Do you need power of attorney for your business?
Jason owns a successful small business with several employees. Unfortunately, he has to go to the hospital for serious surgery. There is the possibility he could be out of action for some time.
Jason wants to appoint his brother to run his business and handle his other financial affairs while he’s in the hospital. What should he do?
The answer is: Jason should sign a power of attorney.
What is a power of attorney?
The term “power of attorney” is confusing and misleading. Power of attorney has little to do with attorneys.
When you sign one, you appoint someone to act on your behalf on matters of legal significance. The legal term for such a person is “agent” or, in some states, “attorney-in-fact.” But the person does not have to be an attorney.
Not all power of attorneys are the same. You can limit what your agent can do for you and when he or she can do it. And you can have more than one agent at the same time.
There are three main types of powers of attorney:
Financial power of attorney
You need a financial POAany time you want someone else to conduct business for you. This includes:
- Operating your business
- Using your assets to pay your living expenses
- Buying and selling real estate or other property
- Entering into contracts
- Handling your investments, including retirement plan transactions
- Handling transactions with banks and other financial institutions
- Filing and paying your taxes
- Hiring lawyers and making decisions regarding lawsuits.
A financial power of attorney can go into effect when you sign it. Or, it can have specific start and end dates.
Jason, in our example, should sign a financial power of attorney to appoint his brother to run his business and handle his other financial affairs while he’s in the hospital. The power of attorney can start on the day Jason enters the hospital and end when he’s released.
Many spouses have sign financial powers of attorney. This way, one spouse can act for the other if something happens to one of them, or for when one spouse is out of town.
In some states, a financial power of attorney need not take effect until you become mentally or physically incapacitated. In this case, you have a power of attorney in place for emergencies, without having to give your agent authority right away.
Special power of attorney
With a special POA, you give your agent authority to complete specific, clearly defined tasks. For example, you could sign a special POA to give your agent authority to sign a contract on your behalf, open a bank account, sell a specific business asset, or settle a lawsuit.
Typically, you use a special POA when you need someone to perform a task you can’t—notably when you’re out of the country or are in the hospital.
To point out, Jason could use a special POA to give his brother authority to sign loan papers on his behalf while he’s in the hospital.
Health care power of attorney
A health care power of attorney gives your agent authority to make medical decisions for you if you are unable to do so on your own. As an illustration, a health care power of attorney will take effect if you become unconscious or mentally incapacitated, and your doctors need someone to make decisions on your behalf.
This scenario is not the same as a living will. A living will is your instructions for end-of-life medical care. Some states allow you to combine a living will with a health care power of attorney. Such documents are often called an advanced health care directive.
What is a durable power of attorney?
In most states, unless a power of attorney provides otherwise, it automatically ends if you become incapacitated. To avoid this, you must include a clause that makes yours “durable.”
In other words, it continues in effect even if you’re incapacitated—sometimes called an enduring power of attorney. Any type of power of attorney can be durable.
Jason, in our examples, should make his financial power of attorney durable. This way, his agent will be able to continue running the business if Jason becomes incapacitated while he’s in the hospital.
Who can be an agent in a power of attorney?
Any adult can act as your agent. This person should be someone you trust. They should also have the ability to follow through with your instructions. For example, don’t appoint a relative to manage your business if they don’t have business acumen.
Your agent is your fiduciary. This term means they must act in good faith in your best interests. The agent should keep accurate records, keep your property separate from his or hers, and avoid conflicts of interest.
You can sue your agent for misuse of power of attorney. But obtaining a court judgment against an agent can take years. It could also be uncollectible if there is no money or other assets left.
What happens after you die?
A power of attorney only remains in effect while you are alive. Once you die, your will goes into effect. Typically, the executor of your will take over from your agent.
However, the person you named as your agent in your power of attorney can also serve as the executor of your will.
What happens if you don’t have a power of attorney?
If you don’t have a power of attorney, things can get messy. If you become incapacitated, your relatives will have to go to court to get someone appointed to handle your affairs. This person is usually called a conservator.
The judicial path takes time and costs money. Also, the court might not appoint the person you would have wanted to act on your behalf.
Assume that Jason doesn’t have a power of attorney and goes into a coma after his surgery. There is no one able to take over running his business and other financial affairs immediately. His relatives will have to go to court to get a conservator appointed. The court doesn’t have to select Jason’s brother, even though this is the person he would have wanted.
How to create a power of attorney
Creating a power of attorney is incredibly easy. Many states have created standard forms that you can use, although it’s not mandatory. You fill in the blanks or check the appropriate boxes. Do an internet search for “power of attorney” for your state to find out if your state has such a form.
Some banks and brokerage companies have their own power of attorney forms.
You’ll need to sign your power of attorney in front of a notary and get it notarized. Some states also require that you have one or two witnesses present when you sign. If your agent is going to deal with your real estate, you must file a copy of a power of attorney with your county recorder’s office.
The Growth Center does not constitute professional tax or financial advice. You should contact your own tax or financial professional to discuss your situation.