Principals and agents are the two groups of people who make up the basic power of attorney relationship. The principal is the person who creates the POA document -- or has it created by a professional. The agent is the person who is given power of attorney privileges by the document. The agent is sometimes referred to as the attorney-in-fact.
In order to create a legally binding power of attorney document, the principal has to meet two basic criteria. First, he or she must be an adult of legal age who can enter into such a contract. Second, he or she must be considered of sound mind. That means that the person appointing another as their power of attorney must be mentally capable of doing so and not be under duress of any kind.
Likewise, the agent must also be an adult who is of sound mind, unless the principal is selecting an organization as a power of attorney. You might choose to appoint a bank as your power of attorney for limited management of financial interests, for example, or you could appoint a law firm as power of attorney to carry out certain legal duties should you be unable to do so.
A power of attorney form does not necessarily put someone in control of all your decisions or assets. As the principal, you have the ability to limit the agent's abilities. There are cases, for example, where one spouse creates a POA naming the other spouse as the agent for the sole purpose of signing a real estate document while the first spouse is out of town and unable to do so.
A power of attorney form also doesn't provide someone with power immediately in all cases. You might dictate that the agent takes over only in certain situations, such as if you become incapacitated. While the relationship between principal and agent seems simple, it's a good idea to work with a legal professional to ensure you create appropriate limitations in your POA documents.
Source: Money Crashers, "What Is Power of Attorney & How to Get It – Types," Mark Theoharis, accessed May 24, 2016