Investment Glossary – Power of Attorney

Power of attorney does not refer to the power that attorneys-at-law possess, but is rather a document that indicates that a specific person may handle decisions on your behalf. This designation comes in multiple forms, but the document that we will focus on here is the one that gives the greatest discretion to the person noted as power of attorney – that document is what is known as a general power of attorney. This document joins with the will, healthcare proxy, HIPAA release, and living will to form the roster of legal documents that cover most basic situations.

A general power of attorney gives the person of your choosing the ability to act on your behalf in nearly any situation that comes up. That person is referred to as the “agent,” while the person who the document is being signed to provide power of attorney for is called the “principal.” The agent can buy and sell stock. They can buy and sell real estate. They can pay the bills for your household. They can pay the bills for your business. You can craft specific powers into this document, as well as restrict certain ones if you choose to, but if you grant someone a general power of attorney, it is safe to say that you are effectively giving them overarching control over most, if not all, of your financial affairs.

There is one word missing in this designation that is typically important and should be mentioned. That word is “durable,” as in durable power of attorney. The use of that word signifies that the document does not expire in the event that the principal becomes incapacitated. This is the key point and the primary purpose concerning a durable power of attorney – it is typically written to come into effect in the event that the principal is no longer able to perform their duties. A general power of attorney can be written so that someone can act on your behalf even when you are competent, but the primary reason for signing a durable general power of attorney is to lay out a plan for who will manage your affairs in the event you are not able to manage them yourself.

So what does this actually mean?

You need to make sure your agent is clear on what your wishes are for your financial affairs prior to getting to this point since they are going to be acting in your stead during this time. Have these conversations early, even if they’re uncomfortable. If you save yourself the discomfort of having them to begin with, all you are doing is adding discomfort to your agent’s life later on in the event something happens to you. Because once you reach the point where you are incapacitated, you want someone who is able to take action quickly and confidently based on your desires, not someone who is wondering what to do because they weren’t aware of what you wanted.

In most states, either one or two doctors are required to certify that you are incapable of making decisions on your own in order for this document to be used by your agent. A spouse is typically the most common person to be chosen as power of attorney, with children or other associates being named as contingents in the event that your spouse predeceases you. But you can name any person of your choosing as your power of attorney, though you want to make sure they are someone you can trust. In addition, you’ll probably want to think about choosing someone you’ve had the hard conversations mentioned above with, which will hopefully help to make this document as effective as possible for you.