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Understanding Power of Attorney

By Elle

legal reference booksEven though you’re young and healthy now, you shouldn’t ignore answering the question “Do I need a will?” or the importance of documents like trusts or Power of Attorney. These are legal documents that can protect you and your loved ones.

We’ve previously gone over the importance of things like how to prepare a will, but I’m going to use this post to explain the significance of having a well thought out and executed Power of Attorney.

What is Power of Attorney and What Does It Cover?

It is a legal document that gives someone (the “principal”) the ability to designate and give a person (the “agent”) the authority to act on your behalf in legal, medical, and financial matters.

It is frequently used in the unfortunate event that you’re incapacitated or disabled to the degree that you can not handle your affairs for awhile. If you decide to prepare a power a attorney, there is some terminology you should be familiar with:

  • Durable – This designation is immediate and allows your agent to act on your behalf regardless of your health, but does not allow the agent to make health decisions on your behalf. You can revoke it at any time.
  • Nondurable - This designation is limited in time. It’s usually for very specific situations, such as a real estate transaction that the principal cannot be present at. Once the transaction is complete, the agent loses power of attorney.
  • Springing – In this case, the agent gains authority only if you become disabled or incompetent.

What is the Scope of an Agent’s Authority?

Here are some ways an agent can act on a principal’s behalf:

  • Manage principal’s property
  • Handle tax matters
  • Operate principal’s small business
  • Claim property that principal inherits
  • Make healthcare decisions (with an advance medical directive, you can spell out your wishes)
  • Manage banking transactions for the principal
  • Invest principal’s portfolio in stocks, bonds, mutual funds

As you can see, there is a lot of power you can give to your agent, so please think it through. Make sure you take the time to select the right person and decide how much authority you will grant them.

How Do You Set Up a Power of Attorney?

There are a few ways you can go about creating your Power of Attorney. Each option has its own merits and drawbacks. You have to decide what is right for you. Please be aware that you’ll need a notary and at least one witness for it to be valid. Please check your state’s requirements before completing one. Here are the options:

1. Do It Yourself

You may decide to tackle this situation completely on your own. There are some blank generic forms available on the web, but they usually aren’t sufficient as they don’t always address your specific circumstances. It also involves quite a bit of work as you have to draft this paperwork yourself.

2. Online Legal Document Preparation Services

If you are overwhelmed by the prospect of doing the legal documents yourself, but you’re limited on funds, you may want to look into having a company handle it for you. While the option is usually cheaper than hiring a lawyer to draft your paperwork, you still have a bit of legwork to do before, during, and after the process to make sure your documents are valid in your state.

3. Licensed Attorney

Honestly, if you want to make sure your power of attorney is valid and covers all your bases, you should budget the money and get it done by a professional. It is an important document that you really don’t want done shoddily. You may be able to negotiate a reasonable fee from your lawyer, who should be able to walk you through the process.

Your Take

How prepared are you in case of a disability or incapacitation? What would you do if you can’t attend a contract signing but need someone to do so on your behalf? What is your experience with Powers of Attorney and do you have a preference on what type to use?

(Photo Credit: umjanedoan)

Elle
Elle helps families achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth over at Couple Money. Learn how to live on one income and have fun with the second. She's paid off $15,000 in debt and counting, and is a contributing blogger at TurboTax's blog.

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Comments

  • http://thecollegeinvestor.com Robert

    A power of attorney is very important. I just got married this year, and set it up for my wife and myself to have power of attorney for each other.

    While you can go to an attorney to setup a generic one (such as real estate transactions), most banks, brokerages, and credit unions require you to fill out their specific form and have it notarized. This is free (other than the notary fee), and should cover most of your basic needs.

  • Elle

    Thanks Robert for sharing the helpful tip. It amazed me how powerful and useful a power of attorney can be, depending on how it’s prepared and executed.

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