In legalese, a power of attorney is simply a document that authorizes another person to act on your behalf. The term is also perfectly descriptive — especially the word "power."
"It's a very powerful document, and people have to be aware of what the document does," said Kimberly Schechter, an attorney specializing in trusts and estates at Novick and Associates in New York. She told CNBC's "American Greed" that in its broadest form, a power of attorney can give your designee "unfettered access to financial information, to making business decisions, opening bank accounts, closing bank accounts."
And yet, Schechter believes that everyone should consider having just such a document drawn up — and not only senior citizens.
"It's my professional opinion that as soon as someone turns 18 years old they should consider doing (it)," she said. "The dangers of not assigning the power of attorney or giving someone the authority to do so can be extremely, extremely costly."
That is because, when used properly, a power of attorney can protect your assets should you become incapacitated. Or it can free you to concentrate on other matters, such as running a business, while someone you trust — known as your "agent" or "attorney-in-fact" — handles your day-to-day financial affairs. Experts say a power of attorney is an essential part of any financial plan, and not just for the very rich.
But, as the sayings go, with great power comes great responsibility. Also, absolute power corrupts absolutely.
Some wealthy professional athletes including NBA Hall of Famer Dennis Rodman and former NFL and college football great Ricky Williams learned that the hard way when they entrusted their finances to Peggy Fulford, aka Peggy King.
Fulford, now 61, is serving a 10-year prison sentence after admitting she fleeced her victims out of millions of dollars by falsely claiming she was a Harvard-educated financial advisor. She did not charge a fee, saying she just wanted to help her clients build "generational wealth" long after their playing careers were over. In fact, she was mostly building her own wealth. A key to her scam was obtaining powers of attorney from her famous clients.
"Peggy was sexy, she was attractive, she was seductive, she knew how to play on a man's heartstrings," said Rashad McCants, who signed up with Fulford just after the NBA's Minnesota Timberwolves drafted him out of the University of North Carolina in 2005. He promptly granted Fulford power of attorney. "She knew what to do to lower your guard," he said.
On the court, Rodman — a two-time NBA Defensive Player of the Year — knew better than to lower his guard. But it was a different story when it came to Fulford, who conned him out of an estimated $1.2 million.
"It makes me sad I trusted someone I considered family to manage my money, and they did terribly wrong by me. I hope other athletes and celebrities can learn from this experience," Rodman said in a statement to "American Greed."
For Williams, the figure came closer to $3 million. In all, a judge ordered Fulford to pay nearly $5.8 million in restitution.
You can have a power of attorney tailored to your specific needs, making it as narrow or broad as you wish. You may want it to take effect only if you become incapacitated, or you may want to turn over some or all of your authority now. A good estate planning specialist can help you decide what you need. Beware of one-size-fits-all powers of attorney available online.
"The internet can be your friend, but it can also be the world's greatest enemy because people don't understand the consequences or the legalese of these documents," Schechter said. "It seems very easy to go online and get the information, but people don't necessarily understand the unfettered ramifications that this could give someone."
Figuring out who that someone will be can also be tricky. Many people will simply grant power of attorney to a spouse or loved one, but even that can require a leap of faith. Schechter said there are ways to take some of the guesswork out of the process.
"You always want checks and balances," she said.
One way to accomplish that is to divide the authority among more than one person, appointing "co-fiduciaries."
"You can have maybe two people, two people who have divested interest, who don't necessarily know each other," Schechter said. "You could have an attorney and an accountant. You can have a business advisor doing it. You could have a friend, a parent, a sister, a brother. It doesn't have to be limited, but don't give the keys to the kingdom to one person."
Another safeguard is to have your attorney-in-fact bonded. That is where a third party known as a surety effectively guarantees that you will be made whole should something go wrong. The specialized firms that put up the bonds do not take the guarantees lightly — after all, their money is at stake — so they are very careful about taking risks. That means the surety will scrutinize every aspect of the person or entity they are being asked to bond.
Shechter said clients of Fulford, for example, would have done well to demand that she be bonded.
"By having her bonded they would've done a background check. They would've asked to see her finances. They would've looked and said this woman, who is claiming she is worth millions of dollars, wasn't worth a penny," Schechter said.
After you have gone to all the trouble of setting up a power of attorney and vetting your attorney-in-fact, you might be inclined to stow all the paperwork in the safe, go about all your other business, and forget about it. After all, you went through all of this work so that you would not have to think about all of these issues anymore. But that would be a mistake. Schechter said you still must be vigilant.
"You have to look at your checkbooks. You have to look and see what money is coming and going," she said. "Where was the money spent? Where did it go? How was it spent?"
If things do not add up or your agent goes rogue, act quickly and decisively. Start by contacting your financial institution.
"Change the account number. Change the names of people who have access to your accounts," Schechter said.
Revoke your old power of attorney, set up a new one, and do it in writing.
"An important fact that many practitioners don't even know — when you execute a new power of attorney, it is so important to put in the language that you revoke all other powers of attorney," she said. "So, this is saying that any power of attorney that came before the present one is no longer good."
Whether you are a professional athlete or a regular Joe — or Jane — your trust is one of your most valuable assets. Don't give away that power without building in plenty of safeguards.
See how Peggy Fulford managed to outmaneuver some of the most talented athletes in the world, and stole a fortune. Catch an ALL NEW episode of "American Greed," Monday, March 2 at 10pm ET/PT only on CNBC.