What is a Power of Attorney in Estate Planning?

Many people overlook the power of attorney when planning their estates, focusing solely on what happens after they’re gone. However, this legal tool plays a vital role in protecting your interests while you’re still alive.

What is an Estate Planning Power of Attorney?

An estate planning power of attorney is a document that allows you to designate someone to make decisions on your behalf if you become incapacitated. It serves as a financial and legal safeguard for your future. This power of attorney may also be referred to as a general power of attorney or financial power of attorney. A separate power of attorney, known as a health care power of attorney, enables you to appoint an agent to make medical and other health-related decisions for you if you’re incapacitated or unable to make them for yourself.

How Does an Estate Planning Power of Attorney Work?

When you create a power of attorney during estate planning, you’re essentially designating a trusted individual to step in and handle your affairs if you’re unable to do so. 

Power of Attorney (POA) outlines:

• The identity of your agent (also called an attorney-in-fact)
• The scope of their authority
• The timing of when their powers activate
• Any restrictions on their decision-making abilities

For example, a client once specified that her appointed agent couldn’t sell her family’s long-held vacation property. This provision protected her wishes while still granting necessary authority over other financial matters.

What Types of Powers Can Be Granted?

1. Financial accounts and investment management
2. Real estate transactions
3. Business operations
4. Legal representation
5. Tax-related decisions
6. Gift-giving on your behalf

Giving these powers doesn’t mean you lose control—you still have the ability to make decisions for yourself as long as you are able.

When Does an Estate Planning Power of Attorney Take Effect?

An estate planning Power of Attorney takes effect based on its type and there are two primary types:

1. Durable Power of Attorney: This version becomes effective immediately upon signing and remains valid if you become incapacitated.
2. Springing Power of Attorney: This type only activates when a specific event occurs, typically when a physician declares you incapacitated.

The choice between these options depends on your personal circumstances. Durable powers offer immediate protection but require significant trust in your agent. Springing powers provide more control but may face practical challenges when implementation is needed.

Who Should You Choose as Your Agent?

Choose a trustworthy, financially savvy, and readily available person familiar with your values. They should handle pressure well. While many opt for a spouse, adult child, or close friend, some situations may benefit from appointing a professional fiduciary. These experts can bring valuable objectivity and expertise to complex financial or legal scenarios.

How Does a Power of Attorney Differ from a Will?

A power of attorney manages your affairs while you’re alive and ends at death. A will directs asset distribution and appoints an executor after death.  While both are key components of estate planning, they serve distinct purposes:

Power of Attorney:

• Functions during your lifetime
• Manages affairs if you’re unable to or are incapacitated
• Ceases to be effective upon death

Will:

• Takes effect after death
• Directs asset distribution
• Appoints an executor for estate management

Consider the power of attorney as a safeguard for life’s unexpected events, while a will serves as a blueprint for your legacy after you’re gone.

Bottom Line

A financial power of attorney is a fundamental tool that allows you to maintain control over your affairs, even when you can’t actively manage them. It provides peace of mind and can prevent legal complications for your loved ones.

Given its significance, this document warrants thoughtful consideration. Consulting with an estate planning attorney can ensure your power of attorney aligns with your overall estate plan and adequately protects your interests.

Keep in mind that a power of attorney is just one element of a comprehensive estate plan. Consider how it interacts with your will, trusts, and other estate planning documents to create a cohesive strategy for your future.