A power of attorney (POA) is a legal document that gives someone, called your agent, the legal authority to make decisions on your behalf. A financial power of attorney explicitly grants your agent the right to make financial decisions for you, including paying bills, managing accounts, and completing business transactions. The responsibilities of your agent can be as limited or expansive as you choose, but do not extend to property you have in a trust, which is managed by a trustee. POAs also expire when you die and your agent cannot change the terms of your will or manage your estate.
You may see a financial POA referred to as a general power of attorney or power of attorney of property , and it can be durable or non-durable. A durable power of attorney remains in place if you become incapacitated (mentally or physically able to take care of yourself or make decisions), which is why it can be an important part of your estate plan. This type of power of attorney will ensure that important financial decisions are made on your behalf if you become sick or unable to manage your money-related affairs.
How financial power of attorney works
With a financial power of attorney, the principal (the person creating the document) grants the agent, also called an attorney-in-fact, certain powers and responsibilities. What duties you grant your agent depends entirely on you; you don’t have to grant them the right to make every type of financial decision. The POA document also outlines when your agent’s powers go into effect and when they expire. For example, you could draft a POA that’s in effect for just one transaction, or you could make one that only takes effect if you are diagnosed with Alzheimer’s.
You can allow your agent to do any of the following with a financial POA:
Spend and use money in your bank accounts
Make investment decisions
Manage retirement accounts, like 401(k) plans and IRAs
Buy and sell real estate
Make mortgage payments, credit card payments, or other payments
Conduct business transactions
File and pay taxes and receive tax refunds
Collect government benefits, like Social Security
Claim an inheritance
Hire legal counsel
A financial agent cannot make decisions about health care. For this you need to get a separate POA, called a medical power of attorney or healthcare power of attorney.
Financial POA and living trusts
An attorney-in-fact can transfer property into a living trust that you’ve already created, but their powers are limited beyond that. A trust is a separate entity that holds assets on your behalf. It has its own set of rules about who receives the assets and how they are used. You cannot grant your agent the ability to change its terms or use the money in the trust through a financial power of attorney. The trustee is the only person who can manage the trust — this strict measure regarding trust property is one reason why a trust can be a useful tool for managing your assets.
Durable vs non durable financial power of attorney
A financial power of attorney comes in two types: durable and nondurable. A nondurable financial power of attorney could be used if you want someone to handle a financial decision when you’re not physically able, like if you are leaving the country, but need someone to sign some papers to complete a business transaction while you are away. If you get into an accident that leaves you in a coma, the power of attorney would end and the agent could no longer make decisions on your behalf. Some states allow for springing POA, which take effect only after you become incapacitated.
A durable power of attorney on the other hand would allow your agent to make decisions for you even if you become incapacitated. A durable POA document is more common as part of an estate plan since it remains in effect even if you become sick or can no longer manage your own finances. Planning for these types of circumstances is an important facet of elder law. No matter which type of power of attorney you have, all POAs expire if you die.
How to get financial power of attorney
A financial power of attorney is a fairly straightforward document and there are few ways of getting one. Just like with other estate planning documents, you can find a template and fill it out yourself, use an online service, or call a lawyer. Some states also offer a free POA form that you can use. Using a lawyer would be the most expensive option, but can be worth it if you have complex needs.
In order for the POA form to be considered a valid legal document, your state may require you to have it witnessed and notarized. Even if your state doesn’t require notarization, it can be a good idea since a notarized POA form is more likely to be accepted by a financial institution. You can also file your POA document directly with the financial institution you use or that your agent would use. Doing this can save your agent time later, since the institution may need to process the power of attorney form.
Some states may additionally ask that you file the financial power of attorney document with a local court or recording office if you grant someone the right to buy and sell property on your behalf. You can ask an estate planning lawyer for more details about what’s required in your state.