You might have heard that it’s a good idea to have a power of attorney. You might also have heard that there are several types of power of attorney.
There are four types of financial power of attorney that allow you to name someone to act on your behalf in financial matters. So you have to be careful about which type you choose because you could end up giving your the person you name as your agent too much or too little power.
There also is a healthcare power of attorney that allows you to name someone to make medical decisions for you if you can't.
If you’re a financial caregiver for a parent or a loved one, you also want to make sure you’ve been given the right types of power of attorney. Otherwise, you might run into trouble when trying to help your parent with financial and medical matters.
To clear up any confusion, here’s what you need to know about the different types of power of attorney. Working with an attorney to draft POA documents can help ensure that you make the right choice.
Types of financial power of attorney
A financial power of attorney is a legal document that allows you to name someone to make financial decisions and transactions for you. The person named to act on your behalf is called your agent or attorney-in-fact. Your agent doesn't need to be an attorney but does need to be at least 18 years old.
The power your agent has may be temporary or permanent and may take effect immediately or only in certain situations—depending on the type of power of attorney. There are four main types of financial power of attorney:
- Limited power of attorney
- General power of attorney
- Durable power of attorney
- Springing power of attorney
Regardless of the type, your agent will typically need to present the actual POA document to act on your behalf. In most states, the document will remain valid until you die or if you choose to revoke it, according to the American Bar Association.
For a POA document to be valid, you must be of sound mind (mentally competent) when you sign it. If you do not have a POA document and become incapacitated, it might be necessary for a court to appoint a conservator to manage your financial affairs for you.
Limited power of attorney
A limited power of attorney limits the scope of power that your agent has. It can be limited to a specific transaction, types of transactions or a period of time. For example, if you’re going to be out of the country, you can draft a limited power of attorney to let someone sign for you at a real estate closing, says elder law attorney Josh Berkley.
A limited power of attorney might seem ideal if you’re worried about giving someone too much power. However, if you (or your parent for whom you are a caregiver) were to develop, say, dementia and needed someone to manage money matters for you, you wouldn’t want to limit that person’s powers to specific transactions or a certain time frame. A limited power of attorney would be too limited.
General power of attorney
A general power of attorney gives your agent broad powers to make any sort of legal or financial transaction for you if you are unable to yourself. However, there are a few limits on a general power of attorney’s power. Typically, a general POA doesn’t have the authority to write a will for you or alter your will. And, unless designated as durable (see below), the power ends when you become incapacitated.
For most people, the best option is to have a general durable power of attorney because it gives your agent broad powers that will remain in effect if you lose the ability to handle your own finances.
An attorney can customize a general POA to limit powers even more—or add powers, Berkley says. For example, you might want to give your power of attorney the power to make gifts with your money, including to himself or herself. This power can come in handy if you end up needing long-term care and need to transfer assets to qualify for Medicaid to help pay for long-term care.
Or you might want to explicitly prohibit your POA from gifting your money to himself if you’re worried about that person taking advantage of that power. However, if you can’t trust someone to handle your money responsibly, you shouldn’t name that person to be your power of attorney.
Durable power of attorney
A durable power of attorney remains in effect even if you become incapacitated temporarily or permanently. “I don’t know why anyone wouldn’t do durable power of attorney now,” Berkley says. “If you become incompetent, you want someone to be able to handle your affairs.”
The designation can be used for a general or limited power of attorney. For most people, the best option is to have a general durable power of attorney because it gives your agent broad powers that will remain in effect if you lose the ability to handle your own finances.
Springing power of attorney
A springing power of attorney springs into effect only in certain circ*mstances that you designate. For example, a springing POA often is written to take effect once someone becomes incapacitated and two doctors agree that the person is no longer fit to handle his affairs.
The added level of protection might seem great. However, it’s likely to create roadblocks for your power of attorney when he or she needs to start acting on your behalf, Berkley says. He tells clients that he won’t draft a springing power of attorney document unless they have a good reason for one because it can cause too many problems.
