By Peter J. Strauss, J.D.

The power of attorney is perhaps the most important tool a person needs to protect financial interests if a time comes when an individual is not able to act. Signing a power of attorney is absolutely critical to ensure a person’s future independence in the event of illness or incapacity. Without it, one risks having his or her affairs managed by a court-appointed guardian, possibly a stranger, under court supervision and often without the ability to have any input. In other words, the person literally loses financial control.

What Is a Power of Attorney?

The power of attorney is the cornerstone of a financial-management plan. It ensures that a person’s wishes will be respected if he or she is unable to act. It is a written document whereby someone is appointed to manage that person’s financial affairs in the event of illness or incapacity.

The person executing the power of attorney (called the “principal”) appoints another (called the “attorney-in-fact,” “proxy,” or “agent”) who, through this legal document, is empowered to manage the principal’s financial affairs. The attorney-in-fact can be a spouse, a child, or someone else. That designated person can pay bills, make banking and brokerage account transactions, and even bring a lawsuit. Generally the power of attorney spells out in detail the specific powers that the attorney-in-fact will have.

How Is a Power of Attorney Governed?

Powers of attorney are governed by state law, which determines the process required for executing a valid power of attorney, the powers that may be granted to the attorney-in-fact, and other provisions concerning validity and duration of a power of attorney.

Some states have a “statutory” power of attorney form where the principal checks off categories of powers to be given to the attorney-in-fact, which are then defined in detail in the statute. In most states, the attorney-in-fact does not have any power to make health care decisions. This requires a separate medical power of attorney (termed “health care proxy” in some states).

Depending on the state, it may be necessary to expressly include additional powers or the attorney-in-fact will not have them. In New York, for example, the power to make gifts of $10,000 a year is included in the statutory short form but authorization to make larger gifts must be expressly added. Similarly, in some states the document must grant specific authority to amend or revoke a trust the principal has previously executed.

What Time Period Is Covered by a Power of Attorney?

Historically, a power of attorney did not survive the disability of the principal, thereby making it useless for future planning purposes. Later, the durable power of attorney evolved, so called because it is valid even after the principal’s incapacity. Thus, a durable power of attorney is a simple and inexpensive alternative to the need for the appointment of a guardian.

The durable power of attorney is recognized in all 50 states and the District of Columbia. But, in order to be considered “durable” in most states, it must contain words to the effect that “this power of attorney shall not be affected by subsequent disability or incapacity of the principal.” In a few states, the power of attorney is automatically durable unless the written document provides otherwise.

When Does a Power of Attorney Take Effect?

In most cases, a power of attorney takes effect when signed. This may be troublesome for someone who wishes to provide for the management of his or her financial affairs in the event of a future disability but does not want to grant broad powers to a person who could act immediately. The solution is the “springing” power of attorney. The springing power of attorney becomes effective only at some specified future time or upon the occurrence of a specified event, such as incapacity. Thus the authority of the attorney-in-fact cannot be exercised until there is a need. Most, but not all, states allow a springing power of attorney.

One problem in utilizing the springing power of attorney is the determination of when the triggering event has occurred. If, as is most common, the document says it becomes effective upon “my incapacity,” this could create problems. What does this mean? How is incapacity determined, and by whom? It is better to have the triggering event be something more specific such as “when my physician certifies in writing that I am unable to care for myself or manage my financial affairs.” Once this specific language is decided upon, make sure it is added to the power of attorney document.

Who Should Be Appointed Attorney-in-Fact?

It is easy to say that only a trusted person should be appointed to serve as attorney-in-fact. However, in actuality, the idea of giving broad powers to any person to act, even a trusted person, can be discomforting. Therefore it is extremely critical to choose someone wisely.

Also, the person chosen must be willing to undertake the job and have good judgment and instincts. A favorite niece in Alaska may not be the right person because she lives far away and especially if she lacks experience. Business acumen is important, but more than that is needed. Common sense, a willingness to seek professional advice, and the ability to act in accordance with the known or presumed wishes of the principal rather than in a way that the attorney-in-fact thinks “is best” for the principal may be more important.

Is it a good idea to designate more than one person as attorney-in-fact? Opinions differ on this question. If a person is for some reason unsure about the reliability or ability of a possible designee, appointing two (or more) people who must act together or by majority vote may be a good idea. They could act as checks on each other. Doing this, however, is not allowed in all states.

What’s the downside of appointing more than one person and requiring unanimity or majority vote? The efficient exercise of the power of attorney may not be practical or become too complicated. It may be better to allow each attorney-in-fact to act alone, perhaps requiring that certain actions—such as making gifts—require joint or majority action.

What Limits Do Attorneys-in-Fact Have?

An attorney-in-fact cannot make a will for the individual, or change or revoke a will. Some states, notably Florida and Georgia, do not allow an attorney-in-fact to delegate his or her authority under the power of attorney to another person.

What If Your Loved One Has Dementia?

If the caregiver’s family member has been diagnosed with dementia, it is not necessarily too late to have him or her sign a power of attorney. The level of capacity to execute a power of attorney is relatively low and the person may still have sufficient judgmental capacity to sign one. Rather than jump to conclusions, speak to the person’s physician about this.

A durable power of attorney is an essential tool in today’s life planning. It is important for all of us to thoughtfully and responsibly plan for the possibility of illness and incapacity. Facing such issues head on, having the sometimes delicate discussions required and acting on them all will help others understand our wishes.