A trust is the legal relationship that is created when a person transfers “stuff” to a trustee with the understanding that the trustee will manage it for the benefit of one or more beneficiaries. We use the term “stuff” to mean any kind of property you can own. It includes both real property—such as land and buildings—and personal property—such as bank accounts, stocks and bonds, and personal effects. The person who transfers the stuff to the trustee is called a trustmaker. This person is also known as a settlor, grantor, or trustor. Usually, the trustmaker is also the trustee (or perhaps co-trustee) and the initial beneficiary of the trust. It is not uncommon for husbands and wives to create two separate trusts and to be the co-trustees of both of their trusts during their joint lifetimes, and then, after the death of one spouse, to have the survivor serve either as sole trustee or co-trustee with one or more other individuals or a trust company.
A trust is controlled by a document called the trust agreement (sometimes called the trust instrument). The trust agreement sets out the rules about how the trust will be run. We often refer to a client’s set of estate planning documents as their “rule book,” and the trust agreement is the part of the rule book that controls the trust.
If the trust agreement says that the trustmaker can revoke it or change it, the trust is what we call a revocable trust. If the trust agreement does not allow the trustmaker to change or revoke it, we have what is called an irrevocable trust. Irrevocable trusts are used in many estate plans. They allow trustmakers to make gifts but keep the recipients from having complete control over the gifted assets. Irrevocable trusts play an important part in many estate plans. They can help provide tax savings, creditor protection, and expert management of assets.
A living trust is one that you create and fund (transfer stuff into) during your lifetime. It can be revocable or irrevocable, depending on how much control you want to maintain over the trust and its assets. A revocable trust gives you complete control, whereas an irrevocable trust gives you limited or no control. A testamentary trust is one that goes into effect and is funded following your death because it is governed by your last will and testament.
You remain in control of your trust assets as long as your trust is revocable. The trustee is bound by the trust agreement. You have final say over what the trust agreement says, and failure to abide by the trust agreement can make the trustee personally liable to the beneficiaries, including yourself. This means that if the trustee messes up, that person may have to pay for the mess out of his or her own pocket. Most often, the trustmaker of a revocable living trust is the initial trustee. In that situation, the trustmaker does not have to worry about anyone questioning his or her management of the trust. In fact, potential beneficiaries have a vested interest in not doing anything that might cause the trustmaker to revoke the trust or change the trust agreement in order to exclude a troublemaker. This is a simple demonstration of the “golden rule” of estate planning:
The One who hath the Gold maketh the Rules
If your kids are good kids, they won’t stick their noses into what you do with your trust. If they are bad kids, hopefully they are smart kids and will at least act like good kids as long as you’re alive because they won’t want to be disinherited. If you do not have any children—or don’t have any that you like—don’t assume that revocable living trusts are not a good idea for you. There are many good reasons for creating trusts, and some of them may apply to your situation. One reason that many people create revocable living trusts is so that their stuff will not go through probate after they are gone, or through conservatorship if they become incapacitated.
Once assets are transferred to the trustee, the trustmaker no longer holds legal title to them—even if the trustmaker and the trustee are the same person. Thus, if the trustmaker dies or becomes incapacitated, the trust continues, and the successor trustee (who is named in the trust agreement) takes over administering the trust.
Trusts are often the building blocks of effective estate plans. They provide simplicity, flexibility, and predictability in dealing with your assets. The also give you the peace of mind of knowing that you have arranged your affairs to ensure that your wishes will be carried out, and that future transitions (such as your incapacity or death) will be much easier on your loved ones.
ARE YOU HAVING A BAD HEIR DAY?
As Benjamin Franklin once said, “You may delay, but time may not.” No truer are these words than in the case of estate planning. The average person allows 10-to-15 years to elapse before revising his or her estate plan. Life’s ups and downs, and the impending estate tax law changes, present the opportunity to protect your legacy.
Unless Congress acts before the end of the year, in 2013, the estate tax rates in effect prior to the Bush tax cuts enacted in the early part of the last decade return. Although in 2012, the maximum rate was 35 percent on taxable estates in excess of $5,120,000, in 2013, the top marginal rate will be 55 percent, and the exemption rate will decrease to $1 million. For example, if your estate were worth $1.5 million, in 2012, you would not have paid federal estate tax; whereas, in 2013, you will pay federal estate tax because of the decreased exemption. With the potential impact of this in mind, don’t let the heir day of your loved one turn out to be a bad heir day, which most of us run the risk of doing by failing to implement an estate plan in the upcoming year.