Healthcare power of attorney
A healthcare power of attorney document allows you to name someone make medical decisions for you if you can't. The person you name may be called your agent, proxy, representative or surrogate. Your agent can have the power to admit you into a hospital or nursing home, to speak with your doctors about treatment, and to gain access to your health information that might otherwise be protected by the Health Insurance Portability and Accountability Act (HIPAA).
It's important to choose a healthcare agent while you are healthy and mentally competent to ensure someone you trust can manage your medical care if you become incapacitated. Otherwise, without a healthcare power of attorney in place, a court might need to appoint a guardian for you.
According to the American Bar Association, it's best to name just one person as your healthcare agent and to choose a back-up agent. Your agent needs to be at least 18 years old and of sound mind.
What to consider when choosing your agents
The most important step when getting powers of attorney is choosing the right people to be your agents. There are several things to consider when deciding whom to ask to fill these important roles.
Financial power of attorney
A general durable power of attorney typically is the best option. It does take effect immediately. So if you’re worried about giving someone that power while you’re still mentally competent, put the POA document in a home safe or safe deposit box and tell your power of attorney how to access it if something happens to you. “Until they have a copy of it, it’s no good,” Berkley says. A financial institution won’t trust that someone is your power of attorney unless that person has the document to prove it.
However, if you can’t trust the person you’ve named to act responsibly, maybe you haven’t chosen the right person. You can name more than one person to be your financial power of attorney and require all of them to act together to create a system of checks and balances. However, Berkley cautions against that. “It’s a safeguard, but it can be a roadblock,” he says.
Logistical issues can arise, such as getting agents in different states to come together to sign documents. Plus, it can lead to fighting among the agents. “Wait until something happens and a little money is involved,” Berkley says. “All those people who got along are ready to scratch each other’s eyes out.”
If you name more than one agent, at least give them the power to act independently. Berkley says the better option would be to name just one person you trust wholeheartedly and name two alternates in case the primary power of attorney is unable to act or doesn’t want to do the job.
If you feel like you’ve made a mistake with the person you’ve named or the type of power of attorney you’ve chosen, you can revoke the power and draft a new document. Just be sure to let your former POA and your financial institutions know that you’ve named a new power of attorney.
Healthcare power of attorney
Your healthcare agent has the power to make life or death decisions for you, so it needs to be someone you trust. If you have an advance directive that spells out what sort of end-of-life medical care you do or do not want, your healthcare agent must follow your wishes in that document. However, not all slituations can be anticipated in an advance directive. So it's important to name someone knows your healthcare priorities and will advocate for you.
It's also a good idea to name someone who lives close to you or who travel to oversee your care if you become incapacitated. It should be someone who is willing to devote the time this role might require and who can handle conflicting opinions about your care from other family members who aren't your agent.
According to the Amercian Bar Association, your healthcare agent should not be one of your healthcare providers, the operator of a healthcare facility that is serving you, someone who works for a government agency that is financially responsible for your care or someone who professionally evaulates your capacity to make decisions.
How to name financial and healthcare powers of attorney
There are plenty of do-it-yourself power of attorney documents that make naming an agent to act on your behalf fast and easy. Most attorneys agree that it's OK to use DIY healthcare power of attorney documents. However, it's best to work with an attorney to draft a financial power of attorney for you.
Healthcare power of attorney: The American Bar Association offers a free health care power of attorney form that is valid in every state except Indiana, New Hampshire, Ohio, Texas and Wisconsin. If you live in one of those states, you can check with your state bar association, state department of health or even your doctor to see if a free form is available.
Financial power of attorney: Work with an estate planning or elder law attorney to ensure that you choose the right type of power of attorney and to have the document customized to your needs. To find an attorney, check your state bar association’s website (search for your state name and “bar association”) to see if it has an online member directory to find an estate planning or elder law attorney near you. You also could use the National Association of Estate Planners & Council’s online directory or the National Academy of Elder Law Attorneys’ online directory.
If you decide to go the DIY route for either type of power of attorney, make sure the documents are legally binding. To do so, you'll need to sign them and you might need to have them notarized or have witness signatures, depending on the state where you live. Look for documents that specify what the requirements in your state are.
[ Keep Reading: The Pros and Cons of DIY Financial Power of Attorney Forms ]
