One essential component of your financial plan involves designating power of attorney to someone you trust in case you are incapacitated or unable to complete a task on your own.
“I usually tell clients that a power of attorney is a document to allow someone else to make decisions on your behalf,” says Jennifer Abelaj, senior counsel for Davidoff Hutcher & Citron LLP in New York City.
Generally, power of attorney applies to legal and financial matters, but a separate document can also allow a proxy to make health care decisions for you if you are incapacitated.
The rules for designating power of attorney vary from state to state, so it’s important to know your own state’s laws. Here’s what to know about power of attorney, including more information on these topics:
— How to set up power of attorney.
— Limited versus general power of attorney.
— Immediately effective versus springing power of attorney.
— Durable power of attorney.
— Power of attorney for health care.
Read on for more details on how to set up power of attorney.
What Is Power of Attorney?
Power of attorney is a written legal document that allows an agent or attorney-in-fact to take financial and legal actions for you.
It’s important to note that power of attorney is revocable, meaning that if you are mentally competent and decide that you can no longer count on the person you designated as your agent, you can update your documents and select someone else.
The person you select as your attorney-in-fact will depend largely on the type of power you’re granting — whether it’s general or limited — and your relationship. For general power of attorney, people often select their spouses or sometimes their children. But you can choose anyone, as long as it’s someone you trust.
How to Set Up Power of Attorney
First, determine why you want to set up power of attorney. You may be solidifying a real estate deal but need someone to sign the closing documents while you’re out of town. Or maybe you’re building an estate plan and want to prepare for a future where you’re unable to complete certain tasks or make financial decisions.
Often, designating general power of attorney is part of a larger estate plan, so if you’re visiting a lawyer to draft a will, trust or guardianship documents, you can roll this into the conversation. “If somebody is going to have one of these things prepared for them, they should do it locally and with somebody who is competent,” says Neil Solarz, shareholder and director at Weinstock Manion, a law firm based in Los Angeles.
Depending on your situation and state, there may also be a power of attorney template you can complete without visiting a lawyer. In New York, for example, there’s a power of attorney document available online, Abelaj says. You’ll typically need witnesses or notarization, so take note of the processes in your state and speak with a lawyer if you’re concerned about filing these forms correctly on your own.
Limited vs. General Power of Attorney
Depending on your needs, you may want to designate a limited or special power of attorney, which allows the agent to complete restricted transactions, such as selling a piece of property, and is limited in scope.
Conversely, a general power of attorney allows your agent to do most anything you could do, such as file taxes or pay bills. A general power of attorney is usually part of an estate plan in case you’re unable to handle your own financial matters as you age or become incapacitated.
Immediately Effective vs. Springing Power of Attorney
A springing power of attorney goes into effect in a predetermined situation, such as after the principal becomes incapacitated. Typically, the legal document will specify the circumstances under which the power takes effect. An immediately effective or nonspringing power of attorney is in place once the paperwork is signed.
What Is a Durable Power of Attorney?
Generally, powers of attorney end when the principal becomes unable to make decisions on his or her own. But for many folks, becoming incapacitated is exactly the kind of situation in which they want someone they trust to have power of attorney.
That’s where durable power of attorney comes in. A durable power of attorney continues after the individual is incapacitated. So if you are unable to make financial or medical decisions on your own after an accident or illness, the document will remain in effect.
What Is Power of Attorney for Health Care?
You are generally also able to name a medical power of attorney, someone who knows your wishes and can make health care decisions for you as a proxy. This may also be called a health care proxy.
“If you’re unable to make decisions on your own, the health care proxy kicks in,” Abelaj says. You’ll want your health care proxy to know your wishes when it comes to how you’d like doctors to treat you if you can’t make decisions on your own. This may also accompany a living will, which expresses your desires on continuing life support if you’re terminally ill or being kept alive by machines.
While it may be upsetting to consider who’d make decisions for you if you become incapacitated or are in a vegetative state, planning for the future will make it easier on your family and yourself. Says Abelaj: “You really have to face your mortality.”
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