A power of attorney (POA) is a legal document in which one person (the principal) authorizes another (the agent or attorney-in-fact) to handle specific matters on their behalf.
When the principal chooses the right person to act on their behalf and safeguard their interests in those fields, they create this document and sign it. From that moment on, the power of attorney is set up and legally binds its parties to its terms.
In this guide, we'll cover everything you need to know about this document, from what a power of attorney is used for to the types and steps involved in its creation. Keep reading to find out the answers and more.
What is a Power of Attorney?
A power of attorney letter, also known as a POA form, is a legal document granting authority to the agent, also known as the attorney-in-fact, to perform specific actions on the principal's behalf in various fields. It is often used when the principal is unavailable, incapacitated, or lacks the expertise for specific financial, medical, or other matters.
The empowered agent named in the power of attorney acts within the scope and for the tasks specified by the principal in this written document. As a result, with a power of attorney, responsibilities and liabilities are established and clear, which leaves no room for potential misunderstanding for both parties involved.
Depending on the tasks delegated and whether the authority continues after the principal's incapacitation, different types of POAs exist to suit various situations, as we will explain in the following section.
7 Main Types of Power of Attorney
Types of power of attorney vary in scope and the specific authority granted to the agent.
Let's explore these variations, from general power of attorney to specific types, such as power of attorney in property:
#1. General Power of Attorney
A general power of attorney is issued when principals want agents to broadly represent them, allowing them to act on their behalf for various matters.
This type of power of attorney is ideal when principals prefer to delegate all kinds of tasks to someone they trust, ensuring those tasks are handled in their best interests without needing to manage them personally.
While this type grants broad authority, agents cannot undertake certain personal matters, such as marriage or writing a will on behalf of principals.
#2. Financial Power of Attorney
A financial power of attorney grants authority to the agent to act solely on behalf of the principal in financial matters, unlike the general power of attorney, which covers broader areas. Principals often designate someone knowledgeable in finance to manage their affairs when they lack the expertise or time to manage their finances adequately.
Typical areas covered by the financial power of attorney include property transactions, where agents are generally authorized to sell or rent real estate, or financial transactions, where the agent is empowered to pay bills or file taxes on behalf of a principal.
#3. Healthcare Power of Attorney
Similar to a financial power of attorney, a healthcare power of attorney is also a form of limited power of attorney. It grants agents specific authority over healthcare decisions on behalf of the principal.
With a healthcare power of attorney, agents typically have the authority to make decisions regarding medical treatments, medications, surgeries, and end-of-life care for the principal.
#4. Limited Power of Attorney
Limited power of attorney grants agents the authority to act within specific areas. This term includes various specialized powers of attorney, including financial or medical POAs.
This type of power of attorney is designed to empower agents to make decisions and take actions on behalf of the principal within a specified scope, which ensures clarity and accountability in their delegations.
#5. Durable Power of Attorney
In general, a non-durable power of attorney terminates when the principal becomes mentally incapacitated or passes away, as they are then unable to make decisions or appoint representatives. However, a durable power of attorney remains valid even after the principal becomes incapacitated.
This ensures that the agent can continue to act on behalf of the principal, especially concerning matters such as managing finances and making decisions related to inheritance rights.
#6. Springing Power of Attorney
This springing power of attorney becomes effective only under specified conditions, such as the principal's incapacitation. Only when the conditions defined in a power of attorney are met does the agent gain legal authority to act on behalf of the principal.
For this type of POA, it's essential to clearly outline how and when these conditions will be determined in the power of attorney document.
What Information Goes into a Power of Attorney?
The information that goes on a power of attorney includes the following:
Power of Attorney Provisions
Information about the parties. This section includes the principal’s and the agent's full names, addresses, and contact details. This field is essential for accurately identifying the parties.
Scope of authority. The document should clearly outline what powers are being granted. The principal can authorize the agent to make medical decisions, real estate decisions, conduct legal proceedings, or handle tax-related matters. In any case, the scope of authority must be clearly defined.
Duration of authority. The POA must specify when it becomes effective and how long it lasts. It could become effective when the principal signs it, starts upon a particular future event or lasts until a specific date or event.
Appointment of agent successor. The principal should specify who will replace the agent when they cannot act. This way, the principal prevents delays in taking necessary actions if the agent is unable to act.
Signature and notarization. The principal must sign the document, which may also need to be notarized and/or witnessed to be legally valid, depending on particular state laws.
When Should You Create a Power of Attorney?
Generally speaking, a power of attorney should be used when the principal cannot accomplish certain activities or make decisions personally. That is why they authorize another person to act on their behalf.
In everyday life, there are many situations where the principal chooses to use a power of attorney, often related to future planning and making decisions.
For example, when it comes to property or an estate the principal will acquire in the future, they want to ensure there is someone to handle financial and non-financial matters regarding that estate. Or, if the principal needs to undergo a risky surgery, they may feel it's safest to authorize an agent to make decisions on their behalf during the surgery or if something goes wrong.
Another typical example is when the principal frequently travels for business or personal reasons, so they need someone to manage their obligations to government institutions, pay bills, or handle other tasks while away.
Therefore, when you are aware that you cannot personally represent your interests, you should have this document at your disposal, enabling you to authorize a trustworthy person to act.
How to Choose an Agent
Choosing an agent hinges on three key factors: trust, the agent's abilities, and their willingness to accept the responsibilities.
