Powers of attorney and health care directives

Most estate planning documents deal with what happens after death. Powers of attorney and health care directives are different. They cover the period when a person is alive but unable to act, whether for a few weeks after surgery or for years because of dementia. This post describes what each document does and how they fit together.

Financial power of attorney

The Consumer Financial Protection Bureau defines a power of attorney, or POA, as a legal document that allows someone else to act on your behalf. The person who signs it is usually called the principal. The person given authority is the agent, sometimes called an attorney-in-fact. Despite the name, the agent does not have to be a lawyer.

A financial POA can be broad, covering banking, bills, taxes, property and investments, or limited to one task.

Two terms come up often:

• Durable. The CFPB explains that a POA used for advance planning generally is "durable," meaning it continues to be effective even if the principal becomes incapacitated. A POA that is not durable may stop working at exactly the moment it is needed.
• When it starts. Some POAs are effective as soon as they are signed. Others are written to take effect only if the principal becomes incapacitated. Which forms are available and how incapacity is established depend on state law.

A power of attorney generally ends when the principal dies. From that point, authority over the person's property passes to the executor or administrator of the estate, or to a successor trustee for property held in a trust. The post on wills and trusts covers those roles.

Health care directives

Medical decisions are handled by separate documents, often grouped under the name "advance directive." Medicare describes an advance directive as a legal document that records your wishes about medical treatment in case you are not able to make decisions about your care, and says it includes two parts:

• A health care proxy, sometimes called a durable power of attorney for health care, names someone trusted to make health decisions if the person cannot.
• A living will describes which treatments the person would want if their life is threatened, such as breathing machines, resuscitation and tube feeding.

The National Institute on Aging notes that advance directives only go into effect if you cannot communicate your own wishes. Signing one does not hand over medical decisions while the person can still speak for themselves.

The two parts do different jobs. A living will speaks to situations the person anticipated. A proxy can respond to situations nobody anticipated. The NIA points out that a proxy can be chosen in addition to, or instead of, a living will.

The financial agent and the health care proxy can be the same person or different people.

What happens without them

If someone becomes incapacitated with no financial POA in place, the CFPB warns that a friend or family member might have to go to court to have a guardian appointed, a process it describes as potentially lengthy, expensive and very public. A guardian of property, called a conservator in some places, is someone a court names to manage money for a person the court has found cannot manage it alone.

On the medical side, the NIA explains that when there is no advance directive, state law determines who may make medical decisions. That is typically a spouse, parents or adult children, and an unmarried partner who has not been named as proxy could be excluded.

Marriage does not by itself give one spouse authority over the other's individually owned accounts. A retirement account has one owner, and the custodian generally acts only on instructions from that owner or from someone with documented legal authority.

Risks and limits

A POA is a powerful document. The CFPB cautions that it gives someone else a great deal of authority over your finances without regular oversight. The forms of misuse it lists include an agent spending the principal's money on themselves or doing things that were not authorized, such as making gifts or changing beneficiaries on insurance policies or retirement plans.

The safeguards the CFPB describes include telling other family members that the POA exists, appointing only someone who is truly trusted, and requiring the agent to report transactions regularly to another person. It also notes that a POA can be revoked.

An agent is a fiduciary, which the CFPB defines as someone who must by law manage the person's money and property for that person's benefit and not their own. See also what a fiduciary is.

A few practical limits are worth knowing:

• Some financial institutions ask for a POA on their own form, or review an outside document before accepting it.
• Some federal benefit programs appoint their own fiduciaries. The Social Security Administration, for example, says that someone holding a power of attorney must still apply to serve as a representative payee to manage another person's benefits.
• An agent's authority comes from the document. If it does not mention a power, such as dealing with retirement accounts, the agent may not have it.

Keeping documents current and findable

The NIA suggests reviewing advance directives periodically and after major events such as retirement, a move to another state or a significant change in health, and giving copies to the proxy and to health care providers.

Medicare Part B covers voluntary advance care planning as part of the "Welcome to Medicare" and yearly "Wellness" visits.

The forms, signing requirements and terms for all of these documents are set by each state, so an attorney can advise on what is valid where a person lives. The CFPB's guides for managing someone else's money explain the duties from the agent's side.