Klitzman Law Group, PLLC

Is a Power of Attorney Really Necessary?

A power of attorney is a document to be signed and notarized and allows one person, known as the “principal,” to appoint another person, known as the “agent,” to act on the principal’s behalf within the scope of authority described in the document. According to a recent article from The Gazette, “Money & the Law: Powers of attorney more complex than they might seem,” the power of attorney can be very broad or limited to a particular transaction.

You may want someone to be able to pay your bills if you are temporarily incapacitated, for instance, but not to sell your home. A personalized power of attorney document can set specific limits for your unique situation.

As part of an estate plan, the POA is likely to be “general,” granting broad authority to the agent. This may be especially useful to someone who regularly travels and can’t always be physically present to conduct transactions. It also benefits someone who faces a risk of cognitive decline or impairment due to age or illness.

With proper language, a power of attorney can be made “durable,” meaning the grant of authority contained in the document survives legal incapacity. The POA does not survive the death of the principal.

If a person doesn’t have a durable financial POA and becomes incapacitated, a conservator must be appointed to handle the person’s financial affairs. This requires a legal proceeding, which can be costly, time-consuming and divisive among family members.

A POA should be created with careful thought and planning. The agent could turn rogue. For instance, a child appointed as the POA watching their inheritance shrink because of their ill parent’s medical expenses might skimp on an elderly parent’s health needs.

Financial powers of attorney can also create risks for agents. The agent’s job is simple when the person has full capacity—most of what the agent will do is carry out directions given by the principal. However, when the person becomes incapacitated, they are responsible to act as a fiduciary, in the same way a trustee or conservator would.

What duties does the POA entail once the principal becomes incapacitated? They must round up information and become responsible for managing whatever is delineated in the POA document. This may include financial affairs, investment accounts, tax obligations, pet care, etc.

Determining when incapacity has arrived can be difficult. In some elderly people, capacity comes and goes. When should the agent begin making discretionary decisions?

There are also questions about the standard of care applicable to agents named as POA. In most states, the standard of care is more than good faith, requiring diligence, competence, and prudence.

A power of attorney is more complex than it appears, requiring serious attention by estate planning attorneys and their clients as part of the estate planning process. They should be updated, just as an estate plan is updated, every three to five years or when circumstances warrant.

Reference: The Gazette (Sep. 3, 2023) “Money & the Law: Powers of attorney more complex than they might seem”

A Roth Conversion Can Benefit Retirement Plan

Before 2020, leaving a traditional IRA to younger beneficiaries created dual tax breaks. The original owner reduced taxable income by making pretax contributions during their lifetime, and beneficiaries could stretch the benefits of tax deferral over their lifetime. All that ended with the SECURE Act, but there are some options, as explained in the article “Why a Roth Conversion is a Powerful Estate Planning Tool” from Think Advisor.

After the SECURE Act, beneficiaries who don’t qualify as “eligible designated beneficiaries” or EDBs must empty the inherited IRA account within ten years. If the original owner had already begun taking minimum required distributions, the beneficiary must also take annual RMDs during the ten-year distribution period.

Someone who inherits a traditional IRA must now pay taxes on the entire account balance within ten years of the original account owner’s death. This can be a sizable tax burden, especially if the beneficiary is in their peak earning years.

Roth beneficiaries who don’t qualify as EBDs must empty the account within the same ten-year distribution period applying to traditional IRA accounts. However, Roths have a decisive advantage during the original owner’s lifetime: no RMD rules.

The original owner will always be deemed to have died before their required beginning date because a Roth account can never go into pay status since there is no required beginning date for distributions. Therefore, the Roth IRA beneficiary can wait until the tenth year to empty the account, allowing the funds to grow tax-free without worrying about the tax hit in Year 10.

When the beneficiary eventually takes distributions, the original contributions are nontaxable because the original owner paid taxes on Roth contributions during their lifetime. If the five-year rule is satisfied—at least five years have passed since the original owner made their first contribution or conversion to the account—earnings will also be tax and penalty-free to beneficiaries.

Roth accounts benefit the original owner because they offer a tax-free source of income during retirement. However, they’re also a valuable tax-free gift for account beneficiaries.

