Power of Attorney Explained: Who Can Handle Your Money If You Can't

An accident, illness or cognitive decline could leave anyone unable to manage their finances, whether temporarily or permanently. If that happened to you, who would pay your bills, manage your accounts, file your taxes or handle your property? A power of attorney ensures someone you trust can step in and act on your behalf, avoiding a costly and stressful court process.

What a power of attorney is

A power of attorney, often abbreviated POA, is a legal document that gives someone, called your agent or attorney-in-fact, the authority to act on your behalf in financial and legal matters. The person creating the document is called the principal.

Your agent doesn’t need to be a lawyer. Many people name a spouse, adult child, sibling or trusted friend. Your agent can handle tasks you specify, such as paying bills, managing bank accounts, filing taxes, managing investments, handling real estate transactions and dealing with government benefits.

Common types of powers of attorney

A general power of attorney gives your agent broad authority over your financial and legal matters. It’s often used when you want someone to handle a wide range of affairs.

A limited power of attorney, sometimes called a special power of attorney, gives your agent authority for a specific task or time period, such as selling a car, closing on a home while you’re out of the country or managing a particular account.

A durable power of attorney stays in effect if you become incapacitated. This is crucial, because a non-durable power of attorney ends if you become unable to make decisions, which is precisely when you might need it most. Most estate planning attorneys recommend durable powers of attorney for planning purposes. In many states, powers of attorney are durable by default unless they specify otherwise, while in others they must explicitly state that they’re durable.

A springing power of attorney takes effect only when a specific event happens, such as your incapacity, depending on state law. While springing powers can provide reassurance that your agent won’t act until needed, they can create delays and complications, since your agent may need to prove the triggering event occurred, often requiring documentation from doctors. Some states don’t allow springing powers.

When a power of attorney ends

A power of attorney generally ends when you die. After death, your executor, named in your will, or the administrator appointed by a court handles your estate. A power of attorney may also end if you revoke it, if a court invalidates it, if the purpose is accomplished or the specified time expires, or in some cases if your agent is your spouse and you divorce.

You can revoke a power of attorney at any time while you’re mentally competent, typically by notifying your agent in writing and informing institutions that have copies.

Health care decisions

Financial powers of attorney usually don’t cover medical decisions. For those, you’d use a health care power of attorney, sometimes called a health care proxy or medical power of attorney, which names someone to make medical decisions for you if you can’t. This is often paired with a health care directive or living will, which describes the medical care you want or don’t want in certain situations, such as end-of-life care.

Having both financial and health care powers of attorney ensures that trusted people can manage all aspects of your affairs if needed.

Choosing an agent

Choosing the right agent is one of the most important decisions in creating a power of attorney. Pick someone trustworthy, organized, financially responsible and willing to serve. Your agent will have significant authority over your finances, so trust is essential.

Consider whether the person lives nearby, has the time and ability to handle your affairs, and would act according to your wishes rather than their own preferences.

Talk with your chosen agent about your wishes, your financial situation and where to find your documents. Make sure they understand their responsibilities, including the legal duty to act in your best interest, keep your money separate from theirs and keep records of transactions.

You can name a backup, or successor, agent in case your first choice can’t serve. Some people name co-agents to act together, though this can create complications if co-agents disagree or need to act jointly on every decision.

Why a power of attorney matters

Without a power of attorney, your family may have to go to court to get authority to manage your finances if you become incapacitated. This process, called guardianship or conservatorship depending on the state, can be costly, slow, public and stressful. A court may also appoint someone you wouldn’t have chosen.

A power of attorney avoids this process, allowing someone you trust to step in quickly.

Protecting against misuse

While most agents act honorably, powers of attorney can be misused. To reduce risk, choose a trustworthy agent, consider requiring your agent to provide periodic accountings to another family member, limit the powers granted if appropriate and keep your documents in a secure place.

Check your state’s rules

Requirements for signing, witnesses and notarization vary by state. Some states have statutory forms. Many banks and financial institutions have their own power of attorney forms or requirements and may be reluctant to accept documents that are old or unfamiliar. Ask your financial institutions about their policies and consider providing them with copies in advance.

An estate planning attorney can help you create a power of attorney that meets your state’s requirements and reflects your wishes, often as part of a comprehensive estate plan.