Powers of attorney: Springing vs. nonspringing

Estate planning typically focuses on what happens to your assets when you die. But it’s equally important (some might say more important) to have a plan for making critical financial and medical decisions if you’re unable to make those decisions yourself.

That’s where the power of attorney (POA) comes in. A POA appoints a trusted representative (the “agent”) who can make medical or financial decisions on your behalf in the event an accident or illness renders you unconscious or mentally incapacitated. Typically, separate POAs are executed for health care and property–this is the case in Georgia. Without them, your loved ones would have to petition a court for guardianship or conservatorship, a costly process that can delay urgent decisions. (Depending on the state you live in, the health care POA document may also be known as a “medical power of attorney” or “health care proxy.”  In Georgia, these documents are called the “Advance Directive for Health Care”.)

A question that people often struggle with is whether a POA should be springing or nonspringing.

To spring or not to spring

A springing POA is effective on the occurrence of specified conditions; a nonspringing, or “durable,” POA is effective immediately. Typically, springing powers would take effect if you were to become mentally incapacitated, comatose or otherwise unable to act for yourself.

A nonspringing POA offers two advantages:

It allows your agent to act on your behalf for your convenience, not just when you’re incapacitated. For example, if you’re traveling out of the country for an extended period of time, your POA for property agent could pay bills and handle other financial matters for you in your absence.

It avoids the need for a determination that you’ve become incapacitated, which can result in delays, disputes or even litigation. This allows your agent to act quickly in an emergency, making critical medical decisions or handling urgent financial matters without having to wait, for example, for one or more treating physicians to examine you and certify that you’re incapacitated.

A potential disadvantage to a nonspringing POA — and a common reason people opt for a springing POA — is the concern that the agent may be tempted to commit fraud or otherwise abuse his or her authority. But consider this: If you don’t trust your agent enough to give him or her a POA that takes effect immediately, how does delaying its effect until you’re incapacitated solve the problem? Arguably, the risk of fraud or abuse would be even greater at that time because you’d be unable to monitor what the agent is doing.

What to do?

Given the advantages of a nonspringing POA, and the potential delays associated with a springing POA, a nonspringing POA is generally preferable–however, this should be carefully analyzed with your estate planning attorney on a case by case basis. Just make sure the person you name as agent is someone you trust unconditionally.

Contact us with any questions regarding POAs.

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Beware the GST tax when transferring assets to grandchildren

As you plan your estate, don’t overlook the generation-skipping transfer (GST) tax. Despite a generous $5.49 million GST tax exemption, complexities surrounding its allocation can create several tax traps for the unwary.

GST basics

The GST tax is a flat, 40% tax on transfers to “skip persons,” including grandchildren, other family members more than a generation below you, nonfamily members more than 37½ years younger than you and certain trusts (if all of their beneficiaries are skip persons). If your child predeceases his or her children, however, they’re no longer considered skip persons.

GST tax applies to gifts or bequests directly to a skip person and to certain transfers by trusts to skip persons. Gifts that fall within the annual gift tax exclusion (currently, $14,000 per recipient; $28,000 for gifts split by married couples) are also shielded from GST tax.

Allocation traps

To take full advantage of the GST tax exemption, you (or your estate’s representative) must properly allocate it to specific gifts and bequests (on a timely filed gift or estate tax return). Allocating the exemption wisely can provide substantial tax benefits.

Suppose, for example, that you contribute $2 million to a trust for the benefit of your grandchildren. If you allocate $2 million of your GST exemption to the trust, it will be shielded from GST taxes, even if it grows to $10 million. If you don’t allocate the exemption, you could trigger a seven-figure GST tax bill.

To help prevent costly mistakes like this from happening, the tax code and regulations provide for automatic allocation under certain circumstances. Your exemption is automatically allocated to direct skips as well as to contributions to “GST trusts.” These are trusts that could produce a generation-skipping transfer, subject to several exceptions.

Often, the automatic allocation rules work well, ensuring that GST exemptions are allocated in the most tax-advantageous manner. But in some cases, automatic allocation can lead to undesirable results.

Suppose you establish a trust for your children, with the remainder passing to your grandchildren. You assume the automatic allocation rules will shield the trust from GST tax. But the trust gives one of your children a general power of appointment over 50% of the trust assets, disqualifying it from GST trust status. Unless you affirmatively allocate your exemption to the trust, distributions or other transfers to your grandchildren will be subject to GST taxes.

Handle with care

If you plan to make gifts to skip persons, or to trusts that may benefit skip persons, consider your potential GST tax exposure. Also, keep in mind that repeal of the GST tax, along with the gift and estate tax, has been proposed. We’ll keep you abreast of any tax law changes that affect estate planning, and we can answer your questions regarding the GST tax.

