Archive for the ‘Banking’ Category

Does your power of attorney have all the muscle that it needs? A flabby, wimpy power of attorney can be dangerous because it may lull you into a false sense of security and leave you susceptible to getting smacked when you thought you were protected.

Often, one of the first documents I ask a new client to show me is a power of attorney. Then I perform what must seem like a strange ritual as I spend 30 seconds feverishly flipping through pages and scanning the document. At that point I either smile and nod or frown and shake my head. I have been looking for specific powers; for muscle.

Last year I discussed the basics of powers of attorney . . . what they are, the different types, and why they are so important. If you are the least bit uncertain, go back and review that post . . . in fact, if you have about 30 minutes grab a note pad and pen and watch the video posted in that article. Then come back here!

Is Your Fiduciary Faithful – Are His Bona Fides In Order?

Under state law, the person making the POA (the principal) and the person authorized to act (the agent or the attorney in fact – they mean the same thing) are said to be in a fiduciary relationship. The word “fiduciary” is based on the Latin “fide” or “faith”. As in simper fidelis or Fidelity Bank or bona fide.

Fiduciaries are governed both by statute and common law (common law is law that is generally agreed upon by all and sort of “just out there”). A fiduciary is subject to a number of rules that are essentially legal applications of practical ideas of diligence, loyalty and fair dealing. In the context of POAs, however, those rules pose some important considerations.

Perhaps primary among those rules is the duty to conserve the principal’s assets for the benefit of the principal and to avoid commingling the principal’s assets with the agent’s assets . . . or, for that matter, to avoid self-dealing (keep your hands out of the cookie jar!).

Those rules are a good “default setting” because they protect the principal from carelessly giving too much power to an unsuitable agent. On the other hand, those rules prohibit gifting.

The Gift That Keeps On Giving

Gifting can be an important authority. As I tell my clients, “by ‘gifting,’ we aren’t talking about birthdays and Christmas, we’re talking about the ability to freely transfer assets out of the name of the principal.” The ability to undertake a series of carefully planned “gifts” can be essential to a sound estate planning or asset preservation strategy.

A North Carolina statute specifically prohibits gifting under a power of attorney if the document is silent as to gifting. If you enjoy looking up such things, look at N.C.G.S. § 32A-14.1. (By the way, Georgia readers, the same is true under Georgia common law.) In other words, a short power of attorney that says “I give my agent full power and authority to do anything and everything I could do for myself” does not authorize gifting if that topic is not specifically addressed.

And that, Dear Reader, is one of the first things I am looking for when I scan a power of attorney and I know the engagement is likely to involve various asset preservation strategies.

Gifting Powers . . . But Not Really

Another problem I often encounter is the North Carolina statutory short form power of attorney. That is a one or two page form. After a general paragraph that appoints a person “to act in my name in any way which I could act for myself, with respect to the following matters as each of them is defined in Chapter 32A of the North Carolina General Statutes” there follows a series of powers for the principal to initial in order to confer the power. The latest version has 17 different powers, including the power to make gifts . . . even to the agent himself or herself.

These are dangerous forms because they lull people into a false sense of security. The danger comes in the words “as each of them is defined in Chapter 32A of the North Carolina General Statutes.” When it comes to gifting, section 32A-2 of the General Statutes says that in the short form the gifting election means the agent may make gifts of the principal’s assets “in accordance with the principal’s personal history of making or joining in the making of lifetime gifts.”

The problem is that not many people have established a “personal history” of gifting the residence or a farm or other substantial assets . . . even to a spouse! Someone with a statutory short form may think she is covered, but a responsible agent may later discover that that is not at all the case.

The principal, of course, is free to alter the common law or statutory law principles that apply to fiduciaries when she has her POA prepared. That is the key to a well-drafted and thoughtful power of attorney.

Problems With Gifting

Many people are understandably nervous about granting gifting authority to an agent, but some limits on the agent can be put in place. For example, an agent may be given unlimited authority to make gifts to a select group of family members as long as the agent secures the written permission of certain other individuals.

Many POAs attempt to control an agent’s ability to gift by saying something like “my agent may make gifts in an amount not to exceed the federal annual gift tax exclusion.” Be careful of this. That language was inserted as an easy way to put some sort of “reasonable” restriction on gifting ability. The federal annual gift tax exclusion currently is $13,000 to as many individuals as the person making gifts wishes to favor. In a POA, however, limiting the ability of an agent to make gifts to that amount can render the gifting authority nearly useless if there are substantial assets that need to be conveyed. For example, a $13,000 limit on gifts can make conveying a residence or large sum of money difficult, if not impossible.