By way of example, in 2006, 46 percent of the general public had a will; however, in 2007, that percentage dropped to 37. But actually, estate planning is about more than having a will. Four basic documents encompass a good estate plan: a Last Will and Testament, a General Durable Power of Attorney, a Healthcare Power of Attorney, and a Living Will.
Each of us needs an updated Living Will
The recent celebrity case involving Gary Coleman provides a clear example of the ills that can occur without an updated estate plan. In 2006, Coleman created a healthcare directive that gave his then-wife power to make medical decisions if he became incapacitated. It apparently included a statement to prolong his life for as long as possible. After divorcing and failing to revise his healthcare directive, Coleman suffered a head injury and was admitted to the hospital, diagnosed with a brain hemorrhage. Coleman’s ex-wife decided to take Coleman off life support only one day after he was admitted.
In some states, divorce fails to nullify a healthcare directive. If you have been through a divorce, it is wise to review your estate documents to ensure they continue to reflect your wishes.
Form your own dynasty
Although problems can arise due to neglecting to update healthcare directives, preserving wealth is perhaps the greatest concern. Too often, we underestimate the size of our estate, not realizing the problems this can cause after we have gone. Trusts provide a viable option for ensuring that your heirs do not pay excessive estate taxes upon your death. Different types of trusts are available to meet your needs and the needs of your loved ones.
A dynasty trust is one way wealth preservation can be achieved. Despite its name, the term has nothing to do with aristocracy. With a dynasty trust, you transfer the assets of a business, real estate, or other income-producing property to the trust. Depending on the exact terms, the income accumulates or is paid out on behalf of the trust’s beneficiaries: children, grandchildren, or even remote descendants. Assuming the assets remain in the dynasty trust, they will not be included in a beneficiary’s estate when he or she dies. Thus, the asset values can continue to compound over several generations without any erosion due to estate taxes. Further, because the beneficiaries do not own the assets, there is protection against loss from creditors or divorce proceedings. Wealth is preserved and remains in the hands of family–with little or no tax consequences.
Create a “heir” style that works for you
When is a good time to update your estate plan? While it is always good to maintain a current estate plan, significant life events mandate a revision. If you’ve recently started a business, you may need to update your estate plan. Crucial aspects, such as business succession planning, guarantee that the wealth you’ve worked so hard to build is passed on to those you love or designate. Additionally, our changing economy can result in loss of a job or early retirement, both invoking the need for a review. Similarly, a spouse that is re-entering the work force or changing from full- to part-time status, necessitates re-evaluating your assets.
Changes in family may dictate a change in your estate plan. If a son or daughter should marry someone you would prefer not to include as an heir, inevitably, you would want to take a second look at your estate planning. You would find it important to avoid the risk that your wealth could end up in the hands of a former son- or daughter-in-law.
Indeed, even if you like your in-laws, other life events can trigger an update to your estate plan. Have you recently moved into Pennsylvania? Or, are you planning a move to another state? If so, it is good advice to learn about the laws of your new locale to make sure that your plans are protected. Even marriages, births, and other happy events in our lives should awaken the notion that our estate plans need to be re-examined.
Perhaps you have a domestic partner who you would wish to one day become your heir. Pennsylvania does not recognize same sex or common law marriages. Thus, in this Commonwealth, a same sex or opposite sex non-related individual inheriting from you will be taxed at a rate of 15 percent. Don’t let him or her experience a bad heir day. Trusts and other estate planning, such as beneficiary designations on financial accounts, can play an important role in preserving the assets of your domestic partnership.
Most of us put estate planning on the back burner. It’s easier to choose to wait for tomorrow. By contrast, we go to the barber or beauty salon on a regular basis because we defy being caught having a bad hair day! Applying mousse, gel and spray guarantees we will have a good hair day. Similar protection in the form of a good estate plan can be applied so that a bad heir day is likewise avoided.
Have your estate plan updated today, and do wonders for your heir!
