Legal & Financial Planning

The Ultimate Guide to Financial Power of Attorney

Cameron Huddleston
Cameron Huddleston
January 17, 2023
The Ultimate Guide to Financial Power of Attorney

Chances are, you don’t have a financial power of attorney. After all, most Americans don’t. Only one-third of adults 55 and older have a durable power of attorney, according to a survey by Merrill Lynch and Age Wave. The percentage among younger generations is likely even lower. 

If so many Americans don’t have a power of attorney, is it even necessary? In a word: yes.

You need a power of attorney if you want to have a say in who gets to make financial decisions for you if you can’t on your own. And it’s essential that your parents or loved ones name you as their power of attorney if you are a financial caregiver for them. Without that designation, you won’t have the legal right to make financial transactions for them. 

What is a financial power of attorney?

A financial power of attorney is a legal document that allows you to name someone to make financial and legal decisions for you if you can’t. You are referred to as the principal. The person you name in the financial POA document is called your agent or attorney-in-fact.

You might need someone to make financial decisions for you if an injury or other health emergency leaves you temporarily unable to make decisions on your own.  You might need someone to manage your finances for you if you develop dementia. Or you might simply need someone to make a one-time financial transaction for you if you’re overseas and can’t access your accounts. 

In short, there are a variety of situations when you might have to rely on someone else to handle your finances for you. You want that to be someone you trust and have chosen to take on the responsibility. Otherwise, if something happens to you, the person who steps into this role—or is appointed by a court—might not be the person you would want handling your finances (more on this below). 

Even if you’re married, you still need to have a power of attorney for financial affairs because there are limits on the authority your spouse has over property you own together. You can name your spouse to act as your agent. However, it’s a good idea to name a backup in case your primary power of attorney is unable to take on the responsibility at any given point. This also helps prevent putting so much power into just one person’s hands. 

Types of financial power of attorney

There are four main types of power of attorney. The one you choose will determine how much power you actually give the person you choose to be your agent.

Limited POA: A limited power of attorney gives someone the right to make only certain financial decisions for you or one-time transactions. For example, you might have a limited POA to close a real estate deal for you. 

General POA: A general power of attorney gives someone broad powers —essentially the right to make any sort of financial decision if you are temporarily unable to do so yourself. It’s no longer valid if you become incapacitated or when you die. 

Durable POA: A durable power of attorney can be general or limited. However, it remains in effect when you become incapacitated. For example, if you develop dementia, you would need to have a durable power of attorney to have an agent make financial decisions for you.

Springing POA: This type of power of attorney springs into effect under certain circumstances that you designate. For example, you might have a springing POA that becomes valid once you become mentally incapacitated and are designated as such by one or more physicians. 

Elder law attorney Josh Berkley recommends having a general durable power of attorney—the kitchen sink power of attorney, as he calls it.

Elder law attorney Josh Berkley recommends having a general durable power of attorney—the kitchen sink power of attorney, as he calls it. “It gives someone the power to do anything,” he says. “It’s about as broad as can be.”

A limited power of attorney can be too restrictive and, therefore, ineffective if you truly need someone to step in and take over your finances if you become incapacitated. “I don’t normally recommend that because you don’t always know what will come up,” he says. “You need people to have broad powers.”

The problem with a springing power of attorney is that your agent might not be able to act on your behalf without jumping through hoops—such as getting documentation from doctors – to prove you’re no longer competent. Even more troublesome is defining in a springing POA document at what point you are incapacitated. The triggers that make your power of attorney springing could be subject to argument in court, Berkley says.

How does financial power of attorney work?

The idea of giving someone so much power over your finances with a generable durable power of attorney probably seems risky. It can be if you don’t name the right the person. That’s why it’s so important to choose someone you trust to be your agent. 

If you want to make sure that person only uses that power once you’re no longer able to make financial decisions on your own, put the financial POA document some place safe and spell out under what conditions you’re comfortable with that person accessing the document.

Your power of attorney will need to show the actual document to your financial institutions before getting access to any of your accounts. Without the document, your agent doesn’t really have any power. This is something you can point out to your parents if you will be their financial caregiver and they are reluctant to name you power of attorney. Tell them they can hang onto the document naming you power of attorney until a point when they actually need your assistance with their finances.

You (and your parents, for that matter) also can name more than one power of attorney to create a system of checks and balances, so to speak. Keep in mind, though, that you could make it difficult for your agents if you require them to act collectively. If want to allow them to act independently, you need to spell that out in the power of attorney document.