Other Powers To Think Of

In addition to gifting powers, there are a number of other powers that may require specific attention in a well-drafted POA.

• Real Property

Real property law (land and things on the land) tends to be intricate and the law varies greatly from state to state. Often there are many surprises (many not pleasant) in the law that could restrict the ability of an agent to transfer the principal’s interests in real property.

With that in mind, specifically defining in a POA what an agent may or may not do with real property might be wise.

• Retirement Assets

Everything that could be said with respect to real property applies to retirement assets . . . except for the fact that most retirement plans (IRAs, 401(k) Plans, pensions) are controlled by federal law. A good POA will describe what an agent may or may not do with respect to retirement assets.

• Establishing and Dealing With Trusts

Most states have statutes that pertain to whether an agent may establish a trust on behalf of a principal . . . and most of those statutes require the POA to specifically describe what an agent may accomplish on behalf of the principal with respect to trusts if the agent is to have any authority at all.

• The authority should address both revocable trusts and irrevocable trusts.

Keep in mind that establishing a trust and using the principal’s assets might also be an indirect gift. For example, a trust may provide that the principal will receive income for life, and upon the death of the principal the trust will be distributed to other individuals. In that case, trust authorization language should be used together with gift authorization language.

As with gifting, the agent’s authority to establish and fund trusts can be tied to some external authority (perhaps the approval of another individual).

So . . .

Pull out your power of attorney. Is it up to protecting you? Or do you have a wimp on your hands?

Questions?  Leave a comment below and I’ll respond.

According to conventional wisdom you should always name your spouse as beneficiary of an IRA. Let’s smash some traditional pumpkins (I am writing this in October, after all). Read on to understand why it might be a great idea to name a trust as the beneficiary of an IRA and what some of the trade-offs of doing so are.

Standing on Tradition: Naming The Spouse As IRA Beneficiary

There really is a good reason for naming the spouse as IRA beneficiary . . . much of the time. As I have written, the beauty of an IRA is that the longer money can be allowed to languish in an IRA, the more it will grow without being burdened by taxes. Because of that, the usual thinking is to try and take out as little as possible. On the other hand, there are all sorts of tax rules about when someone MUST take distributions and how much those distributions must be. Remember the rule:

SOMEDAY, SOMEHOW, SOMEONE WILL PAY TAXES ON THE IRA.

Why Naming A Spouse The IRA Beneficiary Is So Slick (Usually)

If a spouse “inherits” an IRA, she can treat it as her own. This means she does not have to begin distributions until she is 70 ½. When she does begin taking distributions she can use a special table that assumes she has a husband 10 years younger (heh, heh, heh) even though she may have just become a widow. That means MUCH smaller mandatory distributions because they are being spread out over her life and the life of Mister-Make-Believe-Ten-Years-Younger-Romeo.

The special spousal rules for inherited IRAs also say that she can name the kids as beneficiaries and upon her death they will have separate IRAs they can take out over their life expectancies (although I have found – quite nonscientifically – that most IRAs inherited by adult children quickly become new cars or tuition payments!).

On The Other Hand . . .

Sometimes naming a spouse as IRA beneficiary is a bad idea. There may be reasons that outweigh the usual good tax reasons for naming a spouse. For example, I often encounter couples concerned about protecting assets for a surviving spouse in case he or she ever needs to go into a nursing home. An IRA left directly to a spouse will be a countable asset for Medicaid purposes. There may be other good asset protection motives involved, as well.

The solution may be to name a trust as the beneficiary of the IRA. That way, IRA assets may be protected while remaining available to benefit the surviving spouse.

There are a number of ways a trust can be designed, depending upon what the client and I are trying to accomplish. Much of how a trust will be treated depends upon whether it is something the IRS calls a “designated beneficiary.”

Is A Trust A Designated Beneficiary?

If a trust benefits only real live (as in “beating hearts living”) people then the trust will be a “designated beneficiary.” If a trust says “Mom is the primary beneficiary, then the kids” that will suffice. If the trust says “Mom may receive some, but not necessarily all benefits, then when Mom dies the North Carolina Zoo takes” the trust will not be a designated beneficiary.

If a trust is NOT a “designated beneficiary” of an IRA, then the IRA must be distributed within five years if the owner dies before 70 ½. If an IRA is not huge, being forced to completely distribute it within five years is not necessarily bad.