An agent can be a family member, a relative, a friend, or a professional. Whoever it is, the most important thing is that they are trustworthy and that the principal is confident that the agent will act in their best interest. Without trust, there could be doubt about the agent's intentions and actions.
Second, the agent must have certain abilities and knowledge. If the principal needs someone to represent them in court or negotiate an important contract, they need a lawyer because they have expertise in these areas. If they need someone to manage their financial matters, a person with knowledge of economics and finance is a good fit.
An agent must accept the power to act on the principal's behalf. Otherwise, there cannot be an agreement between them, which could negatively affect both parties.
Last, the agent must meet state law requirements, which are common in almost all states.
These usually include:
Being 18 years old
Being mentally competent
Having no criminal record
Having no conflict of interest
How to Set up a Power of Attorney in 5 Easy Steps
Setting up a power of attorney involves several steps to ensure your document is effective and legal, such as:
#1. Use Contracts.net Document Builder
To make drafting this complex document easier, we offer our professional Contracts.net POA builder, which will provide you with the necessary power of attorney form in just a few clicks.
On our website, you can find every type of POA, and all you need to do is fill it out according to easy-to-understand instructions and your desired information.
#2. Choose an Agent
In the section above, we explained the qualities and legal requirements an agent should meet, so stick to that. Choose an individual you trust who has the necessary attributes to act on your behalf, is willing to accept the responsibility of being your agent, and understands their obligations.
Additionally, ensure that the agent meets all the requirements prescribed by state law. Once you decide who will represent your interests, include their information in the document.
#3. Decide on the Agent’s Powers
The next step is to clearly define what powers you are granting your agent.
This could include the following:
Making financial decisions
Handling real estate transactions
Managing healthcare decisions
Dealing with legal and tax matters
When deciding on agent powers, consider that there are two ways:
General authority—which allows agents to take any actions on your behalf
Limited authority—which precisely defines actions the agent can take
Defining clear authority limits provides legal protection in cases of misuse or exceeding authority.
#4. Specify the Duration of the POA
Here, you should specify the duration of POA, and you have three options to do so, namely:
The POA takes effect immediately upon signing the document.
The POA becomes active upon a specific event, such as your incapacity or another predetermined circumstance.
You can set a future date for the POA to start so the agent knows when to begin acting on your behalf.
#5. Sign & Notarize Your POA
Once the document is prepared, the principal needs to sign it. As we stated, depending on the jurisdiction, the POA may need to be witnessed and notarized to be valid and legally binding, so check the legal requirements before filling out the POA.
The principal should make a few copies and provide them to the relevant parties, such as a bank, healthcare providers, attorneys, and family members.
Risks of Having a Power of Attorney
The most significant risk of having a power of attorney is that the agent may not act in the principal's best interests, making decisions that could lead to legal and financial consequences for them.
This can happen when the agent's authority is unclear, leading them to assume more power than intended. They might act outside their expertise or without meeting legal requirements, which can impact the principal, such as selling the principal's property without following legal procedures.
Another risk is a conflict of interest, where the agent prioritizes their interests over the principal's, potentially causing significant damage to the principal.
To prevent these risks, it is essential to implement several measures:
Choose an agent who is trustworthy and fully knowledgeable about the power of attorney's responsibilities and liabilities.
Clearly define the agent's authority.
Require regular reporting on actions taken.
Appoint multiple agents to oversee each other's actions.
Power of Attorney: 3 Crucial Mistakes to Avoid
When creating a power of attorney, it is crucial to avoid these three common mistakes to ensure clarity and effectiveness:
Power of Attorney Mistakes
Incomplete documentation. Ensuring clarity and completeness is vital. So, the parties should specify the type of POA, provide detailed information about the pirates for easy verification, clearly define the agent's authority, and regularly update the document to accurately reflect the principal's intentions. Additionally, signing the document is essential to ensuring its validity.
Proper execution. Depending on local laws, this typically involves signing the document in the presence of witnesses or a notary public. Failure to do so can result in the POA not being enforceable or accepted by third parties such as banks, healthcare providers, or government agencies.
Understanding terms. Clearly outline the actions the agent is authorized to perform and any restrictions that apply. Every term in the POA must be clear and easily understood by both the principal and the agent. This clarity helps prevent misunderstandings that could lead to unintended actions or disputes.
Final Thoughts
When individuals lack the time, presence, or expertise to address critical matters, they can delegate these responsibilities through a power of attorney—a written document that protects their interests.
By choosing an agent and defining their authority, principals establish a structured approach to address future uncertainties, whether in managing finances, healthcare decisions, or other areas.
Therefore, embrace the value of utilizing a power of attorney and always prioritize regular reviews and updates to maintain the document's effectiveness and alignment with your wishes.
Power of Attorney FAQ
Yes, you can revoke a power of attorney at any time, as long as you are mentally competent. You must provide written notice to an agent and any institutions that rely on it.
Any mentally competent adult can be named to have power of attorney. Typically, this is someone you trust, such as a family member, close friend, or attorney.
A person with power of attorney must act in the principal's best interest and manage affairs responsibly. They could be held liable for any negligence, misconduct, or misuse of their authority.
The principal can override their power of attorney at any time. Additionally, a court can intervene and revoke the power of attorney if the agent acts improperly or is not in the principal's best interest.
