What is the right kind of Financial Power of Attorney for You?

A June 2020 Transamerica Center for Retirement Studies survey showed that a mere 28% of retirees have a financial power of attorney (POA)—and many people don’t understand that there are two types of financial powers of attorney that serve different purposes.

MarketWatch recently published an article “Does your estate plan use the right type of Power of Attorney for you?” that says knowing how both types work is crucial in the pandemic, especially in the event that you get sick with coronavirus.

A Durable Financial Power of Attorney can be either “springing” or “immediate.” “Durable” refers to the fact that this Power of Attorney will endure after you have lost mental or physical capacities, whether temporary or permanent. It lists when the powers would be granted to the person of your choosing and the powers end at your death.

An “immediate” Financial Power of Attorney is effective as soon as you sign the document. In contrast, a “springing” POA  means it is only effective when you cannot manage your own financial affairs, usually based upon the written opinion of two physicians.

Therefore, to begin paying your bills, your agent must have written proof of from the physicians, and he or she doesn’t automatically have the authority to ask for them.  When issues, such as doctors’ letters, are required before the agent you chose can serve you, ask your estate planning attorney for guidance.

An obstacle that requires a Durable Financial Power of Attorney can come upon you very fast and possibly include you and your spouse at the same time. For example, you may both become ill, or one could become ill and the other is absorbed in caring for their spouse.

The powers granted by a typical Financial POA are often broad and permit selling and buying assets; managing your debt, car and Social Security payments; filing your tax returns; and caring for any assets not named in a trust you may have, such as your IRA.

If you recover your capacity, your agent must turn everything back over to you when you ask.

Remember that your power of attorney documents are only as good as the people who implement them. You should also make certain anyone named knows that they’ll have the job, if needed. They must know where to find your POA and all other important information.  If you aren’t sure of the type of POA you currently have, it is worth checking as part of an estate plan update.  See our recent article for when it might be time to do that!  https://www.galliganmanning.com/when-to-update-your-estate-plan/ 

Reference: MarketWatch (Oct. 9, 2020) “Does your estate plan use the right type of Power of Attorney for you?”

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What’s the Best Way to Go with Loans to Family?

Loans to family must be treated like real, enforceable loans to third parties if you don’t want to run afoul of gift and estate tax.

Loans are a terrific way for parents to foster a child’s independence, encourage responsibility and signal their confidence that their child can succeed on their own.  They also don’t use any of your lifetime gift tax exemption ($11.58 million per person).  But, loans to family highlight some important tax and family concerns you should be aware of.

Kiplinger’s recent article entitled “Gifts vs. Loans: Don’t Be Generous to a Fault” tells the story of Mary Bolles. The case illustrates that parents’ actions and expectations as to repayment of the loan can recharacterize the “loan” to a taxable “gift.” That can mean unintended gift tax consequences. Mary was the mother of five who made numerous loans to each of her children. She kept copious records of each loan and any repayments. Between 1985 and 2007, she loaned her son Peter about $1.06 million to support his business ventures — despite the fact that it soon was clear he wouldn’t be able to make any more payments on the loans. None of the loans to Peter was ever formally documented, and Mary never tried to enforce the collection of any of the loans.

In late 1989, Mary created a revocable living trust, which specifically excluded Peter from any distribution of her estate when she died. While she later amended her trust to no longer exclude him, she included a formula to account for the “loans” he received in making distributions to her children. After her death, the IRS said that the entire amount of the loans, plus accrued interest, was part of her estate. They assessed the estate with a tax deficiency of $1.15 million.  The estate said the entire amount was a gift.

At trial, the court considered the factors to be weighed in deciding whether the advances were loans or gifts. Noting that the determination depends not only on how the loan was structured and documented, the court also explained that in the case of a loan to family, a major factor is whether there was an actual expectation of repayment and intent to enforce the debt.

The court compromised and held that any advances prior to 1990 were loans (about $425,000), since the evidence suggested that Mary reasonably expected that Peter would repay the loans, until he was disinherited from her trust in late 1989. The court said that the money given to Peter after he was disinherited — from 1990 onward — were gifts.

The decision shows that if you’re considering taking advantage of the elevated gift tax exemption before it sunsets, review any outstanding family loan transactions. You should see the extent to which those loans may have been transmuted into gifts over the years—which may adversely impact the amount of your remaining available exemption. The safest way to do this would be to consult an experienced estate planning attorney, who can help you safely navigate these complex rules.

