Part of estate planning is preparing for when you are incapacitated or other cases when you might still be physically present but have mentally declined. Hopefully, that will not happen. Many people remain sharp and present throughout their entire life, but for many others, very old age is a period of mental weakness. They get less capable of making clear choices as they age and may often be physically unable to make those choices. In that case, you often need someone else to help you make crucial decisions. Two of the most common options for this are the healthcare proxy and power of attorney. Here’s what you need to know. You may also want to talk to a financial advisor to make sure your individual situation is fully taken care of.
What Is a Healthcare Proxy?
A healthcare proxy refers to when you name someone to make any necessary healthcare decisions on your behalf if you are unable to do so. This individual is also referred to as your “agent” or, in some jurisdictions, your “health care agent” or “health care power of attorney.”
You typically name your agent in a living will, a document that establishes any rules and requirements that you have if you are physically or mentally incapacitated. You can also fill out a form that is itself called a “health care proxy,” in which you name your agent. However you name them, in this same form, you will also give instructions for how you want your agent to make healthcare decisions on your behalf.
These instructions are extremely important. In general, a healthcare proxy gives the agent the same scope of medical decision-making power that you have. You have, effectively, authorized this person to act in your stead for the purposes of your health. This authority is only limited by the instructions that you leave in your healthcare proxy form or living will. If you want them to make certain decisions in certain ways, you need to make that clear in their authorization.
A healthcare proxy can only act if you are incapacitated, either mentally or physically and their authority only lasts for the duration of your incapacitation. For example, say that you are in a car crash and knocked unconscious. The hospital would look to your healthcare proxy and the agent that it names, to make any decisions on your behalf until you woke up.
A healthcare proxy can also take effect due to mental decline. In these cases, it’s possible for the grant of authority to become long-term or effectively permanent. If a doctor or court (depending on the rules of the jurisdiction) rules that you are not mentally competent to make your own decisions, your healthcare proxy will kick in and the hospital will look to your agent to make all necessary decisions on your behalf.
In all cases, however, a healthcare proxy has a very specifically defined role. Your agent can only make decisions regarding your healthcare and they can only do so if you are medically incapacitated. It’s important to note that this is an area generally dominated by state law. There are few if any, federal laws that apply here.
What Is a Power of Attorney?
A power of attorney refers to when you name someone to make any necessary legal or financial decisions on your behalf. This individual can be referred to as your agent or your power of attorney, which can get slightly confusing as the form appointing them is also referred to as a power of attorney.
The format for naming a power of attorney is different across jurisdictions, but it typically requires a notarized statement granting someone this authority. You can do this in several different formats such as a specific letter granting someone power of attorney or in a living will. Similar to a healthcare proxy, in the form of naming your power of attorney you also give instructions for what authority you want them to have and how you want them to make decisions on your behalf.
As above, these instructions are extremely important. A power of attorney has the authority to make almost any legal or financial decision on your behalf as though you had made it personally. This includes but is not limited to, signing contracts, conducting business, making financial transactions, filing taxes, employing agents, assuming legal and financial liabilities and more. For example, if they sign a contract, it has the same authority as if you had signed that document.
This is true even if you do not specifically authorize a given transaction. As long as your power of attorney is acting within the scope of their authority it will be legally binding.
Instructions can narrow this grant of authority. When you name your power of attorney, you can assign them a specific scope of authority. For example, you can give someone power of attorney to sign the paperwork on a specific real estate deal or to file your 2023 taxes. If this person then tries to go and sell a bunch of your stocks, the transaction would be illegal because you didn’t give them the authority to do that.
Unless you specify otherwise, a power of attorney can apply whether you are incapacitated or not. In fact, it’s common for people to have a power of attorney for when they are perfectly healthy, just unable to attend a given transaction. When and under what conditions the agent has authority is another matter that you can specify in the form granting them power of attorney.
There are four basic types of power of attorney:
- Durable: With a durable power of attorney, you give someone an indefinite grant of authority. This authority lasts until you either revoke it or until you die. It is relatively uncommon to give someone an unlimited, durable power of attorney.
- Limited: With a limited power of attorney, you give someone a specific grant of authority. This authority applies only to specific situations and/or only lasts until its terms expire. For example, it’s common to give your accountant power of attorney to file your taxes or to conduct specific transactions when you can’t be present.
- Springing: With a springing power of attorney, you give someone a grant of authority that only begins under certain circumstances. It is common, for example, to name a springing power of attorney that only takes effect if you are incapacitated.
- Conditional: With a conditional power of attorney you give someone authority that ends or only lasts under certain circumstances. For example, you might give someone power of attorney that automatically begins if you are incapacitated and that automatically ends when you wake up.
You can combine different types of power of attorney. For example, a springing, durable power of attorney is a common feature of living wills. In that case, the power of attorney would give someone an indefinite grant of authority, but only if you become permanently incapacitated.
The Key Differences Between Healthcare Proxies and Power of Attorney
Healthcare proxies and power of attorney each play a different role in estate planning, but each is critical. The most important differences are:
- A healthcare proxy can make decisions regarding your healthcare and nothing else
- A power of attorney cannot make decisions regarding your healthcare, but they can make decisions about almost all other legal and financial matters
- A healthcare proxy can only act if you are incapacitated and is automatically triggered by your incapacitation
- A power of attorney can act under any circumstances based on the terms you set, but it is only automatically triggered if you define the conditions in advance
- A healthcare proxy’s authority ends once you are no longer incapacitated but can become permanent if your incapacitation is permanent
- A power of attorney’s authority ends when you say it does and can be temporary or permanent based on your instructions
- A healthcare proxy’s authority is automatically revoked once you are awake and mentally competent
- A power of attorney’s authority can be revoked at any time at your instruction
The Bottom Line
A healthcare proxy makes decisions related to healthcare on your behalf and can only act if you are medically or legally incapacitated. A power of attorney makes legal and financial decisions on your behalf and acts based on the scope of authority and under the conditions you have given them. It’s important to plan out your entire estate planning with an advisor.
Power of Attorney Tips
- When do you need power of attorney? That’s an excellent question for the professionals. Consider working with a financial advisor who can help you plan out your entire estate. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to assign a power of attorney or a healthcare proxy, it’s absolutely essential to do this right. Otherwise, someone might challenge their authority when you aren’t able to clarify matters on your own behalf.
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Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.