Scott A. Makuakane, Esq., CFP
Est8Planning Counsel LLLC
Member of the national ElderCare Matters Alliance, Hawaii chapter
The national press has picked up several reports in the Honolulu Star-Advertiser about the plight of Karen Okada. Karen is a 95-year-old woman who signed a “Death with Dignity Declaration” and a “Durable Power of Attorney for Health Care Instructions” back in 1998. Both documents purport to control “in all circumstances.”
The Queen’s Medical Center, where Karen was hospitalized for pneumonia, determined that Karen was essentially brain dead, or, in any event, had “permanently” lost the ability to participate in medical treatment decisions, and that the provisions of her Death with Dignity Declaration required that her feeding tube be withdrawn.
On the other hand, Karen’s health-care agent, in consultation with doctors who are not associated with Queen’s, disagreed with the conclusions reached by the Queen’s physicians. What the agent knew, and the Queen’s physicians discounted, was that just before she was hospitalized at Queen’s, Karen was conscious and able to interact meaningfully with her family and caregivers. During the time she was at Queen’s, on the other hand, Karen was for the most part unresponsive when doctors examined her, but her family reported that she smiled at least twice at her adult grandchildren and nodded to her grandson in response to his question of whether she was able to breathe freely.
The policy of Queen’s was to give precedence to an advance health-care directive over a durable power of attorney in all events, and without inquiring into why a person may have signed apparently contradictory documents. Accordingly, Queen’s took the unusual step of suing Karen’s health-care agent in order to get a court order forcing him to direct Karen’s physicians to remove her feeding tube.
Of course, no one would want to be part of this kind of drama. So what can you do to make your wishes clearly known so there will be no questions about how to carry them out?
Knowledge is power. The more you know about advance health-care directives, and the sooner you act on that knowledge, the more likely it will be that your wishes will be carried out.
In case you were curious about what happened to Karen, her family was successful in gaining her release from Queen’s and placing her in a care home. Since then, Karen has gained 20 pounds and has regained her ability to interact meaningfully with her family.
Heather R. Chubb, Esq.
The Chubb Law Firm
Fair Oaks, California
Member of the national ElderCare Matters Alliance, California chapter
Keeping Our Seniors Safe From Scams
Our seniors are a charitable bunch, but sometimes that can get them into trouble. And the scammers out there know it. The scammers know that our seniors are often isolated and being a friendly bunch are willing to talk to a friendly voice. They also know the mail is the highlight of the day for many seniors. Seniors are also inclined to provide information via surveys. And everyone likes to think they could win it big with the lottery or sweepstakes.
Take my father in law. He has always been charitably minded, but when the stack of donations threatened to topple off the kitchen counter we knew there was a problem. This is a smart man who had a very successful career in sales, but now he was exhibiting signs of short-term memory loss and reduced executive function. We learned soon thereafter that he did indeed have all the hallmarks of Alzheimer’s disease.
The charitable snowball was a wake up call for my family. It was really scary when we started digging into things. At one point, we made a list of all the “charities” he donated to and it topped 100. Fortunately, it wasn’t big amounts, $15 – $30 at a pop, but that added up quickly to hundreds of dollars a month. Not surprisingly, in researching these “charities” we determined that some of them were not non-profit 501(c)s and many of them used the majority of the money they received not for their charitable purposes, but rather for administration and obtaining more donations.
We found the following resources to be very helpful in wading through this mess.
Check out the credentials of a potential charitable organization before you make a donation. Charity Navigator – www.charitynavigator.org – is a great site to gather information.
You can also confirm charitable status of an organization through the IRS web site- www.irs.gov/app/pub-78/– remember that some organizations (like churches) may not be listed, so ask the organization for more information if you’re not sure.
Charity Watch (formerly American Institute of Philanthropy) www.charitywatch.org rates many organizations and provides copies of their annual reports. This is where you can find information about how they are using the funds, especially the amount spent on administration i.e., fundraising.
The Better Business Bureau Wise Giving Alliance—www.bbb.org/us/charity/ – publishes the Wise Giving Guide three times a year. The Guide summarizes the results of the Alliance’s latest national charity evaluations and features a cover story, usually with giving tips, on charity accountability issues or other topics of interest to donors.
The more difficult item that we also dealt with was surveys. My father-in-law received surveys from all sorts of groups, many with often polar opposite political slants, and he felt compelled to fill them out and return them, sometimes with a donation. This only served to get his name on more lists and create more mail.
