A power of attorney (POA) is a designation of authority that is assigned by the principal or grantor to an agent or designee. POA can refer both to the legal form and the designated person, sometimes causing confusion. A further area of confusion is that there are numerous varieties of POA.
What are the types of power of attorney?
One of the most common forms of POA is a healthcare proxy, which allows a designated individual to make medical decisions for the principal when they are unable to either make or express decisions. In this case, the agent’s power is typically limited to medical care, including treatment choices, use of emergency measures, and end-of-life options.
A medical POA is often springing, meaning that the power does not take effect until the principal is incapacitated. These grants of authority are often called durable, which means that the agent continues to have the authority to act until the principal either recovers capacity or dies.
Other POA grants may also be durable, even if they take effect upon issuance.
Are all POAs durable?
No. In fact, most POA designations terminate when the grantor becomes incapacitated. A common example is financial power, which is often established for the convenience of the principal. In those circumstances, the POA is likely carrying out instructions from the grantor rather than making decisions on their behalf. These designations are revoked when the principal becomes incapacitated to ensure that the POA does not take advantage of the grantor.
What does the POA have the authority to do?
The assignment of authority can be detailed in the POA agreement. For example, in a financial POA, the principal might give the agent the ability to pay bills, transfer funds, buy and sell stocks, or sign documents on behalf of the principal. In such a situation, the POA designee would certainly have the ability to withdraw funds from the principal’s bank accounts. The agreement can be vague or specific, and principals should consider being very clear about any limits to the agent’s power.
Agents have a fiduciary duty.
The term “fiduciary duty” is sometimes misused, but it means that the agent must make decisions based on the principal’s best interests. The person with the fiduciary responsibility may not benefit at the expense of the grantor. A POA designation carries a fiduciary responsibility, so the agent must act in the best interest of the grantor. The agent may need to withdraw money from the principal’s bank account for any number of reasons, but they may not transfer those funds to themselves. They also may not transfer other assets to themselves.
Does a POA receive compensation?
Sometimes, the POA designee is entitled to compensation. This arrangement is more likely to be present when the POA is for convenience, and the POA is acting on behalf of the principal rather than managing their affairs because the principal cannot. In such cases, if the principal is not directing the compensation, it should be well documented in the POA agreement to avoid the existence or appearance of a conflict of interest.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
