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Understanding Powers of Attorney (POA): Roles, Responsibilities, and Limitations

Edward Goldstein, CFP |
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Financial Planning

Understanding Powers of Attorney: Roles, Responsibilities, and Limitations

A power of attorney (POA) is a legal instrument that empowers an individual to act on behalf of another person under specific circumstances and with defined responsibilities. It does not mean that POAs come with carte-blanche powers or that one power of attorney type mirrors another. 

Understanding the nuances of POAs and the associated roles and limitations is crucial for effective financial and estate planning. This comprehensive guide explores the various types of powers of attorney, the specific responsibilities of agents, the inherent limitations associated with POAs, and the significance of seeking professional guidance in navigating the complexities of POAs.

What Is a Power of Attorney (POA)?

A power of attorney is a legal document allowing one individual (the principal) to appoint another person (the agent or attorney-in-fact) to make decisions and act on their behalf. POAs come into effect under specific circumstances, often when the principal cannot make decisions independently due to factors such as incapacitation, illness, or injury. This makes powers of attorney crucial in incapacity planning and estate planning.

Additionally, powers of attorney come with certain restrictions, defining the extent and limits of the powers being granted. While some POAs are focused solely on finances and financial needs, others center on health, medical needs, and healthcare choices. These restrictions emphasize the importance of clearly outlining the scope of authority in the powers of attorney documents to avoid ambiguity.

Types of Powers of Attorney:

There are several types of powers of attorney, each tailored to meet specific needs and objectives. The most common types include general POAs, durable POAs, springing POAs, medical POAs, and limited POAs. Each type serves distinct purposes and is designed to address particular situations, offering varying degrees of authority to the appointed agent.

  1. General POAs: These grant broad authority to manage finances, sign legal documents, and make decisions on behalf of the principal.
  2. Durable POAs: Taking effect with incapacity, these give the agent the right to make decisions for the principal when they can't do so themselves.
  3. Springing POAs: Activated by specific events, such as incapacity or absence, these occur when the triggering event occurs.
  4. Medical POAs: Focused on healthcare decisions, these authorize someone to make healthcare choices for the principal, including defining medications, procedures, and end-of-life care preferences.
  5. Limited POAs: Convey a narrow authority for specific, one-off occasions, such as signing a contract on a designated date.

Agent POA Responsibilities:

  • Manage Finances: Pay bills, manage income, handle banking needs, oversee investments, and make prudent financial decisions for the principal.
  • Make Insurance Decisions: Shop for insurance coverage, pay premiums and manage various types of insurance on behalf of the principal.
  • Handle Tax Obligations: File tax returns, pay tax bills, and ensure compliance with applicable tax laws.
  • Access Safe Deposit Boxes: Retrieve items from safe deposit boxes when authorized.
  • Handle Real Estate Transactions: Buy, sell, or lease real estate, seek appraisals, and work with professionals during negotiations.
  • Keep Detailed Records: Maintain records of receipts, banking statements, tax records, inventory lists, and asset performance reports.

What a POA Cannot Do:

  • Create or Modify Estate Plans: Only the principal can create or modify their estate plan.
  • Vote for the Principal: Attorneys-in-fact cannot vote on behalf of the principal.
  • Self Deal: Agents cannot transfer the principal's money into their accounts, borrow it from the principal, or invest its assets into their ventures without authorization.
  • Control Out-of-Scope Items: Anything not explicitly stated in the POA documents is not typically authorized, emphasizing the need for clear and specific terms to avoid ambiguity.

These distinctions in types and limitations of powers of attorney underscore the importance of seeking professional guidance to effectively navigate the complexities of POAs.

It's important to note that powers of attorney can vary in different states due to state laws. However, many states offer similar POA options and accept out-of-state POAs that meet legal requirements.

Conclusion:

Being appointed as an attorney-in-fact in a power of attorney means being entrusted with significant responsibilities in someone else's life. Regardless of how the power of attorney is activated, thoroughly understanding your role as an agent is crucial for effective decision-making and representation.

The responsibilities and limitations associated with POAs underscore the need for principals to seek professional guidance to ensure that their powers of attorney align with their specific needs and objectives for effective financial and estate planning. At Financial Life Planning, we recognize the significance of POAs in safeguarding the interests of our clients and their families. We provide a comprehensive suite of financial planning services, and while we cannot provide legal advice, we can help individuals navigate the complexities of POAs and make informed decisions to secure their financial future.

For more information, please click the button below and schedule a free consultation.

Edward C. Goldstein, CFP®, MBA, President
CERTIFIED FINANCIAL PLANNER ™ Practitioner 
Financial Life Planning, LLC
10,000 Lincoln Dr. East, Suite 201
Marlton, NJ  08053
Phone: 856-988-5480
Fax: 908-292-1040