Reference: Think Advisor (Sep. 1, 2023) “Why a Roth Conversion is a Powerful Estate Planning Tool”

Tasks to Be Done After a Loved One Passes

If you haven’t dealt with losing a loved one, the days and weeks after a death can be overwhelming. Pain and grief are paired with important tasks that must be done, or unnecessary stress will result, explains a recent article, “11 Financial Steps to Follow After the Loss of a Loved One,” from U.S. News & World Report.

An official declaration of death. If the death occurs in a hospital, the hospital will issue it. If the death occurred at home, a medical professional or first responder would make the declaration.

Obtain a death certificate. This usually comes from the funeral home. You’ll want to get five to ten original certificates, which will be used for various legal and financial matters.

Gather financial documents. This includes estate planning documents, a will, a trust, bank and investment account information, utilities and bills, insurance policies and tax returns.

Reach out to advisors. This includes the estate planning attorney, financial advisor, CPA and other professionals working with the deceased. They will be able to offer guidance as you go through the process of managing the estate.

Contact any government agencies. If your loved one was receiving benefits from Social Security, the Veterans Administration, Medicare, Medicaid, or any other government agency, you must notify them of the death. The funeral home may have already sent the SSA a notification. You may still want to confirm if it has been sent, as the ultimate responsibility for notification is the surviving spouse or adult child.

Contact financial institutions. The financial institutions, including commercial banks, brokerage accounts and insurance companies, will all need to receive an original death certificate. If there is a POD (Payment on Death) order, the balance on accounts will be transferred to the designated beneficiary. If there are life insurance policies, you’ll need to find the policy and identify the designated beneficiary.

Avoid identity theft. Contact credit agencies, including Experian, Equifax and TransUnion, to notify them of the death. You may need to contact one for the others to become aware. You should also close the social media accounts of the deceased. Depending on the platform, you may only be able to memorialize the account instead of deleting it.

Other important institutions to contact. The post office will need to be notified, although you may first want to have the person’s mail sent to your home directly. The motor vehicle department needs a notification of death to stop renewing licenses. Unions and professional, service, or fraternal organizations should be notified. There may be survivor’s benefits.

Voter registration. You’ll want to notify the deceased’s voter registration agency, so they can remove their name from voting rolls.

Prepare the final tax return. There are two tax returns to be aware of—the final income tax returns and the estate tax returns. Your estate planning attorney will know the deadlines for both.

Filing the will with the probate court. Once the will goes through probate and is approved by the court, the executor will be able to distribute the deceased’s assets in accordance with the will. If there is no will, the distribution will be overseen by the court and follow the state’s intestacy laws.

Settle any remaining debts. In most cases, the remaining liability on a mortgage or car loan will be payable by the person inheriting them. All other forms of debt, like student loans, credit cards and medical loans, will be charged against the decedent’s estate.

Carrying out these tasks during a difficult time is not easy. An experienced estate planning attorney can help make the process easier for all concerned.

Reference: U.S. News & World Report (Sep. 1, 2023) “11 Financial Steps to Follow After the Loss of a Loved One”

What Is a No-Contest Clause?

There are different ways to defend a last will and testament from a claim filed by an individual or a group of individuals who want to alter the terms you put into your will. One way is to hope your executor or, if the issue concerns a trust, your trustee, can effectively defend your choices, says a recent article from Kiplinger, “What Do No-Contest Clauses Have to Do With Undue Influence?” Another is to include a no-contest clause, which would disinherit all claimants if they lose their challenge or for even filing a challenge in the first place.

A no-contest clause can be a strong deterrent for a beneficiary who believes they are entitled to more than the amount provided if they know that just by filing a challenge, they’ll forfeit their share. However, it may not be powerful enough for someone completely omitted from the estate plan altogether. Many estate planning attorneys recommend leaving something for even a disliked heir to give them a reason not to challenge the will.

There are more reasons than disgruntled heirs to have a no-contest clause in your will. A no-contest clause can help if your will omits any heirs at law not specifically mentioned in the document or revoke the share provided for anyone seeking to claim a share in your estate, increase their share, or claim certain assets in your estate.

A no-contest clause is also useful if someone is trying to invalidate your will, or any provision in it or to take part of your estate in a way not specifically described in your last will and testament.