Finally, and most dangerously, there were the “sweepstakes” and “lottery” winner letters. Hundreds of them. You know the ones . . . “you may be a winner”. . . just send in $$ to pay for the tax, insurance, or handling. In some instances what you are actually doing in returning the response form and fee is agreeing to allow the company to take a monthly amount out of your checking account or credit card to keep you informed of upcoming lotteries, etc. In other instances they use the information to hound you for more money and will even arrange to come to your house to pick up the insurance and handling fee.
We saw this first hand as well. We’re sure it started with sending in a response and check, but it ended with a series of increasingly harassing phone calls and his consent to allow someone to come to the house to pick up the insurance fee. Fortunately we were able to head off the in-person visit and the wiping out of his bank account, but just barely. It gave us a terrific scare. No sooner had we closed his bank account and opened a new one, the very next day he received a call from some outfit requesting his bank account number to set up an account to prevent identity theft of his internet accounts! Sadly, and in this case fortunately, his short-term memory allowed him to give out the old bank account number and no further damage was done.
Three key things to remember when it comes to lotteries or sweepstakes:
No legitimate lottery or sweepstakes will ask you to pay the taxes in advance of receiving your winnings.
If you don’t remember entering, it’s likely a scam.
If it sounds too good to be true, it probably is.
If you have a senior in your life you can do them a world of good by just checking in and taking a look at the mail. If something seems out of order it may be time for a tough conversation and someone to provide a little more oversight. Communication with compassion is the key since no one wants to think they can no longer be independent. But that conversation may lead in interesting directions. I have a number of clients that were grateful when their loved one offered to help with the everyday financial management such as bill paying.
Here are some ways to prepare for and start tough conversations:
If charitable contributions are getting out of control checking out the charities using the above resources can be a great starting point.
The Federal Trade Commission, among other helpful information for consumers, has a terrific Consumer Alert regarding scams. You can find it here http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt099.shtm
If you have never heard of the “Lottery” organization and/or never entered a drawing this is a big clue that it is a scam.
Read the fine print to see what you are really paying for with the lottery. No legitimate lottery will make you pay insurance, shipping, or handling, and taxes are not paid up front.
It’s a jungle out there and we all need to do our homework and be safe when it comes to our hard earned money.
Debra A. Robinson, Esq.
Robinson & Miller, P.C.
Alpharetta, Georgia 30005
Member of the national ElderCare Matters Alliance, Georgia chapter
Don’t Overlook Veterans Benefits for Long Term Care
Veterans or widow(er)s of veterans may be entitled to a non-service connected monthly pension to offset long term health care costs such as home health care, assisted living or nursing homes. Many veterans are unaware of this benefit or assume they don’t qualify because they didn’t retire from the military.
The main requirements for a pension for a veteran or widow(er) are:
There is no specified limit on the amount of assets, but the VA will look at whether a claimant has sufficient means to pay for health care, taking into account the annual health care costs, and the claimant’s life expectancy. Assets that will not be counted in the analysis are the home, car and personal belongings.
The claimant’s annual medical expenses should exceed or be close to the amount of annual income. Medical expenses include health insurance premiums, prescription costs, caregivers, home health aides and the cost of an assisted living facility or nursing home. If the claimant is a married veteran, the medical expenses of both the veteran and the spouse will be counted.
To meet the disability requirement, the claimant’s doctor must confirm that the claimant is housebound and in need of assistance from another individual. The disability does not have to be service related. People aged 65 or older are presumed to be disabled and are not required to be rated as disabled under the VA schedule.
There are three types of tax free pensions available, each with different eligibility requirements and each paying different amounts. The maximum non-service connected pension is called Aid and Attendance, and is available to a veteran or widow(er) who is either blind, living in a nursing home, or in need of assistance to manage the activities of daily living.
2012 Maximum Pension Rates for Aid and Attendance
Single Veteran $1,703 per month
Married Veteran $2,019 per month
Widowed Spouse $1,094 per month
A veteran who qualifies for a non-service connected pension can also apply for benefits through the VA health care system, such as prescriptions, medical equipment, glasses, hearing aids and incontinence supplies.
In these difficult economic times, an extra $1,094 to $2,019 a month in tax free income is not something to ignore. If you are a veteran or widow(er) who might qualify, or if you have a family member who might qualify, now is the time to get started gathering the necessary information and filing a claim. It can take six months or longer for a claim to be processed, but once a claim is approved, payments will be retroactive to the month after the claim was filed.