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Don’t overlook tax apportionment when planning your estate

If you expect your estate to have a significant estate tax liability at your death, be sure to include a well-thought-out tax apportionment clause in your will or revocable trust. An apportionment clause specifies how the estate tax burden will be allocated among your beneficiaries. Omission of this clause, or failure to word it carefully, may result in unintended consequences.

Apportionment options

There are many ways to apportion estate taxes. One option is to have all of the taxes paid out of assets passing through your will. Beneficiaries receiving assets outside your will — such as IRAs, retirement plans or life insurance proceeds — won’t bear any of the tax burden.

Another option is to allocate taxes among all beneficiaries, including those who receive assets outside your will. Yet another is to provide for the tax to be paid from your residuary estate — that is, the portion of your estate that remains after all specific gifts or bequests have been made and all expenses and liabilities have been paid.

There’s no one right way to apportion estate taxes. But it’s important to understand how an apportionment clause operates to ensure that your clause is worded in a way that your wealth will be distributed in the manner you intend.

Suppose, for example, that your will leaves real estate valued at $5 million to your son, with your residuary estate — consisting of $5 million in stock and other liquid assets — passing to your daughter. Your intent is to treat your children equally, but your will’s apportionment clause provides for estate taxes to be paid out of the residuary estate. Thus, the entire estate tax burden — including taxes attributable to the real estate — will be borne by your daughter.

One way to avoid this result is to apportion the taxes to both your son and your daughter. But that approach could cause problems for your son, who may lack the funds to pay the tax without selling the property. To avoid this situation while treating your children equally, you might apportion the taxes to your residuary estate but provide life insurance to cover your daughter’s tax liability.

Omission of apportionment clause

What if your will doesn’t have an apportionment clause? In that case, apportionment will be governed by applicable state law (although federal law covers certain situations).

Most states have some form of an “equitable apportionment” scheme. Essentially, this approach requires each beneficiary to pay the estate tax generated by the assets he or she receives. Some states provide for equitable apportionment among all beneficiaries while others limit apportionment to assets that pass through the will or to the residuary estate.

Often, state apportionment laws produce satisfactory results, but in some cases they may be inconsistent with your wishes.

Avoid surprises

If you ignore tax apportionment when planning your estate, your wealth may not be distributed in the manner you intend. We can answer your questions about taxes and estate planning.

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The stretch IRA: A simple yet powerful estate planning tool

The IRA’s value as a retirement planning tool is well known: IRA assets compound on a tax-deferred (or, in the case of a Roth IRA, tax-free) basis, which can help build a more substantial nest egg. But if you don’t need an IRA to fund your retirement, you can use it as an estate planning tool to benefit your children or other beneficiaries on a tax-advantaged basis by turning it into a “stretch” IRA.

Stretching the benefits

Turning an IRA into a stretch IRA is simply a matter of designating a beneficiary who’s significantly younger than you. This could be, for example, your spouse (if there’s a substantial age difference between the two of you), a child or a grandchild.

If you name your spouse as beneficiary, he or she can elect to roll the funds over into his or her own IRA after you die, enabling the funds to continue growing tax-deferred or tax-free until your spouse chooses to begin withdrawing the funds in retirement or must take required minimum distributions (RMDs) starting after age 70½. (Note that RMDs don’t apply to Roth IRAs while the participant is alive.)

If you name someone other than your spouse as beneficiary, he or she generally will have several options:

  • Take a lump-sum distribution of the IRA’s balance.
  • Withdraw the funds by the end of the year of the fifth anniversary of your death (if you die before beginning to take RMDs).
  • Withdraw the funds over your “remaining” life expectancy, calculated under the applicable IRS table as of the year of death (if you die after beginning to take RMDs).
  • Hold the funds in an “inherited IRA,” which allows the beneficiary to spread RMDs over his or her own life expectancy.

Usually the inherited IRA is the best choice because it maximizes the benefits of tax-deferred or tax-free growth.

Naming a trust as beneficiary

A disadvantage of naming your child or grandchild as beneficiary of your IRA is that there’s nothing to prevent him or her from taking a lump-sum distribution, erasing any potential stretch IRA benefits.

To ensure that this doesn’t happen, you can name a trust as beneficiary. In order for a trust to qualify for stretch treatment, it will need to meet certain requirements, such as distributing RMDs received from the IRA to the trust beneficiaries.  You will need to make sure that your estate planning attorney is well versed in the requirements for naming qualified retirement plans as beneficiaries of trusts–the drafting must be precise in order for the trust to be a qualified beneficiary.

