What Is Power of Attorney and How Does It Work? - SmartAsset

The power of attorney (POA) authorizes another person to sign legal documents and otherwise act on your behalf in the eyes of the law. This power, however, does not apply to making changes to a will. It ends when you die — or earlier. It can never be invoked after your death. You can limit the power in scope or to a certain timeframe or event (such as your becoming incapacitated). You can also revoke it. If you need more help sussing out the nuances of power of attorney and how it can apply to financial documents and decisions in your life, consider enlisting the help of a financial advisor.

Power of Attorney Definition

A power of attorney, also known as a letter of attorney, is a legal document that you sign to authorize another person to act on your behalf. The person who is giving his or her power is known as the principal, the grantor or the donor. The person taking on the power is known as the agent or the attorney-in-fact.

The grantor can choose which rights to give the agent. For instance, if you have a disease that may leave you incapacitated, you can give medical power attorney to an agent to make decisions about treatment when you become unable to do so. Grantors could also give the agent the right to make financial decisions for them, including over their investment accounts. For example, if you are going on a six-month trip around the world, you may grant POA to someone to help you run your rental properties.

Power of Attorney Types

As said above, there are different responsibilities you can grant using a POA. The most common are as follows:

General power of attorney: This gives a broad spectrum of rights to the agent. They can handle business transactions, settle claims or operate your business. This type of power of attorney is useful if you are leaving the country or if you foresee yourself becoming incapacitated. Estate plans often include a general power of attorney. General power of attorney can also include insurance decisions and investment decisions, including those regarding your 401(k) or IRA.
Special power of attorney: This gives specific authority to the agent. If you want to take a sabbatical and need someone to see to your business interests, you could assign specific business powers to your agent for a set amount of time.
Healthcare power of attorney: This POA is specifically for medical decisions. Your agent can make decisions regarding your medical care if you are unconscious or otherwise unable to make your own choices. If you are going into a risky surgery where there is a chance you will end up in a coma, for instance, signing a healthcare power of attorney could be a good decision. This is a key part of an advance healthcare directive.

Durable vs. Springing Power of Attorney

There are two additional categories that every POA will fall into, durable and springing. Durable power of attorney takes effect as soon as you sign the document. Your agent immediately assumes the power you are granting them, and they keep that power if you do become incapacitated or once you take whatever actions that leave you unable to attend to your affairs.

Springing power of attorney, on the other hand, only goes into effect once you become incapacitated. This is a good option for those who simply want to prepare for the event if something were to happen. If you have a high-risk illness, for example, a springing power of attorney lets you maintain the sole right to make decisions for your treatment unless you become incapacitated, in which case your agent assumes the responsibility.

How to Create a Power of Attorney

Creating your own POA is not difficult. Here are the steps you’ll need to take:

Determine which type you need and choose your agent, which we discuss in more detail below.
Buy or download the proper form. The form will depend on the state you are in, so make sure you are getting the correct one. Alternatively, you may want to hire an attorney to help you draw up your power of attorney.
Fill out the form or have your attorney do it for you. This is the part of the process in which you name your agent and spell out the powers you are transferring.
Sign the document. Some states will require you to get your signature notarized. You may also need to get the document formally recorded by the county or file it with a court or government office for it to be legal.

Finding the Right Agent

The key to making a POA work is finding the right agent to make decisions on your behalf. Your choice may depend on which type of POA you are signing. For a POA related to business, for example, you probably want to find someone with business experience. For legal matters, an attorney may make sense. With healthcare, it’s important to pick someone who is close to you. Your spouse, child or close friend probably makes the most sense.

No matter who you pick, make sure you trust them to make the decisions that are the best for you. Legally, your agent only would be liable for an act of intentional misconduct. If your agent simply makes a mistake, that is not a legal issue.

The Bottom Line

A power of attorney is a legal document that passes a person’s decision-making power to another person, known as an agent. You can hand over the rights to make decisions around matters like healthcare, business decisions or real estate transactions. A durable power of attorney goes into effect right away. Springing power of attorney, on the other hand, takes effect when you become incapacitated.

Estate Planning Tips

Whether or not you need a power of attorney now, getting help with your finances always makes sense. A financial advisor can help you properly plan out your estate and what you leave to heirs. Finding a financial advisor doesn’t have to hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Your agent may have to make decisions about your 401(k) account. Find out how much money you’ll have in your account by the time you retire with our free 401(k) calculator.