Harry Felsenthal, Certified Aging in Place Specialist
Licensed Contractor, State of Florida
Call Harry Enterprises, Inc.
Lutz, Florida 33549
Member of the national ElderCare Matters Alliance, Florida chapter
Aging in Place Means Aging in Your Home
This ultimately applies to everyone on the planet, as we are all aging and will eventually need changes to our home to make life easier and safer. The best plan for making Aging in Place modifications to your home is, do a little at a time. Many areas of your home may need adjustments, but if you focus on one area at a time you will be better able to devise a plan for your long-term goal of staying in your home.
Although we all age, Aging in Place doesn’t mean the same thing to everyone. For some, making adjustments to their home is planning for the future. For some, making adjustments to their home is a more immediate need. If you are limited physically in some way due to a birth defect, illness, or injury, the Aging in Place home modifications can be a more urgent matter. However, this still is an individual need for each persons’ individual situation.
Making a list of priorities is a great place to start. Your Aging in Place professional can inspect your home, and help you decide what areas of your home should be addressed first. From there, you will experience a more comfortable lifestyle and ultimately a safer environment. Each step you take to make your home work better for you will alieviate stress, and give you peace of mind. If wheelchair access is your primary issue, then building ramps will give you the freedom of entering and exiting your home, or wider doorways can allow you to move throughout your home without assistance. Adding shower rails, seats, or easy-access stalls can add much needed safety, while alterations to light switches or your kitchen design could just make life more fulfilling. How wonderful would it feel to get that independence back?
After you can perform simple tasks around the home by yourself, you will be able to easily prioritize other areas of the home to help your home once again be a sanctuary of peace and safety. Your high quality of life is the most important goal to achieve, and your Aging in Place specialist will get you there.
Scott Makuakane, Attorney at Law, CFP
Founding Partner, Est8Planning Counsel LLLC
Honolulu, Hawaii 96813
Member of the national ElderCare Matters Alliance, Hawaii chapter, State Coordinator
The Perils of Joint Tenancy
One day Dad and Mom hear about this great idea called “joint tenancy” and put their sons Moe, Larry, and Curly on title to their house. Joint tenancy appeals to Mom and Dad because it provides a way for title to the house to pass more or less automatically to the next generation without the headaches of probate. It’s cheap. It’s easy. What’s the worst that could happen?
All goes well for about 20 years, but then one day Moe announces, “My wife is leaving me and she says she is going to take me for everything I’ve got, including my 20% of your house. She can’t touch that, can she?” Not to be outdone, Larry chimes in with, “Remember that car crash I was in three years ago after my insurance had lapsed? Well, the people in the other car got a judgment against me and their lawyer is asking questions about what I own. I don’t have to tell them that I own a fifth of your house, do I?”
To make a long story short, if Dad and Mom are not able to buy off Moe’s ex-wife and Larry’s judgment creditors, then their house could get sold out from under them. They would get 40% of the net proceeds, but that probably would not be enough to replace their home with a comparable place to live. A “cheap” and “easy” estate planning strategy ends up being neither. If Dad and Mom had invested a little money in having a comprehensive estate plan prepared, they could have held on to their house during their lifetimes and given Moe and Larry their shares of the house in trusts that would protect the house from the boys’ ex-spouses and creditors.
Even if Dad and Mom were to dodge the bullet with Moe’s ex-wife and Larry’s creditors, another way joint tenancy could bite them in the behind is by losing the opportunity to provide some adult supervision for Curly’s share of the inheritance. If Curly is characterized by bad judgment, bad habits, and hanging out with bad people, Dad and Mom would be foolish to give Curly anything. What they might want to do instead is have Curly’s share of the house held in trust for Curly’s benefit. Dad and Mom could place a range of restrictions on when distributions could be made to Curly, from proving to the trustee that he is gainfully employed, to passing a drug test.
While joint tenancy is not necessarily to be avoided at all times and at all costs, it is very important to understand its ramifications. He (or she) who puts other people on title to assets for probate avoidance/estate planning purposes may be making a huge mistake. Joint tenancy costs very little at the front end, but it exposes your back end to some very unpleasant possibilities.