Contact us for additional details.

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ABLE accounts can benefit loved ones with special needs

For families with disabled loved ones who are potentially eligible for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI), estate planning can be a challenge. On the one hand, you want to provide the most comfortable life possible for your family member. On the other hand, you don’t want to jeopardize his or her eligibility for needed government benefits.

For many years, the most effective solution to this problem has been to set up a special needs trust (SNT). But beginning in 2014, the Achieving a Better Life Experience (ABLE) Act created Internal Revenue Code Section 529A, which authorizes the states to offer tax-advantaged savings accounts for the blind and severely disabled, similar to Sec. 529 college savings plans.

Effective June 14, 2017, Georgia has launched its own ABLE account program, which will be called the Georgia STABLE accounts.

How ABLE accounts work

The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $14,000). To qualify, a beneficiary must have become blind or disabled before age 26.

The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.

An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.

Comparison with SNTs

Here’s a quick review of a few of the relative advantages and disadvantages of ABLE accounts and SNTs:

Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age restriction for SNTs.

Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.

Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.

Contact us with additional questions you may have regarding ABLE accounts.

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IRS simplifies procedure for obtaining extension to make portability election

Last month, the IRS issued a Revenue Procedure that allows certain estates to make a late portability election without first filing a ruling request. Portability is a tax law provision that permits a surviving spouse to take advantage of the deceased spouse’s unused combined gift and estate tax exemption (currently $5.49 million).

But portability isn’t automatic: It’s available only if the deceased spouse’s estate makes a portability election on a timely filed estate tax return. This return is due nine months after death, with a six-month extension option, regardless of whether any tax is owed.

What’s new?

Previously, if a deceased spouse’s estate failed to make a timely portability election, the surviving spouse’s only recourse was to request a private letter ruling from the IRS — a costly and time-consuming process. Rev. Proc. 2017-34 grants an automatic extension for taxpayers not otherwise required to file an estate tax return, provided they file a return making the election on or before the later of:

  • The second anniversary of the deceased’s death, or
  • January 2, 2018.

If these requirements are met, the estate may make the election by filing an estate tax return with the following language at the top: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER SECTION 2010(c)(5)(A).”

Is portability right for you?

The portability provision can provide a safety net for couples with joint assets exceeding the exemption amount of the estate of the first spouse to die. We can answer any questions regarding making the portability election.

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GEORGIA’S NEW STATUTORY POWER OF ATTORNEY BECOMES LAW JULY 1, 2017: WHAT YOU NEED TO KNOW

By: John Cleveland Hill, Esq. and Sarah Randal Watchko, Esq.

The General Assembly of Georgia passed and Governor Nathan Deal has signed a new law substantially overhauling financial Powers of Attorney (“POAs”), and the statute is effective July 1, 2017.  This article will give a brief overview of the law and its impacts, but the article is not comprehensive and should not be taken as such.  Individuals should seek the advice of their own legal counsel on this topic.

What is a POA and why is it important?

Let’s start with the basic concept.  A POA is a written document wherein one person (commonly called the “principal”) gives power to another person (commonly called the “agent” or the “attorney in fact”) to “step into the shoes” of the principal regarding the principal’s financial and asset management and decision making.

A POA is especially helpful—if not vitally important—should you reach a point in life where handling your own affairs is difficult or completely impossible. This could be due to an accident or sudden illness. Think of those daily, monthly, and yearly tasks required to make your financial life run smoothly.  If you could no longer care for those things yourself, someone needs to be able to do so for you.  Traditionally, we use a POA for those tasks.  In the absence of a POA, those that care about you will have little choice but to file an action in your local probate court to have someone appointed as “conservator”—what Georgia law calls a financial guardian.  The conservatorship process can be costly, lengthy, and requires ongoing court supervision for the duration of your incapacity.  Obviously the court supervised conservatorships provide an important role when someone does not have trustworthy people in their lives to serve as an agent under POA; for most, however, a POA will be a better choice.  Having a POA executed is intended to thwart the need for a conservatorship.

What does the new law do differently? Protections and Ability to Enforce.

In recent years agents attempting to use POAs for the principal have been met with increasing resistance from certain third parties— in the author’s experience, this resistance has largely come from banks and other financial institutions.  Banks and financial institutions have become so risk/liability averse that they have simply refused to follow the instructions of an agent under POA.  The result is that clients who thought that they had completed thorough, thoughtful estate planning were left in sometimes dire circumstances and their agents were left unable to access or use their finances for the principal’s benefit.