Many no-contest clauses treat a challenger as having predeceased you or having predeceased you leaving no descendants, thereby passing their share according to other terms in the document. In certain states, it is very important to include a specific direction as to what should happen to these forfeited shares. Your estate planning attorney will know how your state’s laws work and how best to include this language in your will.

However, what if the person challenging the will has a good reason to do so? For instance, numerous cases have been brought to court because probable cause existed where the decedent was subjected to undue influence and even elder abuse by a caregiver or a relative in charge of their finances.

In many cases, family members only learn of the abuse after discovering the depletion of the estate and the admission of a new last will to favor the elder abuser over the decedent’s family. The no-contest clause could cause a complete disinheritance for a family member seeking to protect the estate and any other person who appears in court to support the petition.

Not all states treat the no-contest clause the same. Some refuse to enforce them as a matter of public policy. Others strictly construe the clause because they disfavor any forfeitures. Your estate plan should be created with a no-contest clause aligning with the laws of your state. Your estate planning attorney can create a will designed to avoid punishing a challenge brought in good faith.

Reference: Kiplinger (Sep. 1, 2023) “What Do No-Contest Clauses Have to Do With Undue Influence?”

Why are Contingent Beneficiaries Important?

If you’ve been married or in a longstanding relationship, it’s almost certain your initial beneficiary will be your spouse or partner. If you have children, it’s likely an easy decision to make them contingent or successor beneficiaries to your estate. More often than not, children inherit equally, explains the article “PLANNING AHEAD: The problems we have naming contingent beneficiaries” from The Mercury.

To avoid conflict, parents often decide to name children equally, even if they’d prefer a greater share to go to one child over another, usually because of a greater need. This is, of course, a matter of individual preference.

However, as you move down the line in naming a successor or contingent beneficiaries, you may encounter some unexpected stumbling blocks.

If there is a beneficiary who is disabled, whether a child, grandchild or more distant relative, or even a spouse, you have to determine if naming them is a good idea. If the disabled individual is receiving Medicaid or other government assistance, an inheritance could cause this person to become ineligible for local, state, or federal government benefits. An estate planning attorney with knowledge of special needs planning will help you understand how to help your loved one without risking their benefits.

A Supplemental Needs Trust may be in order, or a Special Needs Trust. If the person’s only benefit is Social Security Disability—different from Supplemental Security Income or some others—they may be free to inherit without a trust and will not impact benefits. Social Security Disability recipients cannot work in “substantial gainful employment.”

Another issue in naming successor and contingent beneficiaries is the choice of a trustee or manager to handle funds if a beneficiary cannot receive benefits directly. A grandparent will sometimes be reluctant to name a son-in-law or a daughter-in-law as trustees for minors if their daughter or son predeceases and the inheritance is intended for a minor or disabled grandchildren. The grandparents may be concerned about how the funds will be used or how well or poorly the person has handled financial matters in the past.

The same concern may be at issue for a child. A trust can be structured with specific parameters for a grandchild regarding the use of funds. If a supplemental needs trust is established, the trustee must understand clearly what they can and cannot do.

What happens if you’ve run out of beneficiaries? For those with small families or who live into their 90s, many family members and friends have passed before them. These seniors may be more vulnerable to scams or new “friends” whose genuine interest is in their assets. In these cases, an estate plan prepared by an experienced estate planning attorney will need to consider this when mapping out the distribution of their estate, however large or small, to follow their wishes.

Reference: The Mercury (Aug. 28, 2023) “PLANNING AHEAD: The problems we have naming contingent beneficiaries”

Don’t Fall for These Medicaid and Estate Myths

No matter how many articles are published and posted, many myths continue to come up in conversations between estate planning attorneys and their clients, says a recent article from The Mercury, “PLANNING AHEAD: Outlining some common estate and Medicaid myths.” These three appear to be the most pervasive.

The “reading of the will.” Maybe we’ve all seen too many movies centered on family feuds over inheritances. However, this simply doesn’t happen today. In the movie version, beneficiaries gather in a wealthy person’s library, the decedent’s beloved cat is sitting in their favorite chair, a roaring fire blazes in the seven-foot-tall fireplace and a shock reverberates around the room as the cat is named the sole heir to a fortune.

