Many people are concerned about using a power of attorney. They are worried they are giving away their rights to make their own decisions about important elements of their life. Whether it is about health decisions, financial decisions, business decisions, and many other basic life decisions, they worry that the power to make their own decisions will be taken away from them prematurely.
There are many reasons to utilize a power of attorney, and they provide an important tool that allows individuals to conduct business while physically absent from meetings or otherwise incapable of making decisions. In this post, we will explore more details about a power of attorney, when it can be used, and the situations where consumers would use a power of attorney.
What Is an Authorization Letter?
The term power of attorney (POA) provides legal authorization giving a designated person or persons the power to act on behalf of someone else. The principal or person originating a power of attorney provides the authority to a person or agent, the authority to make decisions on behalf of the principal. The agent can be given broad or limited authority to make decisions on behalf of the principal about the principal’s property, financial arrangements, investments in equities, bonds, mutual funds, or medical care, including decisions about where they will live and what medical treatment they receive.
There are two main categories of POAs, typically decisions about financial issues and medical care. Both types provide the agent with general or limited powers to make decisions on behalf of the principal.
How Is a POA Used?
A properly executed power of attorney or POA document is a legal document. It must be signed by the principal and witnessed by a 3rd party. It bestows the right to the person assuming the POA the right to sign documents on the principal’s behalf. There are several reasons why someone would bestow a POA and give up their rights to sign documents etc. For example, these include a person who is disabled, someone who has a temporary or permanent illness, or a person who is going to be out of the country and unable to personally sign documents or manage their affairs directly.
The principal must select someone they trust, and both parties must sign the POA in front of a witness. There may be stipulations that go along with the POA. The POA may be limited to financial matters and exclude health decisions or vice versa. The POA may exist for a specified period. The POA ends when the principal passes away, the agent can no longer handle the responsibilities, or the court decides for a variety of reasons that the POA should end. A POA can end when the principal and the agent become divorced.
Power of Attorney VS. Authorization Letter
In both cases, these legal documents are used to transfer the authority to someone to do something on your behalf. The letter of authority provides someone the authority to act on your behalf for a specified activity. A POA transfers the total power for someone to act, make decisions, or speak on your behalf.
The agent specified by the POA can act on your behalf even if it contradicts what the principal desires. It is a very powerful document, and the person you select to be your agent should be selected with care. They have full authority to handle all of your financial, legal, and health decisions on your behalf.
Letters of authority (LOA) also carry powerful rights; however, they are more limited in scope and authority. LOAs might be used to allow someone to divulge or pass information to a 3rd party or delegate a specified task or action.
In both situations, the agent must be prepared to show a copy of the POA or LOA to the 3rd party. It is up to the 3rd party to ensure that the specified activity falls within the scope of the LOA, whereas the POA transfers total rights to the agent.
Types of Power of Attorney
There are many different types of POA, with some combined depending on the situation and the needs of the principal. Your lawyer is someone who can provide advice regarding the type of POA and the wording that should be included. Your lawyer can also act as the witness for the signatures.
The following are some of the terms used to describe different forms of POAs:
- Durable POA – takes effect upon the signature of the parties involved and remains in effect even if the person is incapacitated. However, decisions such as removing the person from life support are outside the scope of a durable POA.
- Springing POA – takes effect only when the principal is incapacitated, and the situation must meet specific criteria as outlined in the POA. Lawyers, real estate agents, asset brokers, etc., will request copies of the POA and assess if the situation truly causes the POA to become effective. The POA should clearly state what the triggering event will be to enable the POA to become effective.
- Medical POA – may limit the authorization or decision rights to medical issues only and allow the agent to make decisions regarding medical treatment and end-of-life decisions. Presumably, the principal has discussed how they want to be treated, and the agent will instruct the medical professionals accordingly. The medical POA becomes effective when the principal can no longer make decisions on their own regarding their health.
- Financial POA – covers everything related to the principal’s financial needs, e.g., signing checks, completing tax returns, depositing checks, and managing investment accounts. The agent is expected to carry out the principles wishes as outlined in the POA, and those decisions should be in the best interests of the principal.