Under pre-July 1, 2017 law, third parties could not be forced to accept the POA because, under theories of contract law, the third party was not a party to the contract—the POA was only between the principal and agent.  Until the old law, there was very little, if any, recourse if a third party, such as a bank, refused to accept a POA.

The new statute provides significant protections for the third parties by providing that any person/entity may rely upon the validity of the POA unless that person has actual knowledge that the POA has been is invalid or has been terminated.

More importantly for our purposes here, however, the law creates the ability to force a third party to accept the POA if certain conditions are met.  Here is what is required to force acceptance of the POA:

  • The POA must be the statutory form or a document that “substantially reflects the language in the statutory form.
  • The agent must present the POA to the third party and seek to use the POA with the third party (i.e., agent presents POA to principal’s bank and asks to be given access to the principal’s bank accounts).
  • If the third party refuses to accept the POA, the third party has up to seven (7) business days to request either a certification from the agent, an English translation (if such is necessary), or an attorney’s opinion. If the third party requests any of these items, the agent must supply them to the third party.
    • Certification of Agent is a notarized statement, under penalty of perjury, concerning the principal, agent, and the POA.
    • Attorney’s Opinion is an explanation from an attorney regarding the POA.
  • After the agent supplies the requested documentation, the third party has up to five (5) business days to accept the POA.
  • Third parties may still refuse to accept the POA under certain circumstances: action requested is not required of the third party; action is against federal law; third party has actual knowledge that the POA or agent’s authority has terminated; where agent’s certification, English translation or attorney’s opinion have not been provided; good faith believe that the POA is invalid or agent lacks authority; or where the third makes or knows that another party has made a report to adult protective services concerning abuse of the principal.

If the third party refuses to accept the POA after compliance with the requirements of law by the agent and the third party does not have a valid, statutory reason for its rejection, then a court can be asked to rule on the validity of the POA and issue an order forcing the third party to accept the POA.   The third party can also be forced to reimburse the principal for reasonable attorney’s fees and expenses in pursuing the enforcement.  The court also has the ability to hold the third party liable for additional damages and other remedies.

This is an immense shift in Georgia law with regard to agents being able to care for their principals, and generally speaking, in families being able to care of each other during times of incapacitation.

What should you or your loved ones do now?

Although the new statute does not invalidate pre-July 1, 2017 POAs, the old law will still apply to the old POAs—in other words, there will be little or no ability to force acceptance of the POA.  Individuals should strongly consider contacting their estate planning attorney to determine whether updating to the new statutory POA is advisable for them.

Copyright 2017; Hill & Watchko, LLC.

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In estate planning be aware of fraudulent transfer laws

A primary goal of your estate plan is to transfer wealth to your family according to your wishes and at the lowest possible tax cost. However, if you have creditors, be aware of fraudulent transfer laws. In a nutshell, if your creditors challenge your gifts, trusts or other strategies as fraudulent transfers, they can quickly undo your estate plan.

2 fraud types

Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). The act allows creditors to challenge transfers involving two types of fraud that you should be mindful of as you weigh your estate planning options:

  1. Actual fraud. This means making a transfer or incurring an obligation “with actual intent to hinder, delay or defraud any creditor,” including current creditors and probable future creditors.

Just because you weren’t purposefully trying to defraud creditors doesn’t mean you’re safe from an actual fraud challenge. Because a court can’t read your mind, it will consider the surrounding facts and circumstances to determine whether a transfer involves fraudulent intent. So before you make gifts or place assets in a trust, consider how a court might view the transfer.

  1. Constructive fraud. This is a more significant risk for most people because it doesn’t involve intent to defraud. Under UFTA, a transfer or obligation is constructively fraudulent if you made it without receiving a reasonably equivalent value in exchange for the transfer or obligation and you either were insolvent at the time or became insolvent as a result of the transfer or obligation.

“Insolvent” means that the sum of your debts is greater than all of your assets, at a fair valuation. You’re presumed to be insolvent if you’re not paying your debts as they become due.

Generally, the constructive fraud rules protect only present creditors — that is, creditors whose claims arose before the transfer was made or the obligation was incurred.

Know your net worth

By definition, when you make a gift — either outright or in trust — you don’t receive reasonably equivalent value in exchange. So if you’re insolvent at the time, or the gift renders you insolvent, you’ve made a constructively fraudulent transfer, which means a creditor could potentially undo the transfer.

To avoid this risk, analyze your net worth before making substantial gifts. Even if you’re not having trouble paying your debts, it’s possible to meet the technical definition of insolvency.

