If you’ve ever thought about planning for your future or helped someone else with theirs, you’ve likely encountered the term “power of attorney.” But do you really understand what it means? While the words “power” and “attorney” sound weighty, they might not mean what you think. In fact, there are many misconceptions about what a power of attorney entails and the authority it grants. Spoiler alert: it doesn’t give anyone a temporary law degree.
In this article, we’ll clear up these misconceptions so you’ll know exactly what to expect if someone appoints you as their power of attorney. By understanding your legal responsibilities, you can avoid common mistakes and stay on the right side of the law.
Let’s begin with some context: If a power of attorney doesn’t make someone a lawyer, why is it called that?
What is a Power of Attorney?
A power of attorney is a legal document that gives someone else the authority to act on your behalf in financial matters. The term itself is a bit of a historical relic. Originally, powers of attorney were used to appoint lawyers to handle legal affairs. Over time, however, the concept broadened, allowing individuals to appoint someone—whether an attorney or not—to act as their agent for a variety of purposes.
While holding a power of attorney doesn’t require someone to be a lawyer, the term has persisted due to its historical roots. In essence, granting power of attorney designates someone as your trusted representative, giving them the authority to act on your behalf in much the same way an attorney might.
Most people don’t love the idea of someone else managing their finances, and many never think they’ll need it. But life is unpredictable, and there are times when having someone to step in is essential to protecting your assets. Whether it’s due to old age, a serious accident, or even being out of the country on that long-awaited year-long trip, there are scenarios where acting on your own behalf may not be possible.
Without someone in place to manage things, serious issues can arise. Financial institutions might impose unnecessary fees, fraudsters could exploit your accounts, taxes might go unpaid, your property could fall into foreclosure, or your credit could be ruined. Granting power of attorney ensures that someone you trust can maintain your financial stability and prevent these potential disasters when you’re unable to do so yourself.
Types of Powers of Attorney
While we don’t need to get too much in the weeds here (if you want to get in the weeds, though, read to the end and I’ll show you how to book a call with me), know that there are different types of powers of attorney, each with its own specific purpose. Here are some examples:
General Power of Attorney:
This grants the agent broad authority to act on your behalf, including managing your finances and signing legal documents, even if you’re capable of handling your affairs. It becomes effective as soon as you execute the document. When might you want this? Say you travel for work and you and your spouse have decided to refinance your mortgage. You may want your spouse to sign the paperwork on your behalf, rather than waiting for a time you’re back in town.
Springing Power of Attorney:
This also grants authority to someone to manage your financial and legal affairs. You can execute the document whenever you want, but it doesn’t kick in until you’re no longer able to make your own decisions.
Durable Power of Attorney:
This is a type of general power of attorney that remains in effect even if you become incapacitated. Think of it as the General and Springing Powers of Attorney combined.
Limited Power of Attorney:
This grants the agent authority to handle specific tasks only, such as managing your property or making healthcare decisions.
Healthcare Power of Attorney:
This grants your named agent authority to make medical decisions on your behalf.
Related: Financial Versus Medical Powers of Attorney: Know Your Options
Even though each of these documents operates differently, they all have one important thing in common: the agent’s power ends as soon as you die.
What No One Told You About a Power of Attorney: It Ends With Death
You may mistakenly believe that a power of attorney gives someone the right to access your financial accounts indefinitely. However, this isn’t the case. A power of attorney is a temporary arrangement that ends when the person who granted the power dies. What does this mean, exactly?
Let’s say your aging mother can no longer manage her affairs and she executed a Power of Attorney to give you the authority. While she’s living, you can access her bank accounts to make sure all her bills are paid and paid on time. But as soon as she dies, you no longer have the legal authority to access any of her accounts.
If she had a Will or no estate plan at all, you will have to file paperwork with the probate court and wait for the case to make it through the court system until the judge grants you authority again. In the meantime, if you can’t afford to cover her bills along with your own, you may have to make the difficult decision to let her bills go unpaid. If she still has a mortgage on her house, for instance, and you can’t pay her mortgage and yours, too, the bank could begin to fore lose, and you could lose any equity she had. This equity could have been a significant part of your inheritance.
Going to court can be a frustrating and time-consuming process, and if you haven’t planned appropriately, you can suffer negative consequences. But there’s a silver lining. You and your loved ones can avoid probate court, and maintain access to the other’s finances, if you create a Life & Legacy Plan.
The Good News
With some careful planning ahead of time, you can ensure all your bills get paid and your assets are preserved for your loved ones. The way to do that is by creating a Life & Legacy Plan with a living trust. A trust is a legal arrangement that allows you to transfer your assets to a trustee, who manages them for the benefit of your beneficiaries. A trust survives your death, so there’s no disruption in the ability for someone to manage your finances after you die.
You may have seen ads on the internet, or maybe your financial advisor has offered to draft a trust for you. And you may have the impression that a trust is a simple document you can get for little to no money. But I want to empower you with some education before deciding to go one of these routes. A trust is a legal document with legal consequences, and even lawyers who’ve gone to law school, passed the bar, and practiced law for years find that trusts are more complicated than they first thought. If you draft a trust yourself or with someone who isn’t a lawyer who specializes in this area of the law, you’re taking a big chance with your money and your family. I see these cases often, and usually, the trust isn’t worth the paper it’s written on.
You owe it to yourself and your loved ones to ensure your power of attorney, trust, and related estate planning tools are created correctly and updated over time, and that you understand the benefits and consequences of your plan.
When you work with me to create a Life & Legacy Plan, I’ll empower you with the education you need so you can make the right choices for yourself and your family, that you fully understand how your plan works, and that your family has my support after you’re gone.
How We Help You Preserve What Matters
Understanding the limitations of a power of attorney and the benefits of a trust is crucial for protecting your hard-earned assets. As your Personal Family LawyerⓇ Firm, we specialize in helping individuals like you create a Life & Legacy Plan that addresses your unique needs and provides peace of mind, no matter what happens. Once your plan is in place, you can rest easy knowing that your wishes will be honored, your loved ones cared for, and your property protected.
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This article is a service of SGLaw, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firm leaders, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.