What is a Limited Power of Attorney?

What is a limited power of attorney?

It’s quite simply an extremely powerful estate planning document that can mean the difference between financial success and failure for your future.

What is the purpose of a Limited Power of Attorney?

The purpose is to give someone else the legal capacity to do business for you in case you lack expert knowledge or in case you become incapacitated. Everyone needs to have a “second in command” just in case. And as I said, even healthy people appoint a professional to represent them sometimes. That’s because the professional has more experience.

But anytime you think about granting someone a limited POA, you might start worrying. Nobody wants to give someone else carte blanche power over your affairs if they don’t have to. That’s why this is a limited Power of Attorney. (We’ll talk about how to limit the powers you bestow on others in just a minute.)

What does a POA do?

A limited Power of Attorney document grants (limited) executive powers to another person. Depending on what kind of POA we’re talking about, it can give another person the legal capacity to enter into contracts, make investment decisions, file taxes, claim inheritance, manage banking, buy and sell real estate and make health decisions on your behalf. Pretty powerful…you agree?

In short, if you grant a limited POA to someone, they can transact business as if they were you. That means they can create obligations for which you will be responsible. They can enter into contracts that you will have to honor. And if you don’t honor those contracts, you will be held liable. They may also be able to change your life insurance and IRA beneficiaries. Serious stuff.

If you are given a limited Power of Attorney over someone else’s affairs, it obviously means you have the powers outlined above. It can be a tremendous responsibility.

How are powers limited?

The powers you give someone else are limited in the document you sign. Let’s look at a few examples.

Financial advisors often have limited powers of attorney for clients. Depending on the document, that means they usually only have the power to buy and sell securities on your behalf. In most case they do not have the power to withdraw money from your account. That’s good for you so make sure any contract you sign with an advisor so stipulates.

You also might sign a limited POA with your accountant. That’s because CPAs often have limited powers of attorney to file your taxes for you. They represent you with the IRS but they are limited to only filing the taxes

How else can you limit the powers you grant?

Limited Powers of Attorney can be “springing” powers. That means they only take effect if some triggering event occurs. Usually a “springing power” is used as part of a family living trust or it can be used with a will. This is done so that when you die or become disabled it appoints a representative to manage your affairs. The benefit of a “springing power” is that it gives no authority to anyone so long as you can manage your own business.

A limited Power of Attorney could be durable but most are not. Durable powers stay in effect even after you die or become disabled. A non-durable POA becomes void when you die or become disabled. That’s usually the case with POAs you give to professionals such as accountants and financial advisors. This is also a safeguard you want to make sure is part of any contract you sign with a professional.

Again, limited power of attorney documents are often part of agreements you sign with professions. Be extremely careful and make sure which powers you are giving up and which powers you retain.

Have you ever heard of celebrities being cleaned out by their business managers or someone else? That’s because they signed a power of attorney with a very broad scope and the celebrities granted the professional the power to move money in and out of their accounts. That’s extremely dangerous and I suggest you never grant such powers to anyone if it’s avoidable.

What about a General Power of Attorney?

A General Power of Attorney grants someone the greatest authority possible. Basically, you are telling the world that this person is you for purposes of doing business. A general power of attorney is used for estate planning purposes but typically with a “springing” limit. So they would “spring” into effect upon some triggering event such as death or incapacity.

That’s because you don’t want to grant these powers if you don’t absolutely have to but you want to make sure someone has all these powers if you are not able to manage your own affairs.

How can you set up a Limited Power of Attorney?

If a professional needs you to sign a POA, she’ll have the document prepared. You may want to have your own attorney review the document. But that will be less expensive than having him or her prepare the document from scratch.

When you do your estate plan, a springing power of attorney is usually included. If you don’t have an estate plan, you can have a limited Power of Attorney created for you. You can either have an attorney draft the document for you or you can use a self-service company like Legalzoom.com to prepare the power of attorney.

Have you granted someone else a power of attorney? How did you limit it? Did you run into any trouble? What was it?

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