Powers of attorney: When and why do you want them to take effect?

A power of attorney is a legal document that allows someone else to act on your behalf in almost any matter. These matters can include taking care of a bill dispute with a utility company, completing a major financial transaction or making life-altering health care decisions.

Each state will have its own laws and rules about powers of attorney, such as how to create one and what they can do. In most states, the person you assign to act on your behalf is your agent or attorney-in-fact. And the person who the agent acts on behalf of is the principal.

There's a common misconception about powers of attorney. Whether it's the result of television or movies, many people are under the impression that in creating a power of attorney, you lose the authority to make any decision that your agent can make. This is not true.

Imagine you create a general power of attorney allowing your significant other to serve as your agent. Yes, they could open a new bank account under your name without getting your permission first. But creating the general power of attorney doesn't mean you lost the ability to open a new bank account for yourself.

Think of creating a power of attorney like adding an authorized user to your credit card account. A second person can now make purchases under your account, but your original credit card still works.

The specific procedure for creating a power of attorney will vary among states, but as a general rule, you need three things to create a power of attorney.

First, you need the mental capacity to create the document. For the most part, this means you understand what you are doing and what it means for you and your interests.

Note that this is not the same thing as having the required mental capacity for the power of attorney to be in effect. One of the major reasons people create powers of attorney is to allow someone else to make decisions for them when they are incapacitated.

Therefore, many powers of attorney will go into effect for the very reason that the principal does not have the mental capacity to make certain decisions like entering into contracts or creating legal documents.

Second, you need the power of attorney to be in writing. While there might be very limited instances where you can create a power of attorney orally, it's not recommended you do so.

This is because it may not be effective for certain objectives. Many institutions or organizations where a power of attorney might be used, like a nursing home or bank, may only honor powers of attorney that are in writing even if the law allows them to accept an oral power of attorney.

Third, the power of attorney must be properly executed. At the very least, it means the person creating the power of attorney must sign and date the document. In some jurisdictions, a witness or notarization may also be needed.

Many lawyers who help create powers of attorney for their clients will often take the “belt and suspenders” approach and have the power of attorney witnessed and notarized just to be safe. Not only does this cover all the bases in court, but some institutions may not honor a power of attorney without notarization, even if the state they're in doesn't require it.

Depending on how you want to classify powers of attorney, there are four or five major types. We'll list and discuss five, even though certain types may be combined to create additional versions. These five are the most common in the United States and should cover most, if not all, of your estate planning needs.

• General power of attorney: Subject to the laws of a particular state, a general power of attorney permits the agent to act for the principal in almost any situation. From opening a bank account to buying a car to making medical decisions, a general power of attorney can do it all. However, the general power of attorney ends when the principal revokes it, dies or becomes incapacitated. This latter reason is why a general power of attorney should not be relied on to make health care decisions for the principal.
• Limited power of attorney: Sometimes referred to as a special power of attorney, a limited power of attorney only applies to a specific situation or for a set period of time. A soldier who will be deployed overseas for six months might create a limited power of attorney so a parent can handle financial matters for them until they return home.
• Springing power of attorney: A springing power of attorney remains dormant until a certain condition occurs. Common conditions include the principal leaving the country or becoming incapacitated. A springing power of attorney may also combine with other types, such as a limited or durable power of attorney.
• Durable power of attorney: Durable powers of attorney stay in effect even if the principal becomes incapacitated. If you're creating a power of attorney so someone else can act because you cannot, you will need a durable power of attorney. However, durable powers of attorney are not forever, as they will terminate if the principal dies or revokes it.
• Health care power of attorney: Also known as a medical power of attorney or a health care proxy, this legal document grants an agent the legal authority to make medical decisions on a principal's behalf, usually only after they become incapacitated. As you might expect, these are among the most common types of powers of attorneys created.

It's possible to combine these types of powers of attorney. For instance, you might find a springing limited power of attorney. This allows the principal to create a power of attorney for a specific situation in terms of when it goes into effect and where it applies.

Keep in mind that a health care power of attorney is not the same as an advance directive, health care directive or a living will. The primary difference is that a health care power of attorney assigns an individual to make medical decisions on your behalf, normally when you can't make those decisions yourself. In contrast, the advance directive, health care directive or living will outlines what your wishes are concerning medical treatment in certain situations.

Depending on your circumstances, you will probably want both a living will and a health care power of attorney. In the vast majority of situations, only one may be necessary, but there could be a situation where having both could be very helpful.

There might be a dispute among family members over the terms or application of a living will. But if there's also a health care proxy, they can resolve the dispute relatively easily, at least from a legal perspective. Or the agent to a medical power of attorney might be unsure on what to do, so they refer to the medical directive for guidance.

It's usually fairly straightforward in identifying a general situation where a power of attorney might be necessary. The tricky part is figuring out exactly when a particular power of attorney should go into effect.

For example, you may need someone else to handle your financial affairs when you're unable to and this need is unpredictable. Maybe you're on call for your job that requires you to frequently travel the world. Or perhaps have medical issues that sometimes result in you undergoing unexpected surgery.

You could create a general durable power of attorney for these situations, but that would grant an unnecessary level of authority to someone else. Instead, a springing power of attorney might be perfect for either situation, where it only goes into effect when you're out of the country or incapacitated.

With respect to health care powers of attorney, they are typically a type of springing power of attorney. More precisely, they don't go into effect until a doctor or other specified medical professional concludes that you have been incapacitated or otherwise can't make decisions for yourself. For most people, this arrangement works.

But there could be a dispute as to whether you have become incapacitated such that the health care power of attorney should go into effect. If you have this concern, you might choose to have a lawyer prepare your health care power of attorney such that it goes into effect the moment you execute it or upon your authorization.

Powers of attorney created to handle financial matters may likewise have situations where you would want them to go into effect immediately or only as a last resort. If you have a trusted individual that's already helping you handle certain financial matters and you would simply like to formalize that arrangement, then you might want to create a limited or special power of attorney that immediately becomes active. But if your only concern is how your bills are going to get paid should you become incapacitated, then a springing limited power of attorney is something to consider instead.

To ensure that your power of attorney does exactly what you want it to, you will want to consult with at least two other individuals.

First, you will want to talk to the person who will act as your agent. You need to confirm that they are willing and able to make decisions for you and handle your business, medical or financial matters when necessary.

There's a chance that they may not want the responsibility. Or maybe they do, but they're so busy with work and family obligations, they don't feel like they will have the time to properly serve as your agent when the time arises.

Second, you will want to consult with an attorney. They aren't legally required to create a valid power of attorney, but they can be extremely helpful in creating and executing the power of attorney.

Lawyers ensure that all of the execution requirements have been met to have a legally recognized power of attorney. This is extremely important for not just peace of mind, but in case your power of attorney gets challenged in court. They can also help you make any adjustment to tailor the power of attorney to your specific situation.

One of the biggest benefits with consulting with an attorney is catching potential legal issues you might not be aware of. They might help you limit the authority granted to your agent to prevent potential abuse of the power of attorney. Or in helping you prepare the power of attorney, they can identify additional legal documents you might need, like a living will or trust.

You don't want to give up control when it's not necessary, but you want to make it as easy as possible for someone else to act on your behalf when you can't. So in addition to deciding where the power of attorney will be used, you need to decide when it should go into effect. You will generally have three choices: immediately, when you specifically authorize it or when you become incapacitated.