This article was reviewed by Jay Brecknell, CFP®.
A power of attorney is one of the most important legal estate planning documents you can have—and yet many people don’t have one in place, or even know what it is. You might be wondering how to protect your estate and assets if anything happens to you, or you may just want to ensure you have the right financial care as you grow older.
This is where a power of attorney comes in. It’s a simple way to make some of those life-managing decisions a little easier.
What is a power of attorney?
A power of attorney (POA) is a legal document that gives someone you choose the authority to make financial, property, and real estate decisions on your behalf.
You can choose one or multiple people to be your attorney. They don’t have to be a legal attorney at all, but can be any mentally capable adult of legal age. It’s absolutely essential that you trust this person, so most people choose family members, such as their spouse or children.
Essentially, when you give your power of attorney, you’re assigning them the same financial control over your belongings that you have. This can be useful for a number of reasons, and there are different types of POA for different situations. For some situations, this is to protect your finances in case you become mentally unfit to make your own decisions. But that only works with specific cases—which we’ll break down later.
An important thing to know about power of attorney is that it ends once its creator dies. This means that the attorney does not have control over the estate—that power belongs to the executor identified in the deceased’s Last Will and Testament. People sometimes think they have a POA, but they’ve confused it with naming an executor on their will. Your executor is the one who is given control over the disbursement of the estate. It’s important to make both a Will and a POA to truly secure your finances as part of a proper estate plan.
What can a power of attorney do?
In general, your attorney can do any personal financial activities you can do. They can buy or sell your real estate, manage your banking, manage your investments, sign your cheques, and make decisions about your finances. This is why trust is so essential with a power of attorney.
Your attorney is required to act with your best interests in mind and keep track of every action they take on your behalf, and they must keep your finances fully separate from their own. If you wish, you can place restrictions on your POA so that your attorney can only access a certain part of your finances, such as real estate or a specific bank account.
Power of Attorney Limitations
Your attorney cannot make any medical decisions for you. Their influence is strictly financial, so if you want someone to be able to make your health choices when you’re no longer able to, you’ll need to create a Health Care Directive or a Living Will, also known as a Personal Directive, Representation Agreement, or Power of Attorney for Personal Care.
Your attorney is also not permitted to create a new Last Will and Testament for you, or alter your existing Will.
What are the different types of power of attorney?
There are two main types of power of attorney, with four total variations. These can overlap with one another, allowing you to create a setup that works best for you and your situation.
General Power of Attorney
This is the standard type of power of attorney, though it is becoming less common. This type of POA is valid only while you are still mentally capable of making your own financial decisions. Your attorney will have financial control over your assets, though if you become mentally incapacitated in any way, the POA ends.
A common use for this type of POA is if you have some sort of illness that doesn’t affect your mind, but makes it difficult to manage your affairs. Your POA could then manage things on your behalf, letting you focus on your health. It’s also used to handle finances in your absence if you were to go on an extended vacation out of the country.
Enduring Power of Attorney
This is the most common type of POA. It becomes active as soon as you create it and remains active, even if you experience mental decline. It only ends upon your death.
Many people create this type as a form of advanced planning, so that someone they’ve chosen can control their finances if they’re unable to in the future. It’s essential to create this before you are mentally unfit, as a POA is no longer an available choice once you’re deemed unable to make legally binding choices.
Many people who are aging decide to create this type of POA and choose their children to gain control of their estate, often with instruction on how they would like things to be managed. It guarantees that the person of your choice will be able to step in and manage your finances when you’re no longer able to, without having to navigate any complicated court proceedings.
Essentially, this type is good for planning ahead in case you develop dementia, experience a stroke, or encounter another type of illness that interferes with your decision making process.
Limited Power of Attorney
This type is used for specific circumstances, as it gives the person you choose as your attorney the POA control for a specific purpose or during a specific time frame.
For example, if you’re leaving the country for a number of months and need someone to manage your finances while you’re away, this is a good way to hand someone that power. It will end upon a specific event or time which you choose ahead of time.
Springing Power of Attorney
This type requires a certain event or status to happen before it becomes active. It may require you to become incapacitated by health or other factors before your attorney gains control.
The difficulty with this type of POA is in determining when you are no longer mentally fit to manage your own finances and trigger the POA to become active. You need a doctor to certify for you, and it can be a complicated process, especially when mental issues make it more difficult.
This type is less common because most people simply choose to use enduring POA, which doesn’t require an event or doctor verification to happen before your attorney can step in for you.
When should I use a power of attorney?
Retirement is the perfect time to consider naming a power of attorney. You’re nearing the point of life where it could be extremely beneficial to have someone able and equipped to care for you with full financial authority. If something happens to you or your mental state declines, your finances will be protected by your power of attorney.
As soon as you create a power of attorney, it comes into effect and your attorney can legally act on your behalf depending on the type used. However, you don’t have to use it yet if you don’t want to. You can create an enduring power of attorney with your children and let them know when you’d like them to start acting for you—whether in one year or ten.
When you’re updating your Will (which is another important thing to do as you near retirement), that’s another good opportunity to review your needs and consider whether a power of attorney is a good option for you.
We see some common situations where people choose to create a power of attorney:
- You’re vacationing in another country for an extended period of time (like the winter).
- You have a medical condition that might impact your mental state as you get older.
- You frequently leave the country due to your job or travel habits.
- You want to guarantee that someone you know and trust will have control over your finances.
- You want to set specific limits on how your estate and finances are managed if you are ever incapacitated.
- You want to protect your business while you’re on vacation or in case of mental deterioration.
Who should I choose to be my power of attorney?
Anyone who is willing, capable, and over the age of 19 can be your attorney. We commonly see people choose their spouse as their attorney with their adult children as alternatives. Adult children who will take care of you as you age are a great choice.
Other options are close friends, extended family members, or a professional lawyer or accountant. Your pick for attorney should be good with money, reliable, and able to manage the potential stress or strain of acting as your attorney. You need to ask them if they’re willing to be your attorney, and only pick someone who is ready to accept the responsibility.
The most important aspect of power of attorney is trust. You must trust the person you pick completely, as they will have full control of your finances. Will they treat your finances and assets the same as you would?
If you’ve named a power of attorney earlier in your life, you might want to revisit that. Has the relationship changed? Are they still local or easily able to manage your assets? If you have named a POA that does not live in Canada, you should revisit this as there could be negative tax implications. Are they still alive and mentally capable? Your power of attorney should be younger than you so they will ideally be around for the rest of your life to manage your affairs.
If there isn’t anyone you know who you can trust with the job, you can choose a trust company, or the Public Guardian and Trustee (a government official), to act as your attorney.
Common Issues
One of the most common issues we see with POA is when people think they have a power of attorney, but don’t. You might have named an executor in your will instead of a POA, or you might have one but not updated it in decades so it is no longer accurate or relevant (in case your POA has passed away or is no longer able to perform the duty).
Many people also make the mistake of believing that their power of attorney will cover health decisions, but as we pointed out earlier, this is not the case. A power of attorney covers financial and legal matters only. Pre-planning for healthcare and treatment decisions is a great idea, but you must do it separately from your power of attorney.
Next Steps
Now that you know the basics, it’s up to you to decide if a power of attorney is right for you and your situation.
Managing your finances is essential to an enjoyable and relaxing retirement, which is why we’re so focused on providing the information you need to create the retirement you deserve. Feel free to schedule a meeting to discuss your financial needs and answer any questions you have about this process.
If you want more tips on planning for retirement, read our eBook to learn how you can plan for your golden years!