What happens if wife assigned POA to husband and has dementia and later the husband also gets dementia?

GA, you cannot have the power of attorney for one person transferred to the control of another person without the original grantor's express consent. That's a fundamental part of power of attorney - it is granted by the person to a specific person/persons with any alternatives spelled out when the person is cognizant. My mother's attorney compared it to the any need for a change in attorney representing someone having to be specifically agreed to by the client or the services had to be performed by the attorney or the attorney had to withdraw. This prevents long convoluted chains of powers of attorney that might involve persons that had no relationship with the original grantor and possible motives against their interest. It was an interesting conversation and came into play when my aunt's son was playing games in her last illness and he tried to say a power of attorney with my aunt would be good for my mom.

My thoughts were: the proxy for the husband would have authority over his affairs, which include authority for his wife's affairs. Thus, by extension, would the proxy be able to handle matters for the wife which otherwise would be taken care of by her husband? I.e., can the proxy act in place and instead of the husband, based on the husband's authority for handling his wife's affairs?

It's an interesting concept.

You want to get Guardianship for BOTH of them. That's the safest option. The husband's POA can only assist the husband. POA is not transferable in any way.

Often the POA document will list another person to assume the POA if the first is not able to perform the tasks any longer. Did the form only list one?

I see you're in my geographic area. You might want to contact the Elder Law of Michigan or check with Troy municipal offices or Senior Center to determine if they have free legal advice at the Senior Center (assuming there is one).

Husband's POA has no authority for wife unless included in POA document for wife. Guardianship is probably best option.

That's an interesting question, one for which I don't have an answer, and I'm thinking this is one that needs to be answered by one of the resident legal experts.