Key Concepts and Terminology Explained
The world of legal documents can feel intimidating because of its specific language. Understanding a few key terms will demystify the Power of Attorney and help you grasp its function and power. Let’s break down the essential vocabulary.
Principal and Agent
As we mentioned, the Principal is you—the person creating the Power of Attorney. You are granting the power.
The Agent (or Attorney-in-Fact) is the person you choose to act for you. This is the individual you are entrusting with significant responsibility. Your agent has a legal obligation, known as a fiduciary duty, to act solely in your best interest, manage your assets carefully, and make decisions according to your wishes.
Durable Power of Attorney
This is arguably the most critical term to understand in the context of planning for seniors. The word “durable” means the Power of Attorney remains valid and in effect even if you, the principal, become incapacitated. Without this “durable” provision, a standard POA would automatically end the moment you are no longer able to make your own decisions—the very time when your agent is needed most.
For estate planning and elder care purposes, you almost always want a Durable Power of Attorney. It ensures a seamless transition of decision-making authority precisely when it’s required, without any need for court intervention.
Springing vs. Immediate Power of Attorney
A Power of Attorney can be designed to become effective at different times.
- An Immediate POA becomes effective the moment you sign it. This can be practical, as it allows your agent to help you with finances immediately if needed, even if you are not incapacitated. For example, if you are recovering from surgery and find it difficult to get to the bank, your agent could assist you.
- A Springing POA only “springs” into effect upon a future event, which is almost always your incapacitation. The document will specify how incapacitation is determined—typically, it requires one or two physicians to certify in writing that you are no longer capable of managing your own affairs. The benefit is that you retain full control until you are deemed incapacitated. The potential downside is the delay; getting the required doctor’s certification can take time, which could be problematic in an emergency.
General vs. Limited (Special) Power of Attorney
The scope of an agent’s authority can be broad or narrow, depending on your needs.
- A General Power of Attorney grants your agent broad authority to handle nearly all of your financial matters. This can include everything from paying bills and managing bank accounts to selling real estate and managing investments.
- A Limited or Special Power of Attorney restricts your agent’s authority to a specific task or a limited period. For example, you might create a limited POA to allow your brother to sell your car for you while you are traveling overseas for an extended time. Once the car is sold, the POA ends.
Financial vs. Medical Power of Attorney
It is a common misconception that one document covers everything. In most states, you need two separate legal documents to manage your affairs.
- A Durable Power of Attorney for Finances deals with your property and money. This is the document that allows your agent to pay bills, file taxes, and manage your assets.
- A Medical Power of Attorney (also known as a Healthcare Proxy or Durable Power of Attorney for Health Care) deals with your body and health. It appoints a healthcare agent to make medical decisions for you if you are unable to communicate your wishes. This includes decisions about treatments, surgeries, doctors, and end-of-life care.
These two documents appoint agents for two very different roles. You might choose the same person for both, or you might decide your financially savvy daughter is best for the financial POA, while your compassionate son who is a nurse is better suited for the medical POA.
Fiduciary Duty
This is the legal foundation upon which the Power of Attorney is built. A fiduciary is someone who is required to act with the highest degree of loyalty and good faith for another person. Your agent is a fiduciary. This means they are legally prohibited from using your assets for their own benefit (self-dealing), must keep their money separate from yours, and must make all decisions based on what is best for you. A breach of this duty can have serious legal consequences.