When making a gift there are other considerations.  If you will make such a loan, treat it as such.  Have a lawyer prepare a loan agreement.  Create a reasonable expectation that the loan will be repaid and that you’ll enforce it.  This isn’t just for tax reasons, it is to maintain family harmony.  Giving a “loan” to one child may not sit well with the others, so make sure it is honored.  You should also consider the impact this will have on state taxes, income taxes, and long-term care planning if relevant to you.

To be safe, follow these simple steps:

  1. Document the loan transaction between the lender and borrower.
  2. Charge interest based on the government rates (AFR), which are published monthly.
  3. Make sure the borrower will have enough net worth to likely repay the loan.
  4. Get a copy of the borrower’s financial statement.
  5. If the loan sets out periodic payments, make certain these are made on time.
  6. Report the interest income you receive from the borrower on your income tax return.

Make sure that you do any intra-family loans properly to avoid any future issues.

Reference: Kiplinger (Oct. 7, 2020) “Gifts vs. Loans: Don’t Be Generous to a Fault”

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Will vs Living Trust: A Quick and Simple Reference Guide

Which is better for you? A will or a revocable living trust?
Which is better for you? A will or a revocable living trust?

Confused about the differences between a will and a living trust?  If so, you are not alone. While it is always wise to contact an estate planning attorney to help you decide which is right for you, it is also important to understand the basics. Here is a quick and simple reference guide:

What a Revocable Living Trust Can Do – That a Will Cannot

  • Avoid guardianship. A revocable living trust allows you to name your spouse, partner, child, or other trusted person to manage your money and property, that has been properly transferred to the trust, should you become unable to manage your own affairs. A will only becomes effective when you die, so a will is useless in avoiding  guardianship proceedings during your life.
  • Bypass probate. Accounts and property in a revocable living trust do not go through probate to be delivered to their intended recipients. Accounts and property that pass using a will guarantees probate. The probate process, designed to wrap up a person’s affairs after satisfying outstanding debts, is public and can be costly and time consuming.
  • Maintain privacy after death. A will is a public document; a trust is not. Anyone, including nosey neighbors, predators, and the unscrupulous can discover what you owned and who is receiving the items if you have a will. A trust allows you to maintain your loved ones’ privacy after death.
  • Protect you from court challenges. Although court challenges to wills and trusts occur, attacking a trust is generally much harder than attacking a will. If there is a challenge to a will, the probate court will stop all proceedings until the matter is resolved, which can put the will contestant in the very strong position of demanding to be paid to go away. Because there is no probate court involvement is no necessary in the administration of a trust, challenging a trust does not result in everything grinding to a halt. This puts the trust contestant at a disadvantage and removes the leverage the contestant would have had in probate court. For other ways on how to avoid conflict over your estate after you pass away, see https://www.galliganmanning.com/how-to-avoid-family-fighting-in-my-estate/.

What Both a Will & Trust Can Do:

  • Allow revisions to your document. Both a will and revocable living trust can be revised whenever your intentions or circumstances change so long as you have the mental ability to understand the changes you are making. (WARNING: There is such as a thing as irrevocable trusts, which cannot be changed without legal action. Irrevocable trusts are different estate planning tools from a revocable trust, which is what we are talking about here.)
  • Name beneficiaries. Both a will and trust are vehicles which allow you to name who you want to receive your accounts and property. A will simply describes the accounts and property and states who gets what. Only accounts and property in your individual name will be controlled by a will. If an account or piece of property has a beneficiary, pay-on-death, or transfer-on-death designation, this will trump whatever is listed in your will. While a trust acts similarly, you must go one step further and “transfer” the property into the trust or name the trust as beneficiary of your property and financial accounts – commonly referred to as “funding.” This is accomplished by changing the ownership of your accounts and property from your name individually to the name of the trust or by naming the trust as beneficiary of the property or account. Only accounts and property in the name of your trust  or designating your trust as beneficiary will be controlled by the trust’s instructions.
  • Provide asset protection. Both a trust and a will may include protective sub-trusts which can allow your beneficiaries to receive some enjoyment and benefit from the accounts and property in the trust but also keep the accounts and property from being seized by your beneficiaries’ creditors such as divorcing spouses, car accident litigants, bankruptcy trustees, and business failures.

While some of the differences between a will and living trust are subtle; others are not. An estate planning attorney can work with you to help you determine which is better for you, a will or a revocable living trust, so that you end up with an estate plan personalized to your needs.

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