Financial Power of Attorney: Meaning and Uses

A financial power of attorney (POA) is a legal document that authorizes someone (the “agent” or “attorney in fact”) to handle your financial affairs if you can’t. You might create a financial POA if you’re ill or out of the country^[0].

The powers a financial agent has can range from everyday tasks, such as banking transactions or paying bills and taxes, to more complex moves, such as transferring property into a trust and paying professionals to buy, sell or maintain your assets.

Having a POA can be an important step in estate planning. The legal agreement can ensure that your finances are managed responsibly if you become unable to manage your own affairs due to incapacity or cognitive impairment. If you don’t have a financial power of attorney, a court may have to name someone as your conservator or guardian to manage your affairs^[0].

How does a financial power of attorney work?

A financial POA is a fiduciary relationship between you and the person you designate. Your agent (the person to whom you give financial power of attorney) is legally bound to make decisions in your best interest.

Generally, the responsibilities of a financial POA agent may include managing the following:

1. Distribution of assets to cover daily expenses.

2. Real and personal property transactions.

3. Stock, bond or other securities trades.

7. Estate, trust and other beneficiary needs.

8. Legal claims and other litigation.

9. Retirement benefits payments.

11. Charitable contributions.

In some states, there may be specific types of financial POA designations, such as for real estate transactions, vehicle registration or taxes.

Types of financial power of attorney

A durable POA stays intact if you become incapacitated, such as if you fall into a coma or experience cognitive decline. However, it does not remain in place if you die.

A nondurable financial POA ends if you become incapacitated. If you’re not concerned about incapacity — you’re setting up a POA so someone can handle your finances while you’re out of the country, for example — you may prefer a nondurable POA.

A limited POA restricts your agent to specific activities, such as paying your taxes just for this year or carrying out tasks involved with selling your home. A general POA, on the other hand, gives your agent broad power to execute financial tasks.

You can also set up a POA to be “springing,” meaning that it takes effect after a specific event occurs. The springing event is typically the principal’s incapacity, which can be difficult to prove in some cases.

How to set up a financial power of attorney

1. Choose your agent carefully. This person should be someone you trust to make decisions in your best interest, especially if you’re incapacitated.

2. You may be able to set up a power of attorney without a lawyer if your state has an official form to complete. Some online will-making software offers POA forms as part of their estate planning packages.

4. Give copies of your form to close family members and important financial institutions, such as your bank, so everyone is on the same page in case anything happens.

Tax implications of a financial power of attorney

You might want to use a durable financial POA or a tax-specific POA to authorize someone to file your income tax return for you. You’ll need to fill out IRS Form 2848 to allow your agent to represent you in front of the IRS.

How does power of attorney work in my state?

See the requirements for creating a valid power of attorney in these states: