T alk to any financial adviser about securing your future, and you're likely to hear the term "power of attorney" before very long. If you're like most people, your first reaction might be, "Wait a minute -- isn't it risky to give someone power over my affairs? I would much rather keep control myself."

The concept of a power of attorney is often misunderstood. It is not a risky document when written properly -- in fact, it can be critical to ensuring your financial safety and that of your family. Here's what you need to know about the various kinds of powers of attorney, and some situations in which a power of attorney can help and/or protect you...

Situation: You've retired and moved to a faraway state. Some of your financial affairs -- a home that you have been trying to sell and an interest in a local business -- remain in your former locale. You would rather not travel back and forth to deal with these affairs.

Solution: Rather than cede decisions to, say, an adult child of yours who still lives near your old home but who may be relatively uninformed (or who may not agree with your financial goals), you appoint a trusted adviser, such as your accountant or lawyer, to be your "agent" under a power of attorney. That person can then represent you and make and/or execute decisions on your behalf. Two kinds of powers of attorney...

A "general" power of attorney gives a trusted person the right to act on your behalf in any financial matter if you're traveling or are otherwise unable to make a personal appearance.

A "special" power of attorney limits the person's authority to a specific onetime transaction (say, a real estate closing) or for a limited period (for instance, while you're working or traveling overseas).

Situation: You become incapacitated, either temporarily or permanently, and are unable to make some or all of the decisions affecting your finances.

Many people are caught flat-footed -- they haven't made any arrangements for someone to step in and handle their affairs.

Trap: You did set up a power of attorney, thinking it would help in case you became incapacitated. But sometimes general or special powers of attorney can have a flaw -- they become invalid if you become legally "incompetent" (unable to handle your affairs). Therefore, a typical general or special power of attorney won't be effective when you most need help managing your finances.

Self-defense: For protection in case of incapacity, use a "durable" power of attorney. A durable power will remain in effect if you become incompetent. Therefore, if you reach the point where you can't handle money matters, your agent will be able to pay bills, sell securities, put your home up for sale, etc., if and when these actions are in your best interest.

Situation: You worry that by setting up a general and/or durable power of attorney, you would be giving up too much power. You don't want anyone else to have ongoing legal access to your assets.

Solution: In most cases, advisers, relatives and friends do end up doing the right thing when called upon as agents. But if you nonetheless are reluctant to have a power of attorney in force when it's not needed, you have another tool at your disposal -- a "springing" power of attorney.

Such a power does not take effect when it's executed, so your agent will have no power to touch your finances. Instead, the power will "spring" into effect when certain events transpire, as described in the document.

Example: A qualified doctor attests to your incompetence. At that point, the document will become an effective durable power of attorney and your agent can manage your affairs.

Advantages: Until a springing power becomes effective, you will not have to worry that someone will use a power of attorney to take advantage of you. If you never lose your mental capacity, this springing power will never go into effect.

Disadvantages: If you become incompetent, the process of having a doctor examine you and attest to your incompetency might be time-consuming. In the meantime, you may mismanage your own affairs -- and no one around you will have the legal right to stop you.

Bottom line: Springing powers of attorney are less useful, in my experience, than many people believe. If you are going to trust someone to manage your assets when you are incapacitated, why not trust him while you are capable of keeping an eye on your affairs -- and on him?

Situation: You and your spouse have divided the ownership of your assets for estate planning or asset protection purposes.

This is commonly done to reduce estate taxes and to protect certain assets, such as a home, from creditors and/or lawsuits. In such cases, it probably makes sense for both spouses to grant powers of attorney.

Reason: If one spouse has not done so, his/her incapacity may leave some assets unprotected until a court can appoint a guardian. Usually each spouse names the other as agent. Be sure to also name successor agents in case a primary agent is unable to act.

NUTS AND BOLTS

A power of attorney is generally a very simple document -- you can even buy a basic version in a stationery or office-supply store and fill it out yourself. But a do-it-yourself form may not cover all possible uses of a power of attorney and may leave the power open for abuse. Or it may be too narrow -- failing to give an agent a specific power that you do want him to have, such as the right to make gifts on your behalf, to create trusts or to distribute funds from a 529 college savings plan for your grandchildren.

Best: Use an attorney to create your power. The fee generally will be modest, usually under $500, especially if you work with the lawyer who draws up your will and other estate planning documents.

After a power of attorney has been executed, you may want to send copies to your bank, your brokerage and certain other financial firms with which you do business so that your agent will be able to work with them. Some financial firms have their own power of attorney forms for clients to use and are reluctant to accept others. So when you send yours in, ask for a letter in response acknowledging receipt of the document and acceptance of its terms. This will reveal any problems right away, when they can be dealt with.

Any power of attorney document should be reviewed every few years with an eye toward any law changes or changes in the named agents.

Also, financial firms may be reluctant to accept the exercise of a power that was executed, say, 10 or 20 years earlier. Even though they may be legally required to honor the document no matter how old it is, if they stall while checking that it's still valid, it costs you time. Meanwhile, your financial affairs are not being administered.