What could happen if you don’t have a financial power of attorney

Drafting a power of attorney document is a task you shouldn’t delay—especially not until an emergency makes it necessary. If you have a stroke, develop dementia or have some other health issue that makes you mentally incompetent, it’s too late for a power of attorney to be drafted and signed. That’s because you must be mentally competent to sign this document.

In that case, someone will have to go to court to be legally appointed to make financial decisions for you. There are two big problems with this.

For starters, that person might not be the one you would’ve chosen for this role.  Even if the person is someone you’re comfortable with assuming this role, that person—likely a loved one—might have to spend a lot of time and money going through the court process to become your conservator. Your loved one will likely have to hire an attorney for himself or herself and for you and pay for a doctor or specialist to assess your competency. 

Not only is this process expensive, but also it can be emotionally taxing. Your loved ones will basically be putting you on trial to prove you’re no longer competent enough to make financial decisions for yourself. 

[ Read: What You Need to Know About Being a Financial Caregiver ]

How to appoint a financial power of attorney

Meet with an estate planning or elder law attorney to draft a financial power of attorney document—as well as a will or living trust and an advance health care directive. The cost of these estate planning documents can be up to $1,000 – or more, depending on the complexity of your situation. 

To find an attorney, you could start by visiting your state bar association’s website (search for your state name and “bar association”) to see if it has an online member directory to locate an estate planning or elder law attorney near you. You could use the National Association of Estate Planners & Council’s online directory to search for an estate planning attorney near you. Or you could search the National Academy of Elder Law Attorney’s online directory. If possible, opt for one with the Certified Elder Law Attorney (CELA) designation.

There are a variety of situations when you might have to rely on someone else to handle your finances for you. You want that to be someone you trust and have chosen to take on the responsibility.

There are lower-cost financial POA forms available on websites such as, LegalZoom and Rocket Lawyer. However, there are some risks involved in using these do-it-yourself forms. It’s safer to have this legal document drafted by an attorney to conform to your state’s laws and to be tailored to your situation. However, if paying an attorney doesn’t fit within your budget, getting fill-in-the-blank legal documents can be better than nothing, some estate planning attorneys say. 

[ Read: The Pros and Cons of DIY Financial Power of Attorney Forms ]

After naming a power of attorney, review and update the document every three to five years, Berkley says. If you draft a power of attorney document and stick it in a lockbox for more than a decade, there’s a risk that your financial institutions won’t accept it because they’ll consider it outdated. The document will still be valid, but some companies have policies that require financial POA documents to be no more than a few years old, he says. You don’t want to end up in a situation where your agent can’t act on your behalf when you need help the most.

How to prevent financial power of attorney abuse

Power of attorney abuse can happen when the person you name as your agent doesn’t manage your money in a way that benefits you. Your agent is required to be a fiduciary, meaning that he or she must act solely in your best interest. However, a court doesn't monitor agents appointed as power of attorney to ensure that fiduciary duty is upheld.

To reduce the risk of power of attorney abuse, name someone you trust who doesn't have any financial problems, addictive behavior, relationship issues or a history of lying. You could name two agents to avoid giving too much power to one person. You could include safeguards in the financial POA document to limit what actions your agent can perform or to require your agent to provide an accounting of how your money is managed to a third party.  

Or, you could a second set of eyes on your agent by giving other people you trust the ability to review your financial accounts. One way to do this is with a service such as Carefull. Carefull provides 24/7 account, credit and identity monitoring and gives you the option to name Trusted Contacts who can have view-only access to your accounts. This will allow family members or financial professionals you trust to keep tabs on how your power of attorney is managing your finances if you become unable to manage them yourself.

Bottom Line

A financial power of attorney is a legal document that all adults need. It doesn't mean giving up control of your finances while you're still able to manage them. Instead, it allows you to prepare for the possibility that someone might have to manage your finances for you by naming someone you trust to handle this responsibility. And if you change your mind about whom you want to fill this role, you can revoke the power of attorney and draft a new document appointing a different agent.

Working with an elder law or estate planning attorney will allow you to define what powers you want your agent to have. It's important that this document is tailored to fit your needs and complies with your state's laws.

[ Keep Reading: What to Know About the Types of Power of Attorney ]

This material is designed to provide general information on the subjects covered. It is not, however, intended to provide specific financial or legal advice or to serve as the basis for any decisions.

Cameron Huddleston

Cameron Huddleston

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