Power of Attorney
[power-of-attorney poa beneficiary finance The term power of attorney (POA) refers to a legal authorization that gives a designated person the power to act for someone else. As such, a POA gives the agent or attorney-in-fact the authority to act on behalf of the principal. The agent may be given broad or limited authority to make decisions about the principal’s property, finances, investments, or medical care.
This document is exermpt from power of attorney (POA)
There are two main types of POAs, financial and health care—both of which provide the attorney-in-fact with general or limited powers.
- A power of attorney is a legal document that gives one person the power to act for another person.
- The person who receives the authority is the agent or attorney-in-fact while the subject of the POA is the principal.
- The agent can have broad legal authority or limited authority to make decisions about the principal’s property, finances, or medical care.
- The POA is often used when the principal can’t be present to sign necessary legal documents for a financial transaction.
- A durable power of attorney remains in effect if the principal becomes ill or disabled and cannot act personally.
- A person appointed as power of attorney is not necessarily an attorney. The person could be a trusted family member, friend, or acquaintance.
How a Power of Attorney (POA) Works
It is used in the event of a principal’s temporary or permanent illness or disability, or when they can’t sign necessary documents. The principal must choose a POA who they trust to handle their affairs for them. Documents can be obtained online or through a lawyer. Both parties must sign the paperwork. A third party is usually required to witness it.
Most POA documents authorize the agent to represent the principal in all property and financial matters as long as the principal’s mental state of mind is good. If the principal becomes incapable of making decisions for themselves, the agreement automatically ends.
A person who wants the power of attorney to remain in effect after the person’s health deteriorates would need to sign a durable power of attorney (DPOA).
Making a power of attorney durable means that it remains in force even if the person they are representing becomes mentally or physically incapacitated. An example of this would be if the principal goes into a coma or suffers amnesia. A durable power of attorney, however, does not persist after the client’s death. If the power of attorney is not designated as durable, and the client becomes mentally incapacitated, the authority is voided.
A power of attorney can end for several reasons, such as when the principal revokes the agreement or dies, when a court invalidates it, or when the agent can no longer carry out the responsibilities outlined. In the case of a married couple, the authorization may be invalidated if the principal and the agent divorce.
There are many types of powers of attorney. A durable POA takes effect when the document is signed while a springing power of attorney comes into effect only if and when the principal becomes incapacitated. A power of attorney may also be limited to medical matters, enabling the agent to make crucial decisions on behalf of an incapacitated person.
A power of attorney for use in case of need might be considered by anyone planning for unexpected incapacitation or long-term care, no matter how remote such events appear to be. It might also be needed for someone expecting to be away from home and difficult to reach for some time.
Types of Powers of Attorney
The two key types of POAs are financial and health care. We outline some of the main differences between these two and highlight some of the main types of financial POAs.
Health Care Power of Attorney (HCPOA)
The principal can sign a durable power of attorney for health care, or health care POA (HCPOA), if they want an agent to have the power to make health-related decisions. This document also called a health care proxy, outlines the principal’s consent to give the agent POA privileges in the event of an unfortunate medical condition.
The POA for health care is legally bound to oversee medical care decisions on behalf of the principal. As such, it kicks in when the principal can no longer make health-related decisions on their own.
Financial Power of Attorney
The financial POA is a document that allows an agent to manage the business and financial affairs of the principal, such as signing checks, filing tax returns, mailing and depositing Social Security checks, and managing investment accounts when and if the latter becomes unable to understand or make decisions. The agent must carry out the principal’s wishes to the best of their ability, at least to the extent of what the agreement spells out as the agent’s responsibility. A financial POA gives that individual a wide range of power over one’s bank account, including the ability to make deposits and withdrawals, sign checks, and make or change beneficiary designations.
Financial POAs can be divided up into several different categories. These are the general power POA, limited power POA, and durable POA.