If the owner dies after age 70 ½, however, then the trust can take distributions over what would have been the deceased owner’s life expectancy had he been alive each year. That actually will be a bit faster than if he had been alive and married because the rules use different tables that calculate distributions as if the deceased owner were still alive and single. On the other hand, for older spouses about the same age, there may not be too much difference. The difference is if Mom had inherited directly she would have used a table that pretended there was the “Ten Year Younger Romeo” (slower distributions to account for the younger Romeo’s added life expectancy) but the trust is stuck with using a single person’s table (faster).

Bottom line: If a trust fails the “designated beneficiary” rule it means the IRA must be distributed over five years if the owner died before age 70 ½ and over the owner’s life expectancy (pretending he is alive and single) if he dies after age 70 ½.

Should Everything Be Distributed To Mom?

If we set up a trust to qualify as a “designated beneficiary” the next issue is to decide whether to make the trustee pay out to Mom all of the distributions the IRS says the trust MUST take from the IRA (this is called a “conduit trust”), or to let those IRA distributions accumulate inside the trust (where they are protected).

If the trust is a conduit trust, Mom gets all IRA distributions and she pays all income taxes (probably at her low tax rate). Also, if a trust is a conduit trust the IRA distributions can be stretched out a little bit more than if the trust was an accumulation trust. It also means that if Mom goes to the nursing home on Medicaid, all of those IRA distributions will be paid to the nursing home before Medicaid kicks in.

If the trust gives the trustee the right to accumulate IRA distributions and to decide whether to pay some, all, or none of the IRA distributions through to Mom, the IRA will be distributed to the trust slightly faster, but the assets will be safe from nursing home expenses. To the extent the trustee decides not to distribute to Mom (maybe she is in a nursing home on Medicaid) the IRA distributions being held in the trust will be subject to income taxation at much higher rates than Mom would have paid had the trustee passed the IRA distributions on to Mom. On the other had, if they were paid out to Mom, everything would be gone!

Get Help!

This is a complex topic. The purpose of this brief article was to give an overview of the possible advantages of naming a trust as IRA beneficiary. Sometimes it is a great idea, and other times it may be a really bad idea. Bring it up with your attorney or financial advisor and see what she says.

 

What does cashing in an IRA, or perhaps converting to a Roth IRA, have to do with Medicare premiums? Maybe a lot . . . a lot of your money.

Occasionally a person going into a nursing home may have to cash in an IRA. In other situations converting a traditional IRA into a Roth IRA may make financial sense. At the right time and with the right advice these may be smart moves. But there can be a hidden cost that many advisors never think of.

Medicare Premiums and Income

First a bit of background on Medicare Part B premiums. Medicare is a federal health insurance program. Part B covers visits to and services by various providers. The insured pay for coverage with premiums, usually by deductions from monthly Social Security checks.

Most Medicare enrollees (72%) have been paying $96.40 monthly Medicare premiums the past few years and may be surprised to learn that the 2011 premiums are actually $115.40 a month. But federal law provides a “hold-harmless” provision that says that for most people the premiums will not go up more than any Social Security cost of living adjustment for the year. As we all know, Social Security has not gone up the past few years, so neither have the Medicare premiums. Had there been a Social Security adjustment for 2011, the monthly premiums could have been as high as $115.40.

The other 27% are not so lucky. For people who do not have premiums deducted from their Social Security checks and for new enrollees the 2011 $115.40 a month applies.

For those pulling in a bit more than average the premiums get even steeper. Individuals with annual income of between $85,000 and $107,000, and married couples with income between $170,000 and $214,000 will pay monthly premiums of $161.50. An individual with income between $107,000 and $160,000 ($214,000 and $320,000 for a couple) will pay $230.70 monthly premiums. There are a number of other brackets that scale upwards until premiums hit $369.10 monthly. You may review the 2011 Medicare premiums, co-pays and deductibles here on this website.

The Social Security Administration looks at income reported two years ago to determine Medicare premiums. In other words, 2009 income is used to determine 2011 premiums.

The Rub: Converting IRAs to Roth IRAs

When someone cashes in an IRA – for whatever reason – the cash-in will probably be a taxable distribution. In other words, if Granddaddy converts a $100,000 IRA to a Roth IRA, he will likely have an extra $100,000 gross income for tax purposes.

The result:  If Granddaddy had other income of $40,000, with his IRA conversion he will have reportable income of $140,000. That means in two years, he will be paying $230.70 in monthly Medicare premiums (using 2011 figures). That amounts to $1,611.60 extra that year.

I am not saying converting to a Roth IRA does not make sense. It may be a great move. Do be aware of the extra costs.

A reader asked me if that was a “hidden tax” and I disagreed with him. There is nothing hidden about it!