Fraudulent transfer laws vary from state to state, so consult an attorney about the law in your specific state.

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Leaving specific assets to specific beneficiaries can be problematic

Planning your estate around specific assets is risky and, in most cases, should be avoided. If you leave specific assets — such as a home, a car or stock — to specific people, you could end up inadvertently disinheriting someone.

Unintended consequences

Here’s an example that illustrates the problem: Kim has three children — Sarah, John and Matthew — and wishes to treat them equally in her estate plan. In her will, she leaves a $500,000 mutual fund to Sarah and her $500,000 home to John. She also names Matthew as beneficiary of a $500,000 life insurance policy.

By the time Kim dies, the mutual fund balance has grown to $750,000. In addition, she has sold the home for $750,000, invested the proceeds in the mutual fund and allowed the life insurance policy to lapse. She didn’t revise or revoke her will. The result? Sarah receives the mutual fund, with a balance of $1.5 million, and John and Matthew are disinherited.

Safer alternatives

To avoid this outcome, it’s generally preferable to divide your estate based on dollar values or percentages rather than specific assets.  In our practice, we most commonly recommend that our clients use percentages or fractions.  Specific dollar amounts can be equally as problematic as naming specific assets.  It is problematic because we do not know how long you will live nor what your estate will have in it when you pass away.  What if your estate is not large enough to fulfill the specific dollar amounts?  From the example above could have placed the mutual fund, home and insurance policy in a trust and divided the value of the trust equally between her three children–one third to each.

If it’s important to you that specific assets go to specific beneficiaries— for example, because you want your oldest child to receive the family home or you want your family business to go to a child who works for the company — there are planning techniques you can use to help ensure that outcome while avoiding undesirable consequences. For example, your trust or will might provide for your assets to be divided equally but also for your children to receive specific assets at fair market value as part of their shares.

Please contact us for additional details on planning strategies that can help ensure your assets are distributed as you wish without causing unintentional consequences.

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Is now the time for a charitable lead trust?

Families who wish to give to charity while minimizing gift and estate taxes should consider a charitable lead trust (CLT). These trusts are most effective in a low-interest-rate environment, so conditions for taking advantage of a CLT currently are favorable. Although interest rates have crept up in recent years, they remain historically low.

2 types of CLTs

A CLT provides a regular income stream to one or more charities during the trust term, after which the remaining assets pass to your children or other noncharitable beneficiaries. If your beneficiaries are in a position to wait for several years (or even decades) before receiving their inheritance, a CLT may be an attractive planning tool. That’s because the charity’s upfront interest in the trust dramatically reduces the value of your beneficiaries’ interest for gift or estate tax purposes.

There are two types of CLTs: 1) a charitable lead annuity trust (CLAT), which makes annual payments to charity equal to a fixed dollar amount or a fixed percentage of the trust assets’ initial value, and 2) a charitable lead unitrust (CLUT), which pays out a set percentage of the trust assets’ value, recalculated annually. Most people prefer CLATs because they provide a better opportunity to maximize the amount received by one’s noncharitable beneficiaries.

Typically, people establish CLATs during their lives (known as “inter vivos” CLATs) because it allows them to lock in a favorable interest rate. Another option is a testamentary CLAT, or “T-CLAT,” which is established at death by one’s will or living trust.

Another issue to consider is whether to design a CLAT as a grantor or nongrantor trust. Nongrantor CLATs are more common, primarily because the grantor avoids paying income taxes on the trust’s earnings. However, grantor CLATs also have advantages. For example, by paying income taxes, the grantor allows the trust to grow tax-free, enhancing the beneficiaries’ remainder interest.

Interest matters

Here’s why CLATs are so effective when interest rates are low: When you fund a CLAT, you make a taxable gift equal to the initial value of the assets you contribute to the trust, less the value of all charitable interests. A charity’s interest is equal to the total payments it will receive over the trust term, discounted to present value using the Section 7520 rate, a conservative interest rate set monthly by the IRS. As of this writing, the Sec. 7520 rate has fluctuated between 2.35% and 2.55% so far this year.

If trust assets outperform the applicable Sec. 7520 rate (that is, the rate published in the month the trust is established), the trust will produce wealth transfer benefits. For example, if the applicable Sec. 7520 rate is 2.5% and the trust assets actually grow at a 7% rate, your noncharitable beneficiaries will receive assets well in excess of the taxable gift you report when the trust is established.

If a CLAT appeals to you, the sooner you act, the better. In a low-interest-rate environment, outperforming the Sec. 7520 rate is relatively easy, so the prospects of transferring a significant amount of wealth tax-free are good. Contact us for more details.

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