Power of Attorney (POA): Meaning, Types, and How and Why to Set One Up

A power of attorney (POA) is a legal authorization that gives the agent or attorney-in-fact the authority to act on behalf of an individual referred to as the principal. The agent may be given broad or limited authority to make decisions about the principal's property, finances, investments, or medical care.
POAs can be financial or they can pertain to health care. Both provide the attorney-in-fact with general or limited powers.
Key Takeaways
A power of attorney is a legal document that gives one person the power to act for another.
The person who receives the authority is referred to as the agent or attorney-in-fact.
The subject of the POA is called the principal.
The agent can have broad legal authority or limited authority to make decisions about the principal's property, finances, or medical care.
A durable power of attorney continues to remain in effect if the principal becomes ill or disabled and cannot act personally.
How a Power of Attorney (POA) Works
A power of attorney is a legal document that binds the agent or attorney-in-fact and the principal. It's used in the event of a principal's temporary or permanent illness or disability or when they can't sign necessary documents. Both parties must sign the document and a third party is usually required to witness it.
Most POA documents authorize the agent to represent the principal in all property and financial matters as long as the principal’s mental state of mind is good. The agreement automatically ends if the principal becomes incapable of making decisions. A durable power of attorney is a special type of POA that continues even after the principal becomes incapacitated.
A power of attorney can end for several reasons, such as when the principal revokes the agreement or dies, when a court invalidates it, or when the agent can no longer carry out the responsibilities outlined in the agreement. In the case of a married couple, the authorization may be invalidated if the principal and the agent divorce.
Types of Powers of Attorney
A durable POA takes effect when the document is signed and continues in the case of incapacitation of the principal. A springing power of attorney comes into effect only if and when the principal becomes incapacitated. A power of attorney may also be limited to only medical matters, enabling the agent to make crucial decisions on behalf of an incapacitated person.
The two key types of POAs are financial and health care.
Health Care Power of Attorney (HCPOA)
The principal can sign a durable health care POA (HCPOA) if they want an agent to have the power to make health-related decisions for them. This document is also called a health care proxy. It outlines the principal’s consent to give the agent POA privileges in the event of an unfortunate medical condition. This POA kicks in when the principal can no longer make health-related decisions on their own.
Financial Power of Attorney
A financial POA allows an agent to manage the business and financial affairs of the principal, such as signing checks, filing tax returns, depositing Social Security checks, and managing investment accounts when and if the principal becomes unable to understand or make decisions.
The agent must carry out the principal’s wishes to the best of their ability, at least to the extent of what the agreement spells out as being the agent’s responsibility. A financial POA can give the agent a wide range of power over the principal's bank account, including the ability to make deposits and withdrawals, sign checks, and make or change beneficiary designations.
Financial POAs can be divided up into several categories.
General POA
This POA allows the agent to act on behalf of the principal in all matters as allowed by state law. The agent under such an agreement may be authorized to handle bank accounts, sign checks, sell property, manage assets, and file taxes for the principal.
Limited POA
A limited power of attorney gives the agent the power to act on behalf of the principal in specific matters or events. It might explicitly state that the agent is only permitted to manage the principal's retirement accounts. This type of POA may be in effect for a specific period. The authorization might be effective only for two years if the principal will be out of the country for that length of time.
Durable POA (DPOA)
A durable POA (DPOA) remains in control of certain legal, property, or financial matters that are specifically spelled out in the agreement even if and when the principal becomes mentally incapacitated. A DPOA can pay medical bills on behalf of the principal but the durable agent can't make decisions related to the principal's health, such as taking them off life support.
Springing POA
The conditions for which a durable POA may become active are set up in a document called a "springing" power of attorney. A springing POA defines the kind of event or level of incapacitation that should occur before the DPOA springs into effect.
A power of attorney can remain dormant until a negative health occurrence activates it to a DPOA. A springing power of attorney should be very carefully worded to avoid any problems in identifying precisely when and if the triggering event has happened.
How to Set Up a Power of Attorney
You can buy or download a POA template but be sure it's for your state because requirements can differ. There's no standard POA form for all 50 states, although all states do accept some version of a durable power of attorney. A few key powers cannot be delegated, including the right to make, amend, or revoke a will or contract a marriage in most states, although a handful of states do allow this. You can't delegate the power to vote but the guardian can request a ballot on behalf of the principal.
Some rules generally apply in all states and jurisdictions.
Put It in Writing
Some regions of the country accept oral POA grants but verbal instruction isn't a reliable substitute for spelling out the terms word-for-word on paper. Written clarity helps to avoid arguments and confusion later at a crucial time.
Use the Proper Format
Decide what powers you want to grant and prepare a POA that's specific to that desire. The POA must also satisfy the requirements of your state. Perform an Internet search or ask a local estate planning professional to help you find a form that will be accepted by a court of law in the state where you live. The best option is to seek the help of an attorney.
Delegate the Powers
A POA can be as broad or as limited as the principal wishes but each of the powers granted must be clear even if the principal grants the agent a general POA. The principal can't grant sweeping, nonspecific authority such as, “I delegate all things having to do with my life.”
Specify Durability
A POA terminates if the principal becomes incapacitated in most states. The only way an agent can keep their power if this happens is if the POA is written with an indication that it's durable. This designation makes it last for the principal's lifetime unless the principal revokes it.
Notarize the POA
Powers of attorney must be notarized in most states. It's potentially easier for the agent if a notary’s seal and signature are on the document even in states that don't require it.
File the POA
Some states require that specific kinds of POAs be filed with a court or government office before they can be made valid so look into the rules where you live. Ohio requires that any POA used to grant grandparents guardianship over a child must be filed with the juvenile court. It also requires that a POA that transfers real estate must be recorded by the county in which the property is located.
Not all powers of attorney must be formally recorded or filed but it's a standard practice for many estate planners and individuals who want to create a record that the document exists. File it with your state or county to be on the safe side.