None of this is true, although a pet trust could be used to pay for the care of the cat. There are requirements in some states to notify interested parties of the death, and in some instances, notices need to be published in local newspapers. It is not necessary to provide a copy of the will to interested parties. However, a copy of the will can be obtained once it has been filed with the court as part of probate.

The government or nursing home takes the family residence once a resident enters a Medicaid facility. This is a scary myth. However, the reality is more complex. The government and nursing homes don’t keep an inventory of houses. If a nursing home resident who is unmarried qualifies for Medicaid and still owns a home in their own name and the home is still in their name upon death, in many states, the state generally has a claim as a creditor of the estate through the process of recovery to compensate the state for funds used for the person’s care.

If the house was sold during the lifetime of the Medicaid recipient, the house, which has been an exempt asset under the Medicaid rules, has lost its exempt status by being converted to cash, which is not exempt. This becomes a complicated transaction, but the taking idea is an oversimplification.

There are also exceptions, even during lifetime. They may include transferring the Medicaid recipient’s house to a disabled child or transferring the house to a “caretaker child” if the requirements are met. An experienced elder law estate planning attorney is needed to work through these complex issues.

Finally, there’s a myth or misunderstanding about the five-year lookback period. Most people know the rule applying to transfers before requesting Medicaid benefits. However, it’s not as simple as it sounds. It makes more sense to say assets may not be transferred without following the many rules—and there are many.

For peace of mind, it’s best to meet with an experienced elder law attorney to map out your plan for long-term care and create or update an estate plan. Their knowledge of your state’s laws regarding estate planning and Medicaid will be invaluable.

Reference: The Mercury (Aug. 16, 2023) “PLANNING AHEAD: Outlining some common estate and Medicaid myths”

Wrong Form Leads to a Trust Forfeiting a Large Tax Refund

The other message is to be certain that the person serving as a trustee has the knowledge to administer the trust properly or the wisdom to retain an experienced estate planning attorney who will know how to administer a trust. Not every CPA has detailed knowledge about trust taxation, reports the recent article, “Trust’s Incorrect Tax Form Forfeited large Tax Refund Claim: A Lesson For Trustees,” from Forbes.

For income tax purposes, there are several types of trusts. “Grantor trusts” are those whose income is taxed to the person, the settlor, who created the trust. The trust at issue was a grantor trust. However, when the taxpayer who created the trust died, the trust became a non-grantor trust. These are also called “complex” trusts. The income is not reported by the person creating the trust. Complex trusts usually pay their own income taxes. The beneficiaries receiving distributions then report the income for tax purposes included in the income received from the trust. This is referred to as the trust’s Distributable Net Income or “DNI.”

In this case, the trust is the remainder trust after the termination of a Qualified Personal Residence Trust or “QPRT.” This is a trust used to transfer a valuable house from the taxpayer’s estate to descendants or to a trust for them at a discount from the trust’s current value.

The trust had income to report for income tax purposes, which will be done on Form 1041, U.S. Income Tax Return for Estates and Trusts. The trust felt it was entitled to a refund of some of the taxes it paid, so it filed for a refund. Refund claims are supposed to be filed by amending the trust income tax return, but the trust filed Form 843, a form to claim a refund. The wrong form led the Court to determine that the trust failed to take appropriate action, and the refund was lost. The trust’s filing did put the IRS on notice that the claim was the wrong action.

The IRS said the taxpayer’s filing of Form 843 was insufficient as a formal claim because an amended Form 1041 is the proper form. The Court found that the IRS is authorized to demand information in a particular form and to insist that the form is observed. The instructions on Form 853 advise that the form is for a refund of taxes other than income tax, while the instructions on Form 1041 indicate that it must be used to claim a refund.

What happened in this case? Someone managing the trust didn’t know enough about trust taxation. The family may not have had regular meetings with their estate and trust attorney who created the trust. The deceased taxpayer in this case was a judge, and the trustee was the son of the judge. The taxpayer died in 2015, and the house was sold for $1.8 million the next year. The IRS demanded $930,127 in taxes, penalties, and interest from the Trust. The Trust paid that amount assessed on September 24, 2021. The court opinion was handed down on August 7, 2023. The amount of costs in accounting and legal fees must have been enormous.

