What Is a Power of Attorney?

Consulting with a financial manager at the bank

A power of attorney is a legal document that allows you to grant significant power to somebody else when it comes to handling your personal and business matters. This arrangement lets someone else act on your behalf to handle things like selling property, paying bills or making medical decisions. The powers that somebody gains may be broad or specific and may be permanent or temporary. Furthermore, the power may take effect right away or in the future, such as if you develop a mental or physical disability.

Every state allows power of attorney arrangements, but the rules surrounding them can vary depending on where you live. You don't need to hire an attorney to create a power of attorney document, but tapping the expertise of a lawyer or a legal aid service can simplify the process and protect you. You also can even find free forms online that can help you draft a power of attorney, though you should do this very carefully to avoid giving away too much power.

How Power of Attorney Works

A power of attorney may come into play in both long- and short-term situations. For instance, you may grant general power of attorney status to a trusted person, such as a brother or sister, in advance of needing it. In the lingo of a power of attorney, this person is called an "agent." An agent must be an adult.

In the event that you're affected by dementia, a brain injury or another impairment and run into trouble making decisions on your own, the power of attorney assigns decision-making responsibilities to the designated agent as spelled out in the document.

In that scenario, a power of attorney can prevent a relative or friend from needing to enlist a court-appointed guardian to oversee your affairs after you've become incapacitated.

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.

Tasks that a designated agent may be empowered to carry out include selling your car or your home, closing your bank accounts or stopping medical treatment. In other words, a power of attorney document can cover both your financial and medical affairs.

Be aware that there are two kinds of power of attorney: general and 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 incapicated 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 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.

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