal and designating the agent or agents—such as an adult child—who’ll act on your behalf.
- Detail the powers the agent will have. The document should outline the tasks that the agent can carry out in your name.
- Indicate if the POA is durable. Be sure to note whether the POA is durable, meaning it’s normally in effect until you die or you revoke the POA.
- Notarize the POA. In many cases, a POA needs to be notarized in order for it to be legally binding. Some states require notarization of these documents.
- Record and file the POA. The document may need to be recorded and filed with the recorder of deeds in your county if, for instance, the POA is being used for a land transaction.
Ending a POA
A POA may end under several different circumstances, such as:
- The principal revokes the POA. The principal can revoke the POA as long as they’re mentally capable of doing so.
- The principal dies. A POA ends when the principal’s life ends.
- The agent can’t carry out their duties. An agent may decide to give up their duties, for example, or a judge might remove the agent if that person has acted improperly.
- A court makes the POA invalid. A judge might toss out a POA if, for instance, an agent has been found to have abused their authority.
- The principal and agent split up. If the principal and agent are married and end up getting a divorce, the POA automatically ends.
A power of attorney can generally be revoked by putting the revocation in writing or creating a new POA. The specifics depend on the laws in your state.
It’s not necessary to hire an attorney to revoke a POA.
In a nutshell: Power of attorney
A power of attorney can be a valuable tool that can give you peace of mind. Consider setting up a power of attorney as part of a broader financial plan that includes setting your financial goals.