General Power POA
This POA allows the agent to act on behalf of the principal in any matters, as allowed by state laws. The agent under such an agreement may be authorized to handle bank accounts, sign checks, sell property, manage assets, and file taxes for the principal.3
Limited POA
A limited power of attorney gives the agent the power to act on behalf of the principal in specific matters or events. It might explicitly state that the agent is only allowed to manage the principal’s retirement accounts. This type of POA may be in effect for a specific period. For example, if the principal will be out of the country for two years, the authorization might be effective only for that period.
Durable Power of Attorney (DPOA)
The durable POA (DPOA) remains in control of certain legal, property, or financial matters specifically spelled out in the agreement, even after the principal becomes mentally incapacitated.
While a DPOA can pay medical bills on behalf of the principal, the durable agent cannot make decisions related to the principal’s health, such as taking the principal off life support. When the agent acts on behalf of the principal by making investment decisions through a broker, the broker would ask to see the DPOA.
The conditions for which a durable POA may become active are set up in a document called the “springing” power of attorney. A springing POA defines the kind of event or level of incapacitation that should occur before the DPOA springs into effect. A power of attorney can remain dormant until a negative health occurrence activates it to a DPOA. A springing power of attorney should be very carefully worded to avoid any problems in identifying precisely when and if the triggering event has happened.
How to Setup a Power of Attorney
You can buy or download a POA template. If you do, be sure it is for your state, as requirements differ. However, this document may be too important to leave to the chance that you got the correct form and handled it properly. Many states require that the signature of the principal (the person who initiates the POA) be notarized. Some states also require that witnesses’ signatures be notarized.
The following provisos apply generally, nationwide, and everyone who needs to create a POA should be aware of them:
- There is no standard POA form for all 50 states; state law and procedures vary
- All states accept some version of the durable power of attorney
A few key powers cannot be delegated. These include the authority to do the following:
- Make, amend, or revoke a will
- Contract a marriage in most states, although a handful of states allow it
- Vote (but the guardian may request a ballot on behalf of the principal)
Change of POA
As family circumstances change, periodically review and update the POAs you have created. You can revoke a POA simply by writing a letter that identifies it and states that you revoke it, and delivering the letter to your former agent. Just like the document itself, some states require such a letter to be notarized. It’s a good idea to also send copies to third parties with whom the agent may have acted on your behalf. Then create a new POA and deliver it to your new choice of agent.
What about Beneficiary
A beneficiary is a person (or entity) who is designated to receive the benefits of property owned by someone else. Beneficiaries often receive these benefits as part of an inheritance.
A beneficiary can be designated in the documents relating to a life insurance policy, a retirement account, a brokerage account, a bank account, and other financial products.
Thus beneficiary receives the asset or financial benefits; but POA has the power/authority of managing the asset or financial benefits.
Special Considerations
For details, please refer to the original article. Here I quote the most important information.
Multiple Agents
More than one agent can be named by a POA, either with the authority to act separately or required to act jointly. Having two children separately authorized to manage routine items can be a convenience if one becomes unavailable for some reason while requiring two to agree on major actions like selling a house can assure family agreement over major decisions.
Naming multiple agents can cause problems if disputes arise between them. For instance, if two children are required to act jointly in managing an investment account but disagree over how to do so, it may be effectively frozen. So when choosing two children to act jointly as agents under a POA, be sure they have not only the skills for the task but personalities to cooperate.
Risks
There are many good reasons to make a power of attorney, as it ensures that someone will look after your financial affairs if you become incapacitated. You should choose a trusted family member, a proven friend, or a reputable and honest professional.
Remember, however, that signing a power of attorney that grants broad authority to an agent is very much like signing a blank check—so make sure you choose wisely and understand the laws that apply to the document.
Trust but Verify
Be aware of the dangers of theft and self-dealing created by a POA, even when your agent is your child. To minimize the risk of such wrongdoing, in addition to the steps mentioned above, have your POA require your agent to report all actions periodically to an outside party, such as the family’s accountant or attorney. In other words, trust but verify. A capable attorney can draft your POA to include these safeguards under your state’s laws.