Powers of Attorney

A Power of Attorney (POA) is a legal document that authorizes another person (the agent or attorney-in-fact) to act on behalf of the person granting the power (the principal). Powers of attorney are essential incapacity planning documents that allow trusted individuals to manage financial, legal, and healthcare matters when the principal cannot do so themselves.

Key Terminology

• Principal: The person who grants the power of attorney
• Agent (Attorney-in-Fact): The person authorized to act on behalf of the principal
• Durable: POA that remains effective even if the principal becomes incapacitated
• Springing: POA that only becomes effective upon a specified triggering event

Types of Powers of Attorney

General Power of Attorney

Grants the agent broad authority to handle most financial and legal matters:

• Managing bank accounts and investments
• Buying, selling, or managing real estate
• Filing tax returns
• Handling business transactions
• Collecting debts and paying bills

Important Limitation: A general (non-durable) POA terminates automatically when the principal becomes incapacitated. This makes it unsuitable for incapacity planning.

Limited (Special) Power of Attorney

Grants the agent authority for only specific transactions or time periods:

• Selling a particular property
• Managing a specific investment account
• Handling matters during a defined absence (e.g., military deployment)
• Completing a single real estate transaction

Durable Power of Attorney

The most important feature for incapacity planning. A durable POA remains valid if the principal becomes incapacitated:

• Must include specific language stating it survives incapacity
• Becomes effective immediately upon signing (unless also "springing")
• Terminates upon the principal's death (does NOT survive death)
• Most commonly used for financial/property matters

Critical Exam Point: A durable POA:

• Survives incapacity
• Does NOT survive death

Springing Power of Attorney

A POA that "springs" into effect only upon a specified triggering event:

• Most commonly triggers upon incapacity
• Requires certification of incapacity (often by one or two physicians)
• Provides peace of mind that agent cannot act until truly needed

Disadvantages of Springing POA:

• Delay in agent's ability to act while proving incapacity
• Physicians may be reluctant to certify incapacity due to privacy concerns
• May require court involvement if incapacity determination is disputed
• Some states (e.g., Florida) no longer recognize springing POAs

Healthcare (Medical) Power of Attorney

Authorizes the agent to make healthcare decisions when the principal cannot:

• Consenting to or refusing medical treatment
• Choosing healthcare providers and facilities
• Accessing medical records
• Making end-of-life care decisions
• Authorizing surgery or other procedures

Key Distinction: Healthcare POA typically becomes effective only when the principal is incapacitated, unlike a durable financial POA which can be effective immediately.

Comparison of POA Types

Power of Attorney vs. Power of Appointment

This is a frequently tested CFP exam distinction. These are completely different legal concepts:

Power of Appointment Details (Estate Planning Context)

General Power of Appointment:

• Holder can appoint property to anyone, including themselves, their estate, or their creditors
• Property subject to general power is included in holder's gross estate (IRC Section 2041)
• Exercise or release during lifetime is a taxable gift
• "5 and 5" power: Limited to greater of $5,000 or 5% annually to avoid full estate inclusion

Limited (Special) Power of Appointment:

• Holder can only appoint to a limited class (NOT to self, estate, or creditors)
• Property is NOT included in holder's gross estate
• No gift tax on exercise or release
• Commonly limited to health, education, maintenance, and support (HEMS standard)

HEMS Standard: A power limited to distributions for health, education, maintenance, and support is treated as a limited (not general) power under IRC Section 2041(b)(1)(A), avoiding estate inclusion.

Practical Considerations for POA Planning

Selecting an Agent

The agent should be:

• Trustworthy and ethical
• Financially competent (for financial POA)
• Available and willing to serve
• Able to handle potential conflicts with other family members

Multiple Agents

• Naming co-agents can provide checks and balances but may cause delays
• Successive agents (backups) ensure continuity if primary agent cannot serve
• Consider whether agents must act jointly or can act independently

Third-Party Acceptance

• Banks and financial institutions may be reluctant to honor older POAs
• Some states have adopted Uniform Power of Attorney Act provisions requiring acceptance
• Consider updating POA documents periodically
• Keep POA with the agent and file copies with financial institutions

Revocation

A POA can be revoked at any time while the principal has capacity:

• Revocation should be in writing
• Notify the agent and all third parties who have copies
• Cannot be revoked by an incapacitated principal

Key Exam Concepts

1. Durable POA survives incapacity but NOT death - Critical distinction
2. Springing POA delays agent authority - May be problematic in emergencies
3. Power of Attorney vs. Power of Appointment - Different purposes, different tax consequences
4. General Power of Appointment = estate inclusion - Under IRC Section 2041
5. Limited Power of Appointment = no estate inclusion - HEMS standard qualifies as limited
6. Healthcare POA is separate from financial POA - Both needed for comprehensive planning
7. Regular POA terminates at incapacity - Must be durable for incapacity planning