Key takeaways
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A power of attorney is generally not responsible for debts when the person they are POA for dies.
- A power of attorney may be responsible for debts if they cosigned a loan, share a joint account or are married to the person they’re POA for and live in a community property state.
A power of attorney (POA) is a legally binding document that lets someone else (an agent) act for you (the principal) in the event that you’re not able to do so yourself, whether you’re incapacitated or deceased. The person you appoint can be anyone: a lawyer, a nurse or a friend or relative you trust.
If you have been asked to take on power of attorney responsibilities or want to ask someone to take them, it’s important to know what financial responsibilities are involved and what happens to debt after death.
What is a power of attorney?
A power of attorney isn’t a person or entity. Instead, it’s a legal document that passes decision-making power from one individual (called the principal) or entity to another. You can’t “be” a power of attorney, but you can attain it if an individual (the principal) authorizes you as an agent or attorney-in-fact (though you don’t have to be an attorney or legal professional to act in this role).
“POAs are created and used while someone is alive so that others can make decisions for them,” said Travis Christiansen, owner of Boyack Christiansen Legal Solutions.
Types of power of attorney
The POA allows an agent, to make decisions on behalf of the principal. The extent of that authority (and the time during which it exists) depends on the arrangements.
In most states, there are four types of power of attorney that apply to financial matters:
| Type | Purpose | Used for | Terminates |
|---|---|---|---|
| General power of attorney | Handles the principal’s financial affairs, business matters, investments or lawsuits. | When principals can manage their affairs but want someone else to handle them. | If the principal becomes physically or mentally incapacitated. |
| Durable power of attorney | Handles the principal’s affairs (like the general POA), remaining in effect if the principal becomes physically or mentally incapacitated. | When the principal can’t make decisions due to cognitive decline, medical emergencies or similar situations. | When the principal dies. |
| Special power of attorney | Handles specific tasks on behalf of the principal like property closings or business transactions | When the principal can’t make decisions because of a travel or medical incapacitation. | Once the task or tasks are completed. |
| Springing power of attorney | Handles the principal’s affairs when triggered by certain conditions. | When the principal requires someone to act on their behalf, like disability, mental incompetence or military deployment. | When the triggering conditions expire. |
Another common type of power of attorney, medical POA, allows someone to make medical decisions for the principal but doesn’t give any authority over financial matters.
When is a power of attorney helpful?
A financial power of attorney can come in handy in several ways beyond when someone is permanently incapacitated. For example:
- A service member is deployed overseas. A financial POA can manage a service member’s property and pay their bills while they’re away.
- Estate planning. A POA can help you plan for potential events in the future, like a debilitating brain injury or dementia. Your agent can handle your affairs in advance.
- Temporary incapacity. A power of attorney can be helpful in temporary situations, such as an extended health recovery period.
Is someone with power of attorney responsible for debts?
If you take on power of attorney responsibilities, you might be concerned that you might be responsible for paying their credit card debts or loans during their life or after their death.
You’re not personally responsible (though you might sign checks from that relative’s account to pay balances, depending on the POA requirements). Nothing should come out of your pocket.
As an agent, you might be in charge of tasks like investments, legal decisions, asset management and account administration.
A POA terminates when certain conditions are met — like when a specific transaction closes, a military member returns from overseas deployment or a pre-determined deadline passes. Another event that terminates any POA is the principal’s death. At that point, the former principal’s (now the decedent’s) executor handles things from there. In this situation, “any debt settlement is handled by the estate,” Christiansen said.
Exceptions that make a POA financially responsible
For the most part, a person with power of attorney is not responsible for debts when the primary dies. However, that person might be responsible for debts for other reasons beyond the POA responsibility:
- They were a co-signer on a loan together: If two people co-signed a loan or jointly took one out, they are each responsible for the outstanding balance. If one person dies or can’t pay, the debt is still active.
- They hold a joint account: If both names are on an account application, then the debt is equally the survivor’s debt and must still be paid.
- They’re married and live in a community property state: Nine states follow community property laws: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin. In these states, spouses share equal responsibility for debts.
Depending on where you live, other exceptions could apply.
What should you consider before giving someone power of attorney responsibilities?
The most important step is to find a trustworthy person to handle a power of attorney for you or someone else. You should look for someone you know and trust.
Other considerations for an effective POA should include the following:
- Be concise. The POA document must clearly outline the powers granted to the agent. When drafting a POA document, ensure specific, to-the-point language and avoid vague or flowery mandates.
- Don’t keep it a secret. Once the POA is assigned, tell others about it. Depending on the type of POA involved, provide health care providers, relatives and close friends with the necessary information.
- Ensure proper execution. In most states, a POA must be signed in the presence of a notary public. Other entities might be involved as well. For instance, if the agent is hired to assist with a real estate transaction, the POA document must be filed with the county where the property is located.
- Look out for fraud. POA fraud does occur. It’s unfortunately easy enough for an attorney-in-fact to forge certain documents or enhance their duties without permission from the principal. Even if the agent selected for the POA is trustworthy, monitor accounts frequently and ensure safeguards against fraud in the agreement.
- Update when necessary. A power of attorney is flexible. If you (or your relative) find the agent lacking, nothing says you can’t cancel that POA and find someone else. The POA should be revoked immediately if the agent isn’t working in your relative’s best interests.
The bottom line
Understanding the purpose of a POA can help you be a trusted agent for a relative who needs your help or find a reliable individual to take on the job. At the same time, understanding the role of debt in the POA relationship (and upon the borrower’s death) can help alleviate concerns or give you an idea of where you stand.
Because issues like POA, estates and potential inherited debt are driven by state legislation, working with legal professionals who understand your state’s laws is important to ensure you know your responsibilities.
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