- Long-Term Absence POA – for someone who will be absent for a long period. This POA can include both medical and financial decisions.
- General POA – the agent can act on behalf of the principal, following local and state laws for all financial matters, including filing taxes, signing checks, paying bills, managing assets, and selling property.
- Limited POA – provides only limited powers and specifies which areas the agent can make decisions and sign documents on behalf of the principal. A time period may also be specified.
Note: Unless otherwise stated, all POAs end upon the principal’s death. Usually, an executor is designated in the will to handle and make decisions regarding the principal’s estate. The Agent for the POA may also be the executor; however, they are different roles and can be fulfilled by different people as designated by the principal.
Choosing an Agent for Your POA is an Important Decision
Above all, the person you select for your agent to carry out the responsibilities outlined in the POA should be someone you trust. They will look after your affairs while you are absent from the country or are incapacitated. A trusted member of the family, a trusted friend, or a professional with an excellent and trusted reputation is often among the people chosen for this task.
The person you select will have the same authority from a legal perspective. They will have access to your bank accounts and trading accounts, make gifts, and even sell your property, including your home.
Would you turn over a signed blank check to just anyone? This is how you should consider the POA when making these decisions.
In addition, the person you select to be your agent should also have the requisite skills to carry out the required activities. For example, someone with complex financial affairs needs someone with the skills to handle your financial affairs while you are unable to, regardless of the reason.
When a family member is selected as your agent, there are usually no fees associated with their activities other than miscellaneous expenses. On the other hand, professionals, e.g., a lawyer, will charge a fee to manage your affairs while you are incapacitated or out of the country.
In many situations, the spouse of the principal is named as the agent; however, the spouse may suffer from similar afflictions and be unable to carry out the duties of the POA at some point. Children are also often named POA, especially when the parents consider the child to be capable, honest, and respectful of the parent’s requirements.
If there is more than one child in the family, naming one or the other as your agent can cause friction within the family. Choose wisely. Not only do you want someone honest, capable, and respectful, they need to be able to navigate family politics and avoid conflict or perceived favoritism within the family.
There can be multiple POAs. Avoid overlaps in authority to avoid conflicts between agents. For example, one child could look after the day-to-day financial affairs while another looks after medical decisions. They must discuss major decisions since medical costs can be significant, affecting the financial affairs of the principal and their ability to afford whatever treatment and support are required.
In summary, the following factors should be considered:
- Trustworthiness of the agent (s)
- Capabilities of each agent (s)
- Multiple agents
- Naming children as agent (s)
- Fees charged by professionals
- Proximity to the principle
- Discuss your needs with your agent and ensure they are comfortable with the responsibility
Consequences of Not Having a POA
Many people are reluctant to arrange for a POA. They are worried about many different things, such as who to select, what it will cost, who they can trust, or giving up control of their affairs. These are legitimate concerns for many people in different situations.
Consider the alternative if you do not have a POA in place, naming an agent to look after your affairs should something happen which incapacitates you. There is no one to pay the utilities, rent, mortgage, manage your investments, make medical decisions, etc. Even though you are incapacitated, the IRS, the state, and the city still want to collect taxes owed by the principal. In a worst-case scenario, liens are placed against your assets while you languish in a hospital receiving substandard care because no one has the authority to make decisions on your behalf.
Consider Adding Safeguards
Adding safeguards to your POA may ease your concern about transferring control of your personal affairs to an agent, regardless of whether they are a child, a relative, or a professional.
Consider the following suggestions and choose those that make sense in your situation:
- Begin small – approve a limited POA which limits the decisions and actions that the agent can take, e.g., pay utilities, and taxes, including filing tax returns.
- Reporting – require the agent to review the status of your accounts with other designated members of the family regularly. If preferred, the review can be with a lawyer or an accountant.
- Name two agents – who must agree on major decisions and transactions.
