Power of Attorney is a term that refers to the designation of legal power given to one party to act on behalf of another. It essentially authorizes someone to make decisions and act for someone in some situations. The extent of the power depends on the specific POA agreement and terms.
A power of attorney agreement is designed to make specific actions easier if the principal party is unavailable or unable to make the decision themselves. Because of this, significant care and consideration must go into the appointment of any individual in this role.
Things to Consider
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In most cases, a POA agreement does not give a person the right to revoke or make changes to a will.
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Although a few states allow it, a power of attorney cannot contract a marriage on behalf of the principal in most of the USA.
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The appointed power of attorney cannot vote in the principal’s name.
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Appointing a direct family member- children, in particular- can be complicated for emotional and financial reasons, so discuss the options before deciding.
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A person can name more than one power of attorney in some cases.
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Avoid having one person be responsible for financial decisions and medical decisions as it can lead to a conflict of interest.
How Does a Power of Attorney Work?
Sometimes, a person cannot sign legal documents or attend necessary legal proceedings. It could be due to temporary or permanent illness or injury or simply a matter of logistics and location. The point of a power of attorney is to have a stand-in who can sign or attend in the principal party’s place without difficulty.
A POA agreement must be signed by both parties (the person whose absence needs to be covered and the person who can cover it) and usually an approved third party as a witness. Speak to an advisor about who can act as a witness in Pittsburgh.
The specific terms of how and when a POA comes into play depend on the type of agreement. Some have very limited powers, whereas others are extensive, so it is essential to seek guidance on what type of arrangement is the most beneficial and carries the least risk.
Setting Up a Power of Attorney
The process for setting up a POA is as follows:
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Acquire the correct legally accepted POA form (available online or through a legal advisor).
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Identify- in writing- the selected party or parties.
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Specify what duties are to be delegated and for how long (including whether those powers endure beyond the event of mental incapacitation).
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Notarize and sign the document, along with the elected POA and relevant witnesses.
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Legally record the decision and file it under state laws.
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Types of POA
Handing over legal power to another is not something to be taken lightly. Agreements like this take many shapes and forms, with varying degrees of access and accountability. Signing the wrong type of power over to someone can lead to difficult situations - even if the person is a trusted individual.
Please note that a power of attorney generally applies to financial or health care decisions. A health care power of attorney is specifically set up to act in the case where the principal cannot make their own decisions due to mental or physical incapacity. It should be handled separately from anything financial.
Here are the main categories of financial power of attorney and what they all mean.
General POA
As the name suggests, a general power of attorney can act on behalf of the other party in all activities approved under state law. It can apply to taxes, property, payments, assets, and just about anything related to a person’s holdings and outgoings.
If a person has a general power of attorney, they may be free to make most financial or legal moves on behalf of another person. Setting one up should only be done when the principal is genuinely unable to act alone and when the second party is highly trusted.
Limited POA
Unlike a general power of attorney, a limited POA handles specific matters and nothing more. The main party can appoint someone full rights over a single aspect of their finances: their retirement fund, for example.
Some people use limited powers of attorney to arrange the purchase of overseas assets and property if they cannot be there in person, but it ends with the completion of the transaction. The idea is that a person can support for a limited time in a specific way- not have free reign to do what they want.
It is also possible to set up a limited power of attorney to handle general assets for a specific period. If the principal knows they will be unavailable to handle taxes, bills, property arrangements, and more but only for three months, they can grant full powers for only a short time.
Durable POA (DPOA)
Something to understand about general and limited powers of attorney: they are only legally effective if the principal is sound of mind. If someone is mentally incapacitated or incompetent, their arrangements no longer stand. In this case, only a durable power of attorney can act on their behalf.
A durable power of attorney can have general or limited powers, but the agreement stipulates that they can continue to act even if the other party’s mental capacity changes. Alternatively, the agreement can be arranged so that it only becomes effective in the event of incapacitation. Careful wording and detailed specifics are essential in these circumstances, which are referred to as springing power of attorney.
DPOAs generally do not have any power over medical decisions, even if their powers come into play after an event that significantly changes a person’s condition. It usually remains a purely financial position, with a separate party stepping in as the appointed medical proxy (a different kind of DPOA).
Speak to a Legal Professional to Work with Your Financial Advisor
Appointing a power of attorney in any capacity is a difficult decision with many potential consequences, which is why it should not be done alone. Speaking with a dedicated and experienced attorney, with assistance from your financial advisor, on the best course of action can help ensure the correct decisions are made.
Call today for a consultation to learn more about the ins and outs of POA agreements and how they affect a person’s financial situation.
This material was prepared for The Kelley Financial Group’s use.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
The Kelley Financial Group and LPL Financial do not offer tax or legal advice or services. We suggest that you discuss your specific situation with a qualified tax or legal advisor.