A power of attorney is a legal document that authorizes some else to act on your behalf. The person who signs the power of attorney is referred to as the principal or grantor. The person authorized to act on behalf of the principal is known as an agent or attorney-in-fact.
Powers of attorney are used by estate planning attorneys to plan for incapacity. If actions need to be taken by a person who has lost mental capacity, there is a court procedure called a conservatorship or guardianshipthat can be instituted. Conservatorships require an attorney to represent you in court. The court will typically take the testimony of physicians as to your mental capabilities and declare you to be mentally incompetent. Conservatorships can be costly, both in terms of finances and emotional toll.
Some powers of attorney (particularly those that are durable, as discussed below) can help prevent the need for a conservatorship. A power of attorney allows you to name the person who can act on your behalf so that the court does not have to. Since you have already chosen who will manage your affairs if you become incapacitated, there is no need for a conservatorship.
Powers of attorney come in several flavors:
- General Power of Attorney – A general power of attorney is one that is given for all purposes and not limited in scope. The agent under a GPOA can take any act that the principal could take.
- Specific Power of Attorney – A specific power of attorney is granted for a specific purpose. For example, the principal might authorize the agent to sell a parcel of real estate for a certain price.
- Durable Power of Attorney – Under general principles, a power of attorney is automatically revoked if the person who granted it loses mental capacity. This would defeat the purpose of a power of attorney for incapacity planning. A durable power of attorney is one that contains specific language stating that the agent’s ability to act on behalf of the principal is not affected by the principal’s subsequent incapacity.
- Springing Power of Attorney – Most powers of attorney become effective when they are signed. A springing power of attorney is one that becomes effective only upon the incapacity of the person signing it. Until then, the agent has no rights to act on behalf of the principal.
- Health Care Power of Attorney – A health care power of attorney allows someone to make end-of-life or other medical decisions on your behalf. It is usually a part of a well-drafted living will or advance health care directive.
So which power of attorney is right for you? Like most estate planning questions, the answer depends on your circumstances. A power of attorney that is both general and durable will usually provide the best overall incapacity planning. It gives the agent broad authority to manage your assets and ensures that the document will remain in force after your incapacity.
Powers of attorney are great in theory. But practical difficulties can arise. Third parties (such as banks or title companies) are not generally required to recognize the validity of a power of attorney.
This doesn’t happen very often. But if it does, the consequences are not good. Some clients prefer to avoid this risk by taking advantage of the incapacity planning benefits of a revocable living trust. Unlike a power of attorney, the revocable living trust doesn’t leave discretion in the hands of banks or other third parties. The trustee has legal title to the assets and full right to access them to support you if you are incapacitated. So while powers of attorney provide great incapacity planning benefits, a living trust can be a better fit in some circumstances.