- Consult trusted professionals – such as lawyers and accountants who have the knowledge and integrity to carry out the responsibilities of the agent or monitor the agent
How to Write a Power of Attorney Form
Writing a power of attorney is fairly straightforward. Making the decisions that are to be included in the POA are often more difficult for the principal. The following steps and/or decisions are required when writing a power of attorney:
- Select your agent(s)
- Ensure your agent is willing to take on this role
- Decide the authority level you will transfer, e.g., general or specific
- Decide when the authority will be transferred, i.e., what conditions will trigger the POA
- Determine if any special conditions should be added to the POA
- How long will the POA be in effect?
- Do you need to arrange for guardians of underage children?
- Name a guardian for yourself if you are incapacitated?
- Sign the POA
- Arrange for witnesses to observe you signing the POA and sign the POA as a witness
Sample Power of Attorney Letter
The following is a sample POA letter; however, feel free to customize the letter to meet your particular needs. In addition, each state may have specific requirements in terms of language and the number of witnesses required to sign the POA to ensure it is legal in that state. You may want to consult a lawyer to ensure it meets all of your needs and those of the legal profession.
Designation of POA Agent
I, [Your Name] of [your address], authorize [Agent’s name] of [Agent’s address] as my agent to act for me and in my name and for my use and benefit. If my agent is unable or unwilling to act for me, I name [Successor Agents name] of [Successor agents address] as my successor agent.
I grant general authority to my agent to make decisions on my behalf for the following items:(initial each item you wish to grant general authority to your agent)
- Real property
- Tangible personal property
- Equities, bonds, mutual funds
- Commodities and options
- Banks and financial institutions
- Operation of business or entity
- Insurance and annuities
- Estates, trusts, and beneficiary interests
- Claims and litigation
- Personal and family maintenance
- Benefits from government programs
- Retirement plans
- Taxes
I also grant authority to my agent to handle the following:(initial each item you wish to grant specific authority to your agent)
- Create, amend, revoke or terminate an inter vivos trust
- Make a gift
- Create or change rights of survivorship
- Create or change a beneficiary designation
- Authorize another person to exercise the authority granted under this POA
- Waive the principles right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan
- Exercise fiduciary powers that the principal has the authority to designate
Additional Special Instructions
Add additional special instructions –
Duration of POA
Select the applicable duration:
Durable POA – this POA shall not be affected by my subsequent disability or incapacity, or lapse of time.
Regular POA – this POA shall terminate if I become disabled or incapacitated
Nomination of Guardian (Optional)
If it becomes necessary for the court to appoint a guardian of my person or my estate, I nominate the following person (s) for an appointment:
Name of Nominee for the guardian of my estate: [Name]
Nominee’s address: [Nominees address]
Nominees telephone number: [ Phone number]
Name of Nominee for the guardian of my person: [Name]
Nominee’s address: [Nominees address]
Nominees telephone number: [ Phone number]
Signature and Acknowledgement
[Signature of the principle] [Date]
[Printed Name]
[Address], [Telephone Number]
[Signature of the Witness] [Date]
[Printed Name]
[Address], [Telephone Number]
[Signature of the Witness] [Date]
[Printed Name]
[Address], [Telephone Number]
Preparing a POA can be an emotional event for many people; however, some safeguards can be added, and you have the comfort of knowing that your health and assets will be looked after in a manner that you are comfortable with, should you become incapacitated for any reason.
A POA transfers control of all of your decisions regarding healthcare and your assets to an agent. This is a significant event in a person’s life if the POA is triggered. Safeguards include specifying when and for how long the POA should be in effect, selecting someone you trust or asking a professional to be your agent, limiting the POA to specified activities, naming two agents, and requesting regular reviews by a 3rd party of your assets and health decisions to ensure everything is to your satisfaction.
The POA is a legal document that must be signed by you and witnessed by at least one person or sometimes two people depending on the state where you reside.
Before writing your POA, always have a conversation with your proposed agent for the POA to ensure they are willing and able to take on this important responsibility. Let them know the details of what you want them to do, who they will need to interact with, and the decisions you are asking them to make. Not everyone will be comfortable fulfilling this role.