A Power of Attorney is a legal document where one person, the principal, authorizes another person, the agent, to act on his behalf. The agent has just so much power as the principal gives him. In legal terms, the agent is referred to as the principal’s “attorney in fact”. The principal can appoint the agent to act for him in many various matters or in just a single transaction. For example, if a husband and wife sell their house but one of them is unavailable to attend the closing, the absent spouse can appoint the other to act as agent for the sole purpose of signing documents at the closing.
Once the transaction is completed the agent’s authority is terminated. A principal can also grant to his agent broad authority to act on his behalf with respect to banking, insurance, real estate and a variety of other transactions. This is a general Power of Attorney.
Powers of Attorney can be either durable or nondurable. A nondurable Power of Attorney, whether granted for a specific purpose or for broad, general use, ends when the principal becomes incompetent. A durable Power of Attorney does not expire if the principal becomes incompetent. For this reason most financial planners and estate planning attorneys recommend a durable power of attorney. It allows a person’s financial affairs to continue without question or interruption even if the principal loses competency. This means there is no need to have a court determine that the principal is incompetent and appoint a guardian. Who is appointed guardian frequently becomes a hotly contested matter.
The Power of Attorney can save time, money, keeps the person’s business private (remember, court proceedings and records are generally open to the public), and allows the principal to select the person s/he wants to handle his/her affairs. The attorney in fact does not become the owner of the principal’s property. He or she is simply authorized to act in the place of the principal with respect to the principal’s property. A Power of Attorney does not authorize the agent to make gifts to others, or to him/herself unless the Statutory Gifts Rider is executed. This option should be discussed with your estate planning attorney because gifting can be a useful tool in an estate plan.
A Power of Attorney goes into effect upon signing unless it specifically says it will only go into effect upon the happening of a specific event or at a specific date. This is a “springing” Power of Attorney. There are certain things an agent cannot do on behalf of the principal even with a broad Power of Attorney. For example, a Power of Attorney cannot be used to execute a Living Will (see “Advance Medical Directions”) and cannot be used to execute or revoke a Last Will & Testament (see “Wills-the Basics”, and “Wills”).
Although Powers of Attorney can be durable and survive the principal’s incompetence, they can be revoked by the principal at any time. All Powers of Attorney automatically expire upon the death of the principal. A Power of Attorney is an extremely powerful and useful document and should be part of a comprehensive estate plan. You and your estate planning attorney will decide which Power of Attorney is right for you.