Designating a power of attorney should not be a rushed decision

This article talks about what a power of attorney is and how to go about choosing a trusted agent.

A power of attorney is one of the most important components of an estate plan. Simply put, a power of attorney gives a designated individual (called the agent) the power to make financial and/or medical decisions on one's behalf if and when one becomes incapacitated, such as by a severe accident or dementia. Designating a power of attorney agent is not a decision to take lightly, since it grants quite a bit of authority to another person which, unfortunately, can be abused by unscrupulous individuals. Below is a look at what a power of attorney does and how to go about designating an agent.

What a power of attorney does

There are two types of powers of attorney, a general one and a durable one. A general power of attorney typically covers a specific task or transaction, such as closing a real estate purchase on behalf of another person who cannot complete the task themselves. Once the designated transaction is complete, then the power of attorney typically expires.

A durable power of attorney, on the other hand, typically stays in force until the principal (the person who created the document) dies. A durable power of attorney grants the agent broad decision-making powers over the principal's medical care and/or financial decisions. Some powers of attorney address both financial and healthcare matters in one document, while in other cases there may be a power of attorney for medical decisions and a separate one for financial decisions.

Choosing someone who can be trusted

Because powers of attorney give agents such broad powers, they are, unfortunately, open to abuse. As MarketWatch reports, about $2.9 billion is lost through financial abuse of elderly Americans every year and powers of attorney are particularly prone to such abuse. Sadly, about 34 percent of elder abuse cases are perpetrated by a family member, friend, or neighbor.

While most people ultimately choose a friend or family member they feel they can trust as their agent, it is also important to ensure that a designated agent is free of debt or money problems and has the competence required to make important financial and medical decisions. As CNN reports, an alternative is to appoint an outside party, such as a lawyer or bank, as the agent instead, although such agents will come with a fee.

Building an estate plan

An estate plan entails many considerations, including who will take care of one's financial and healthcare decisions if and when one becomes incapacitated. An estate planning attorney can help people build a comprehensive and effective estate plan, including by assisting with drafting powers of attorney, living wills, trusts and wills.