This is an excellent example of why families need to have regular, ongoing meetings with their estate planning attorneys and tax advisors to be sure everyone is on the same page. Annual reviews and an estate planning attorney focusing on trust taxation could have saved this family money, time, and the stress of an unresolved IRS issue.

Reference: Forbes (Aug. 19, 2023) “Trust’s Incorrect Tax Form Forfeited large Tax Refund Claim: A Lesson For Trustees”

What Kind of Medicare Plan Should You Have?

It’s no wonder people make poor choices about their plans, which can be disastrously expensive since the older we get, the more we need healthcare. A recent article from The Wall Street Journal, “The 5 Biggest Mistakes People Make When Picking a Medicare Plan,” takes a look at the mistakes people make, how to make better choices and which plans are recommended.

Underestimating the costs of traditional Medicare is one of the biggest mistakes. Traditional Medicare, which the government offers, has three parts: A, B, and D. Part A covers care for inpatient hospital services, among other things, and Part B is for physician services. Part D is for prescription services.

The appeal of traditional Medicare is the ability to visit any hospital, doctor, or healthcare provider without a referral or prior authorization of services. If you have doctors you trust, do a lot of domestic travel, need care in different places, or think you might benefit from a treatment a private insurer may deny, this is your best choice.

Many people don’t even consider the options when choosing traditional Medicare. Instead, they allow it to be chosen for them. If you claim Social Security before age 65, which nearly half of Americans do, the Social Security Administration automatically enrolls you in traditional Medicare when you turn 65. It’s the path of least resistance. However, this might not always be the best fit.

The flexibility of the plan comes with certain costs. Part A premiums are often zero for those who have worked for at least ten years. However, Part B carries premiums based on household income. If your household modified adjusted gross income exceeds about $370,000 (or individually more than about $180,000), those premiums can rise to more than $500 a month per individual.

With traditional Medicare, a hospitalization has a $1,600 deductible. A hospital stay longer than 60 days comes with a $400 co-payment daily, and a skilled nursing facility stay of more than 20 days will cost $200 a day. You’ll also be responsible for 20% of the Medicare-approved cost of physician services during the hospital stay.

Another big mistake is underestimating the costs of Medicare Advantage plans. Medicare Advantage is an alternative to traditional Medicare. First, you sign up for Parts A and B, and then you can sign up for a Medicare Advantage plan, also known as Part C. This option is a bundle of A, B, and D, delivered by private insurance companies approved by Medicare. Some plans do not include prescription drug coverage, so you must check carefully.

Medicare Advantage companies are paid a fixed amount of money monthly by the government, so they have an incentive to reduce costs by providing better coverage for medicines that will keep you out of the hospital, However, there are coverage issues. Zero premiums apply to Part A and D, meaning you still pay the Part B premium.  The cost savings on out-of-pocket costs apply only if you stay in network. If you go out of network, your care can quickly become extremely expensive. The in-network and out-of-network distinctions limit where you can get your medical care. If you need access to a certain hospital or healthcare provider and they are not in the network, there may be better options for you.

Choosing traditional Medicare without Medigap, supplemental insurance sold by private companies helps traditional Medicare beneficiaries pay for cost-sharing in Parts A and B. Nearly 10% of those who chose traditional Medicare don’t have supplemental coverage.

Neglecting to get prescription coverage is another big and expensive mistake. You aren’t automatically enrolled in Part D—you must proactively select this plan covering prescription drugs. You have only 63 days after your initial enrollment in Medicare to enroll in Part D. If you miss this window and don’t have any other drug coverage, your Part D premium will be permanently higher.

Finally, many people feel this is too confusing to manage on their own, so they turn to a broker, which makes sense. You should know brokers work on commission, receiving payment from insurance companies. Make sure to ask your broker how they are paid, ask about the plans they are not telling you about and whether or not the discounts you are being offered at sign-up will go away in a year or so.

Reference: The Wall Street Journal (Aug. 15, 2023) “The 5 Biggest Mistakes People Make When Picking a Medicare Plan”

What’s the Best Way to Sell an Inherited Estate to an Heir?

