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Power of Attorney

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on December 22, 2021

A “power of attorney” (POA) is a written document that allows one person to act on behalf of another. The subject individual, whose power is being granted by the POA, is known as the principal. 

The third-party individual who will be granted powers by the POA is known as an agent or attorney-in-fact. The agent has the same legal authority over specified matters as the principal would have if he or she were acting directly. This authority can range from full legal control to simply giving advice.

If you want someone else to make decisions for you should you become incapacitated one day, then carrying out a power of attorney (POA) may be exactly what you need.

How Does a Power of Attorney Work?

A power of attorney is an instrument used in many states by individuals when they are unable or unwilling to manage their own affairs.

The agent named in the document, acting on behalf of the incapacitated principal, will be able to make decisions regarding the principal’s property and personal affairs that might not otherwise be made (for example, sale of property) if guardianship proceedings were initiated.

Types of Powers of Attorney

There are three types of powers of attorney: general, special, and durable.

General Power

A general power of attorney gives broad authority over most business and financial dealings; this is often used for real estate transactions or lending money (e.g., car loans).

Special Power

A special power of attorney gives the agent much narrower authority over a very specific transaction or set of transactions. This is often used for financial matters involving only one company.

For example, if you are buying stock in Company A with your own money, you might want to give special powers of attorney to another person so that he or she can buy the stock on your behalf.

Durable Power

A durable power of attorney stays in force even after the principal becomes incapacitated unless specifically revoked or unless it’s clear that the agent is no longer able to act on behalf of the principal.

This may be used where the agent has a special expertise (such as legal matters), and it is important that he or she can continue his or her efforts uninterrupted upon becoming incapacitated.

How to Create One

There are three elements required to create a valid power of attorney: the principal, the agent and an act by both parties.

Principal

The individual signing the instrument must be at least 18 years old and have mental capacity to understand what he/she is doing when completing this document.

Agent

The principal must appoint another individual (or individuals) to act on his/her behalf.

Act by Both Parties

A formal oral or written declaration must be made appointing an agent with specific powers under a specific instrument.

Make sure to download the proper form which needs to be filled out completely. You may also ask the assistance of a lawyer to review this document for accuracy before being signed.

Risks and Benefits of Granting a Power of Attorney

Risks

When granting a power of attorney, it is important to understand that if the agent is also in poor health or has poor judgment, you may be putting your utility bills for safekeeping.

Depending on the scope of authority given by the document, this could be everything from your house payment to your grocery list.

Benefits

If you are unable to make decisions about your financial affairs because of illness or injury, someone else can step in and help you out.

This can be an efficient way to conduct business while you are away.

For example, Joe Smith goes on vacation for two weeks and gives his friend John Doe power of attorney over his banking affairs during that time period.

John will then have access to Joe’s bank account, allowing him to pay any outstanding bills or even withdraw money for souvenirs.

Choosing the Right Agent

It is recommended that you carefully consider who will serve as your power of attorney and how long they will need this authority before granting it.

It may be helpful to discuss who specifically you would like to appoint and what, if any limitations, would make sense for your situation.

You can also add conditions under which you want your agent’s powers revoked (such as incarceration).

Final Thoughts

If you do not create a power of attorney document but still wish to protect yourself in case you lose mental capacity, then explore the possibility of having an advance medical directive or living will.

While these are different from a power of attorney, they do give the person you select as your health care proxy the ability to make medical decisions on your behalf.

No, but it is recommended that you carefully consider who will serve as your power of attorney and how long they will need this authority before granting it.
The following are examples for general and special power of attorney, respectively: "This Power of Attorney grants my agent broad authority over most business and financial dealings on my behalf. All powers not granted by this document are reserved for me." "This Power of Attorney authorizes my agent to purchase stock on my behalf from Company A over the course of 30 days only. No other actions are authorized."
The grantor (client) does not need any witnesses at the time he/she signs the document granting power of attorney. The agent does need to have two witnesses present when he/she signs the document, especially if the instrument is being used for banking purposes. Finally, the notary public who administers an oath to the grantor also needs two witnesses present at the time he/she takes his/her oath.
There are three types that can be used, each granting authority over a different area: (1) general; (2) limited; and (3) durable. The first one gives your agent broad authority, while limited grants less power. A durable power of attorney remains in effect even if you become incompetent or disabled. This is important to note, as it can take effect before you are incapacitated.
The person granting power of attorney must be competent (mentally capable) at the time he/she signs. This document is binding even if signed when someone does not have full mental capacity; however, there could later be questions about its use. Powers of attorney do not need to be filed with any government agency, but most attorneys recommend keeping them in a safe place just in case they are needed.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.