The power of attorney is one of the most versatile estate planning tools available. A power of attorney is a document which allows you to give give authority to another person to act on your behalf.

The person creating the power of attorney is known as the principal. The person who receives the authority to act on the principal's behalf is known as the agent or the "attorney-in-fact." The attorney-in-fact doesn't have to be an actual attorney, but can be anyone you choose.

The principal decides the scope of the power of attorney. For example, you can give an attorney-in-fact the power of attorney for one simple investment. On the other hand, you can also make the power of attorney unlimited. One limit, however, is that you cannot grant the power to make a will.

Any power of attorney ends with the death of the principal.

What Types of Decisions Are Authorized by a Power of Attorney?

There are several standard powers that can be included, such as the ability to pay bills, transfer funds, or complete business transactions. However, there may be more specific reasons you want to execute a power of attorney.

Almost any decision you can imagine can be delegated by a power of attorney. Blank forms include many standard powers, yet if there is a substantial amount of money at stake, or if it is some other important decision, a specific power of attorney is much more likely to be accepted as valid. It is wise to consult an attorney in drafting the power of attorney to insure that it is effective when it is needed most: at the time the decision needs to be made.

Is There Only One Type of Power of Attorney?

In fact, there are three types of powers of attorney, a limited power of attorney, a durable power of attorney, and a springing power of attorney:

  • Limited Powers of Attorney - A limited power of attorney is used only for one reason outlined when the power is executed in a document. If you are selling a house out-of- state, for instance, and wish to make a friend or relative your attorney-in-fact for that sale, you can make a limited power of attorney. In the document that describes the power of attorney, you specifically state the matter at hand (e.g., "the sale of the home at 123 Main Street"). Also included is an expiration date of the power.
    • If the power of attorney is not specific enough, real estate brokers, mortgage agents and banks may not deal with your attorney-in-fact. It is a good idea to consult an attorney on the requirements for an effective limited power of attorney.
  • Durable Powers of Attorney - A durable power of attorney is much broader than a limited power of attorney. It does not expire if the principal becomes incapacitated. Durable powers of attorney allow the principal to delegate authority over a general area of the principal's affairs, rather than a single transaction.
    • A durable power of attorney is immediate. When you sign this type of power of attorney, the attorney-in-fact can act at anytime. It is not necessary for you to authorize individual transactions. Therefore, the principal must choose someone in whom they have absolute confidence.
  • Springing Powers of Attorney - A springing power of attorney becomes effective upon the happening of some event, which is almost always designated as the disability of the principal.
    • Therefore, determining whether or not the principal is "disabled" enough for the power of attorney to "spring" into action is a formal process. Springing powers of attorney are not automatic, and institutions may refuse to work with the attorney-in-fact. Disputes are then resolved in court, which is of course a costly, and unwanted, procedure.
    • Springing powers of attorney are popular for those who are unwilling, while still healthy, to delegate control over their affairs. However, there is a greater potential for problems when springing powers of attorney are used.

Do I Need an Attorney to Draft My Power of Attorney?

The enforceability of a power of attorney is not always clear. A qualified estate planning attorney can aid in the drafting of an enforceable power of attorney. An attorney will also be able to protect your legal interests.