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May 11, 2023

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What is a power of attorney – and how does it work?

Life is unpredictable. And as a financial advisor, one of the essential parts of your job is to help prepare clients for that unpredictability – whether that comes in the form of balancing a portfolio so that it’s not over reliant on a single company or sector or ensuring they have the right documents in place in case of an accident or health scare. One of these key documents is a power of attorney. 

A power of attorney (POA) is a legal document that authorizes an individual, known as the agent or attorney-in-fact, to act on behalf of another person, known as the principal. This document is used to designate a trusted person to make important decisions for the principal in case they become unable to make decisions for themselves.

Types of powers of attorney

There are four main types of powers of attorney:

General power of attorney
A general power of attorney grants broad powers to the designated agent or attorney-in-fact. The agent has the authority to make decisions and take actions on behalf of the principal, including managing finances, buying and selling property, and entering into contracts. A general power of attorney is typically used when the principal is unable to make decisions due to illness, injury, or absence.

Limited power of attorney
A limited power of attorney, also known as a special power of attorney, grants specific powers to the designated agent or attorney-in-fact. The powers granted are limited to a specific time period or a specific purpose. For example, a limited power of attorney may be used to allow an agent to sell a property on behalf of the principal.

Durable power of attorney
A durable power of attorney is a type of general or limited power of attorney that remains in effect even if the principal becomes incapacitated or unable to make decisions. A durable power of attorney is often used to ensure that someone can make decisions on behalf of the principal if they later become mentally or physically incapacitated.

Healthcare power of attorney
A healthcare power of attorney is a legal document that allows an individual to designate someone else to make medical decisions on their behalf if they become unable to do so. The designated person becomes the healthcare agent or proxy and is responsible for making medical decisions based on the individual’s wishes.

Who needs a power of attorney?

Just about every adult could benefit from a POA, but there are some types of clients who you should be especially vigilant in making sure have one:

Elderly individuals
As people age, they may become more vulnerable to physical or mental health issues. A power of attorney can ensure that someone they trust is able to make decisions on their behalf if they become unable to do so.

Individuals with chronic illnesses
Clients with chronic illnesses may experience periods of incapacity. A power of attorney can ensure that someone is able to make decisions on their behalf during those periods.

Individuals who travel frequently
Those who travel frequently may want to designate someone to make decisions on their behalf while they are away. A power of attorney can ensure that someone is able to make decisions in their absence.

Parents of minor children
Parents of minor children may want to designate someone to make decisions on their behalf in case they become unable to do so. A power of attorney can ensure that someone is able to make decisions for the children if the parents are unable to do so.

Parents of young adult children
In reality, kids don’t turn into adults overnight – but legally, they do. At eighteen, children are adults in the eyes of the law, and parents no longer have any ability to help make decisions related to their kids if something unexpected happens, for example they become incapacitated. Parents may want to talk with their children about having a POA drafted, even if it only focuses on healthcare.

What happens if a client becomes incapacitated without a power of attorney?

If a client becomes incapacitated and doesn’t have a power of attorney, it may be necessary for a court to appoint someone to act on their behalf. This process can be time-consuming and expensive and may not result in the person they would have chosen to act on their behalf being appointed.

In such a scenario, a family member or loved one may need to petition the court to be appointed as their legal guardian or conservator. This process typically involves providing evidence of the client’s incapacity and demonstrating that the person seeking appointment as their guardian or conservator is a suitable candidate. A court will then determine whether to appoint that person to act on their behalf.

If no suitable candidate is available, the court may appoint a professional guardian or conservator to manage their affairs. This can be costly and may not result in the same level of personalized attention that a family member or trusted individual would provide.

How to create a power of attorney

Consult an estate attorney to have a power of attorney drafted for your client. Your client will first want to choose an agent, or attorney-in-fact. This person should be someone the principal trusts to make decisions on their behalf. It is important to discuss the role with the person beforehand and make sure they are willing to accept the responsibility. They will then need to decide on what type of power of attorney they would like put in place.

Helping clients understand the importance of power of powers of attorney

Ensuring your clients have their essential estate planning documents in order is an important service to them, and shows value that goes beyond their portfolio. For those clients who need additional education into the importance of estate planning, you can give them the branded guide, Why Estate Planning Matters.

The information provided here does not, and is not intended to, constitute legal advice or tax advice; it is provided for general informational purposes only. This information may not be updated or reflect changes in law. Please consult with your financial advisor or estate attorney who can advise as to whether the information contained herein is applicable or appropriate to your particular situation.