Ronald Zack, Esq.
Ronald Zack, PLC
Tucson, Arizona 85701
Member of the national ElderCare Matters Alliance, Arizona chapter
Last Will and Testament (Yours and the one the state has for you)
Without a will, or some other form of estate planning, your property will pass by intestate succession. In other words, if you don’t have a will, the state has one for you. The problem is that the state may not do things the way you would have done them yourself. Also, any property not provided for in your will or through other planning, will follow the state’s intestate succession laws, so even if you have a will, the state may decide where some of your property goes.
Here is what Arizona has planned:
1. If you are married, all of your separate property and your half of the community property will pass to your spouse, as long as you have no children (or no descendants – grandchildren, great grandchildren, etc.). If all of your children are also the children of the surviving spouse – the kids you’ve had together – then all of your separate property and your share of community property still passes to your spouse. The idea is that the kids will eventually get it. (A.R.S. 14-2102 (1)).
2. If you have children who are not also the children of your spouse, your spouse will get half of your separate property and none of your half of community property. (A.R.S. 14-2102 (2)).
3. If there is no surviving spouse (or any property that does not pass to the surviving spouse under number 2, above), property flows, in this order, to:
a. Your descendants – children, children’s children, etc., through the generations.
b. If no descendants, your parents.
c. If no descendant or parent, to the descendants of your parents (your siblings, nieces and nephews, etc.)
d. If no descendant, parent or descendant of a parent, then grandparents or descendants of grandparents (your uncles, aunts and their kids, etc.).
4. Then to the state. (A.R.S. 14-2105).
It is very rare that property would pass to the state – usually, there is somebody among parents or grandparents and their descendants – all your siblings, nieces, nephews, cousins, etc. Still, your property is likely to pass to people you hardly know, don’t know, or even worse, people you were not particularly fond of. The law also defines how shares are to be distributed and requires that relatives of half blood (step-relatives) inherit the same as if they were whole blood relatives. (A.R.S. 14-2107).
Some people say they are not concerned with distribution because they do not have much money, property or other material assets. Keep in mind that this situation can change after death. The younger you are, the more likely the death will be accidental. If so, there may be someone else liable, in an automobile accident for example, and such liability could result in a large payment to your estate. There are cases of medical malpractice or product liability that cause serious illness or death and result in large awards to estates of deceased people. In that event, your will or the state’s will control distribution.
Another problem with not having a will involves minor children. In a will, a parent can appoint a guardian of an unmarried minor. If both parents are dead, or one is dead and the other incapacitated, the appointment will become effective upon filing the named guardian’s acceptance with the court. A minor over the age of 13 can object to the appointment of the guardian. (A.R.S. 14-5202 and 14-5203).
Without a will naming a guardian, it is possible that Child Protective Services would become involved, or that relatives and friends could become involved in a contested guardianship proceeding in court.
It is important to note that the naming of a guardian in a will is only effective if both parents are dead or one is dead and the other incapacitated. This raises additional issues for single parents and divorced parents of minor children. It is not unusual that the custodial parent feels the surviving parent is not an appropriate person to gain custody. In such a situation, it is important to seek legal counsel to try to avoid that result.
Wills can be simple or complex. It is possible to build trusts into wills (testamentary trusts), to do tax planning and to provide for distributions to be made over time. Even a simple will, however, can be fraught with perils. For example, courts will follow the statutes very carefully as to how a will must be drafted and executed. If formalities are not followed, the court is unlikely to consider a will valid, especially if someone contests it. Formalities include things like how the will is signed and witnessed. Issues such as the capacity of the person making the will or undue influence by others may arise. And Arizona law contains some exceptions, exemptions and allowances that cannot be avoided by writing a will. This is not a do-it-yourself project. Your estate plan deals with everything you own and everyone you care about. It makes sense to do it right to make sure you get the result you expect. An attorney, knowledgeable of Arizona statutes, should be consulted to make sure that what you want can and will happen after your death.
Paul T. Czepiga, Esq., CELA
Czepiga Daly Dillman, LLC
Newington, CT 06111
Member of the national ElderCare Matters Alliance, Connecticut chapter
THE ‘POWER’ IN A POWER OF ATTORNEY
Lawyers are continually asked by clients whether they need a Power of Attorney. There is no universal answer to this question, as everyone’s financial situation and relationship with others is different. A meaningful response requires that the client understand what a Power of Attorney (commonly referred to as a “POA”) is and what it can and cannot do.
