What Is a Power of Attorney?

How Power of Attorney Works

A power of attorney document authorizes a trusted person you choose, called a designated agent, to act on your behalf. Financial power of attorney grants the power to make financial decisions; medical power of attorney grants the power to make decisions about your medical care.

When you grant power of attorney, you can choose what decisions the agent is allowed to make for you and when the power of attorney takes effect. Rules surrounding power of attorney can vary depending on your state.

Having a power of attorney in place can be helpful if:

• You become mentally incapacitated, such as by dementia
• You are hospitalized and need someone to make decisions about your medical care
• You are temporarily unavailable to make decisions
• You want someone to make certain financial or legal decisions for you

For example, if you become mentally incapacitated, a power of attorney can prevent the need for a court-appointed guardian to oversee your affairs.

You also can set up a specific power of attorney that applies only in certain circumstances. For example, a service member who's going to be deployed overseas can establish a power of attorney equipping someone back home to pay their bills or deal with other matters of theirs until they return.

Power of attorney can be general or durable.

• A general power of attorney ends when you become incapacitated, withdraw the authorization or die.
• A durable power of attorney authorizes your designated agent to continue handling matters for you in the event you become incapacitated or unable to communicate.

What Is Allowed Under a Power of Attorney?

Among the things a designated agent can do on your behalf a power of attorney are:

• Buy or sell items on your behalf.
• Apply for government benefits such as Medicare, Medicaid or Social Security.
• Oversee your business.
• Collect money that you're owed.
• Cash your checks.
• File a lawsuit.

What Is Not Allowed Under a Power of Attorney?

Generally, the appointed agent in a power of attorney arrangement cannot:

• Make changes to your will.
• Change the power of attorney document or shift powers to somebody else.
• Violate the spirit of the arrangement by not acting in your best interest.
• Make decisions on your behalf after you die, except in certain cases.
• Cast a vote on your behalf in a public election.

Watch Out for Power of Attorney Abuse

Since someone who holds a power of attorney wields tremendous power, be sure to watch out for red flags that this arrangement might not be in your best interest.

• The designated agent pressures you to turn over authority that you're not willing to give up.
• The designated agent spends money on themselves rather than putting that money toward your needs.
• The designated agent does things they don't have permission to do, such as changing your retirement plans or insurance policies.

How to Protect Yourself from Power of Attorney Abuse

What can you do to prevent abuse of your power of attorney? Here are four suggestions.

1. Reassign the power of attorney to someone else. Choose someone you trust and you know will be a strong advocate for you, and be wary of anyone who seems too eager to lend a hand with your finances.
2. Have your power of attorney document require your designated agent to report any financial transactions they make on your behalf to someone else.
3. Inform friends, relatives and financial advisers about your power of attorney so they can keep an eye out for potential problems.
4. Cancel the power of attorney if you're uncomfortable with how the designated agent is handling matters on your behalf.

The Bottom Line

A power of attorney is an important part of an estate plan and can provide a security blanket when you're unable to make decisions about financial and medical matters. However, that protection can vanish if your designated agent isn't acting in your best interest. Therefore, make sure you're entrusting the right person with control over various aspects of your life.