An estate includes a small house appraised at $220,000, which the estate owns, and the family is trying to determine the best way to transfer the home to a 30-year-old adult son. The article, “Parents seek best option to sell inherited estate to adult son” from msn.com, offers a few different options.

One option is to have the son purchase the home from the estate directly. Another is having the parents buy the house and rent it to him, with the end goal of the son buying the home when he is in a better financial position to purchase the house.

The home is currently in a trust, which was done to make it easier for the parents or any other heirs to sell or transfer ownership of the home.

The property can remain in the trust, but the estate or the in-laws do not own it. Instead, it is owned by the beneficiaries of the trust.

The date the surviving in-law spouse died matters. Let’s say the mother-in-law was the last to die, and she died in 2022. If the property was worth $100,000 at the time of her death and its value is now $220,000, the sale to the son would trigger a tax on the $120,000 profit.

Ordinarily, suppose the property is sold within a year of the death of the property owner. In that case, the value of the property at the time of death is assumed to be identical to the amount of the sale, and there are no federal taxes to pay on the sale, as there is no profit.

What about having the son buy the property? If he can qualify for a mortgage and buy the home for the appraised amount of $220,000, the trust will likely be able to avoid any taxes. This is especially true if the date of the mother-in-law’s death was within the last year or if there is documentation showing the home had a $220,000 value at the time of her death.

What if the son can’t qualify for a mortgage, and the parents decide to rent the property to him? The property would become an investment. The wife and brother will enjoy the tax benefits of depreciation, be able to deduct real estate taxes, deduct other expenses and take the rent as income. If and when the son does buy the home, the wife and her brother will have to pay taxes on the profit from the sale of the home—assuming the house continues to appreciate in value—and will have to repay the depreciation benefit received when they owned the home as an investment property.

One thing to be explored is whether the parents or the deceased in-laws have any income or estate tax issues. Under current federal estate tax laws, as long as the estate is below the $12,900,000 exemption, there would be no federal estate taxes to pay. But some states have a state estate tax or other fees on assets left in an estate. An experienced estate planning attorney will be able to help with this.

Regardless of how the parents decide to manage this transaction, having an experienced attorney to draft the legal paperwork will be important. Everything must be carefully documented so all beneficiaries can be confident that the property transfer was done correctly.

Reference: msn.com (Aug. 10, 2023) “Parents seek best option to sell inherited estate to adult son”

Minimize Family Feuds about Your Inheritance

Your last will and testament is the document used to spell out exactly how you want your assets distributed after your death. Keeping it up to date and aligned with your state’s laws can prevent estate battles among family members. A recent article from The Motley Fool, “Where There’s A Will, There’s a Way. How You Can Avoid Conflict When Divvying Up Your Estate,” provides the details.

The article advises hiring an experienced estate planning attorney to create an up-to-date and legally valid will. You’ll want someone familiar with your state's legal nuances and who knows how the local probate courts work.

Your will is also used to name the executor of your estate, who will administer your wishes. If you have minor children, the will is used to designate a guardian for your children.

Communication with your loved ones about your intentions will give them time to process your wishes and could reduce the risk of any will contests. Share your plans with immediate family members and key beneficiaries. The same goes for any changes to the estate plan during your lifetime.

Transparency includes ensuring everyone knows who has possession of the signed, legal, and final version of this vital estate planning document. Your executor or estate planning attorney may possess the will, but others should know where it is being kept.

Typically, a will must be filed with the county probate court within ten to thirty days of death.

Your estate plan also includes beneficiary designations on any bank accounts, investment accounts, and insurance policies. They could be mentioned in your will, but the beneficiary designation directs who receives these assets.

Assets with beneficiary designations don’t go through probate; instead, they go directly to the beneficiary. Review them annually and update them after any significant life events like birth, marriage, divorce, etc.

Estate planning is a highly personal and ongoing process. It is essential to seek guidance from experienced estate planning attorneys to ensure your estate plan reflects your wishes and confirms your state’s law concerning inheritance. Leave a legacy of love, not conflict.

Reference: The Motley Fool (Aug. 6, 2023) “Where There’s A Will, There’s a Way. How You Can Avoid Conflict When Divvying Up Your Estate”