In general, we recommend that our clients execute Powers of Attorney, but only after discussion of several considerations, outlined below. The utility of a POA can be best described by the old saying, “Never has so little done so much for so many.” We will explore the benefits of a POA later in this article, but we will begin with a basic understanding of what a POA is.
A POA creates an agency relationship between the person who signs the POA, known as the principal, and the person who is appointed as POA, known as the agent. Only the principal is required to sign the POA. The agent has authority under the POA only for so long as the principal is alive or at any time before the principal revokes the POA.
A POA can allow the agent to perform an unlimited number and range of functions on behalf of the principal. A POA can also limit the functions an agent can perform.
A POA should be durable – meaning that the principal intends to allow his agent to (continue to) act on his behalf in the event of the principal’s incapacity. A POA is durable if it contains language that expressly states that the POA will remain in effect regardless of the principal’s subsequent incapacity. Without such a statement, the POA lapses if the principal later becomes incapacitated – something almost always not intended when drafting POA’s for estate planning purposes.
Springing Power of Attorney
Once a durable POA is signed by the principal, the agent is allowed to act on the principal’s behalf – the agent can perform any of the functions allowed under the POA immediately. However, some people want to execute a POA so that in the event of their incapacity at some point in the future, someone will be able to pay bills, write checks, etc. on their behalf. As a result of changes in Connecticut law made in 1993, a principal can execute a Springing Power of Attorney. A Springing Power of Attorney can grant the same authority that a (non-Springing) Power of attorney allows, but does not go into effect until some later triggering event.
For instance, Mrs. Smith may be perfectly capable of managing her own affairs now, but may be concerned that as she ages her abilities may decline. She may want to ensure that someone she trusts will be able to help her out in the future should she need it. With a Springing POA, Mrs. Smith can name someone as her agent, but her agent will not have authority to act on her behalf (access bank accounts, etc.) until some point in the future when Mrs. Smith is no longer capable of managing her affairs on her own.
A Springing POA will only marginally protect Mrs. Smith, though. Under Connecticut law, the agent, before he can act under the Springing POA, must sign an affidavit in front of two witnesses and a notary attesting to the facts that (1) Mrs. Smith named him as agent in a POA, (2) his authority does not take effect until Mrs. Smith becomes incapable of managing her affairs, and (3) this contingency has occurred. The agent does not need to produce independent medical evidence that Mrs. Smith is really incapable of managing her affairs (unless Mrs. Smith required it as a condition to the agent’s authority).
Choosing an Agent
This scenario leads to a discussion on choosing an appropriate agent. Whether a person should grant a POA to another depends entirely on whether the person has full, total, and complete trust in another person. If there is no one in whom a person has such trust, then she should not execute a POA – Springing or otherwise.
Using our example above, if Mrs. Smith required her agent to sign an affidavit and attach a certification by a Connecticut-licensed physician attesting to her incapacity, she clearly does not have full, total, and complete trust in her agent. We have found in our practice that roughly 60% of our clients use the Springing POA and the rest opt for a non-Springing POA.
Limitations and Other Express Powers
In financial planning and Medicaid planning contexts, it is best to give a POA that conveys the broadest possible authority, limited only by the principal’s concerns. Connecticut’s statutory POA and Springing POA forms convey thirteen separate powers, including “all other matters.” Although this sounds fairly inclusive, it is not.
The most harmful limitation is that the Connecticut statutory forms do not expressly give an agent the ability to make gifts of the principal’s assets. One’s incapacity does not lessen the need to reduce the gross taxable estate for estate tax reduction purposes or to remove assets out of one’s name for Medicaid eligibility purposes. Without an express gift-making provision, it will be very difficult to transfer the principal’s assets to her beneficiaries even though this is what the principal would have wanted. Even so, gift-making provisions should not be automatically included in all POA’s without first considering the need and ramifications of such a power. If gift-making is to be included, then the principal should also address to whom and to what extent gifts may be made. To her spouse only? Unlimited gifts? To children? Must gifts to children be of equal value?
Other powers that we expressly add to our POA forms after discussion with our clients include dealing with the State of Connecticut, the I.R.S. and D.R.S. on all tax matters (income and gift, including gift splitting, sales and use tax), accessing safe deposit boxes, changing domicile, creating/funding/requesting distributions from trusts, and changing beneficiary designations on life insurance, annuities and retirement plans. Although some of these powers are arguably included in the statutory form, it is wise to explicitly express them in the POA for enforceability purpose.
Acceptability of a Power of Attorney by Third Parties
You may take all the appropriate steps to execute your POA, but your agent may encounter difficulty trying to use the POA at some point in the future. Although the POA you sign is effective until you revoke it ands o long as you are alive, some financial institutions and banks have internal policies whereby employees are instructed to only honor POA’s that are dated recently (in some cases, within six months). Some companies may request that the principal sign a statement that the POA has not been revoked – but what if the principal is now incapable of signing such a statement? These internal policies will frustrate your agent’s ability to act on your behalf.
Your advisor can add language to the POA stating that unless the third party (bank, life insurance company, etc.) has actual notice of revocation, they may rely on the agent’s authority. Your advisor can also include hold harmless or indemnification language to assuage the third party’s concerns. Whatever the method, your advisor should add whatever language possible to make the POA acceptable to the outside world.
An alternative or additional protection to a POA is creating a living or revocable trust. A living trust typically names the principal (client) as trustee and also names at least one successor trustee. The successor trustee will step in to manage the trust if the original trustee becomes incapable or passes away. If the principal transfers or re-titles his assets into the trust, then if he should become incapable, his successor trustee would be able to manage the assets – including paying bills, writing checks, etc. Financial institutions seem to be more accepting of a successor trustee’s authority than the authority of what they deem to be an out-dated POA.
In summary, a POA is a powerful and useful tool for a variety of estate planning needs, both foreseen and unforeseen. Once you sufficiently identify your estate planning or Medicaid planning needs, you should execute a POA as soon as possible to ensure a seamless transition in the management of your finances from you to your agent if you should become incapable of managing your own affairs.
Dagmar M. Pollex, Esq.
Law Offices of Dagmar M. Pollex, P.C.
Braintree, Massachusetts 02184
Member of the national ElderCare Matters Alliance, Massachusetts chapter
Planning for Your Adult Children With Special Needs Can Also Protect Your Assets From Nursing Home Costs
Parents and grandparents of an adult disabled child often ask what’s the best way to make provisions for that member of the family who will not be able to be self-sufficient. Parents generally try to consider the future non-financial needs of the child after the parents are gone. With whom or where will the child live? What housing options or assistance are available? What activities does the child enjoy? Next, there is a need to estimate the future financial needs of the child, taking into account projected government assistance.
When the parents of disabled children think about a financial and estate plan, they plan for their own future, as well as the child’s. Parents with disabled children understand the need to protect their own savings from risks during their lives. Nursing home costs pose a threat to every estate.
Luckily, the Medicaid rules offer important special protections for parents of disabled children by allowing gifts to be made to supplemental needs trusts for the benefit of adult children with disabilities. These gifts do not create a disqualification or penalty period for the parents if they will need nursing home care for themselves in the future.
Another important question is this. How will the parents’ estate be allocated to reach the goals they have for themselves and their child? They may consider leaving a larger share for the disabled child who has greater need than the other children.
However, this is generally not a good option if government benefits may be needed, since most government assistance requires the recipient to have very low income, very low assets, or both. An outright bequest to the child or a trust which gives the child too much ownership over the money will disqualify the child from government assistance until the child spends down the trust assets.
As part of their overall estate planning, parents of special needs children can have a portion (or all) of their estate stay in a trust for the benefit of their disabled child after they die.
The assets will be managed by a Trustee chosen by the parents. In some situations, a brother or sister of the child with special needs is a good choice. Other times, it would be better to name a professional trustee with experience in managing special needs trusts and providing services to the beneficiary.
The trust should be drafted so as to not disqualify the child from government assistance. This kind of a trust is called a supplemental or special needs trust. The parents can include guidance or legally binding directives about how the money is to be used for the child.
Even small amounts in a special needs trust can make a huge difference in the quality of life of a disabled child. For example, while the child’s basic needs could be met with government assistance, the trust could be used to provide “extras” like a television, a trip to visit relatives or tickets for relatives to visit the child, a special van, or computer with voice-recognition technology.
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