PBM
The Importance of a Power of Attorney
admin • Oct 18, 2013

When people consider estate planning, they often think that preparing a will, or perhaps a trust will cover their needs. Certainly, these documents are very important to guarantee that property passes according to ones wishes upon death.  However, when one considers estate planning, it is important to think of managing ones affairs not only after death, but also during ones life.

A “power of attorney” is a grant of legal rights and powers by one person to another. The person granting the powers is know as the “principal,” and the person receiving the power is known as the “agent” or “attorney-in-fact.” The agent essentially stands in the shoes of the principal and acts for him/her on financial matters. If the documents so states, the agent can do most anything the principal can do in financial transactions — withdraw funds from bank accounts, trade stock, pay bills, and cash checks.  It is important to choose this person carefully because he or she can control your assets.

A power of attorney can be very handy in the event that one is unable to take care of his/her own financial affairs, for reasons such as extended travel or illness. This type of document becomes even more important, however, in the event of mental incapacity. A standard power of attorney will terminate upon the principal’s mental disability. However, a durable power of attorney will continue beyond mental incapacity or disability to provide the principal with a safety net of financial management.  Massachusetts Uniform Durable Power of Attorney Act was enacted to allow a standard power of attorney document to stay in effect in the event the principal became mentally incapacitated; hence the term “durable power of attorney.”  When one does not grant a “durable” power of attorney, family members of a person stricken with a mentally incapacitating illness most often must resort to probate court proceedings to obtain the legal authority to handle their loved one’s financial affairs. The probate process can be time-consuming and an expensive procedure which could be avoided if there was a valid durable power of attorney in place.

Third parties that may become involved in transactions with the named agent by presentation of the power of attorney should also be considered. This third party could be a real estate purchaser or seller, a retirement plan administrator, or the principal’s business associates.  More frequently the third party is a financial institution, such as a bank, broker, or IRA custodian, that is presented with a power of attorney document by an attorney-in-fact along with a request that such power be recognized.  When preparing the document the principal should consider particular types of transactions or accounts, which financial institutions are likely to be relying on the document, and the nature of the accounts owned by the principal, to aid document acceptance. Verifying the authority of the attorney-in-fact to act for the account owner, therefore, is the first priority of every financial institution, and each principal and his/her agent should set this expectation.  Although, the typical power of attorney may grant the agent very broad powers, it does not give the agent full authority to take the principal’s money and run away with it.  The agent must use all of the finances for the benefit of the principal.  In other words, it is a management tool. The principal can give his/her appointed attorney-in-fact broad or limited financial management.  For example, you may want to limit the duration of the instrument to a period of time or limit what powers you give to the agent.   Before you grant and sign a power of attorney, be sure you understand exactly what you want your attorney-in-fact to do in your place.

Your changing needs may necessitate the revision of an existing power of attorney, ensuring it accomplishes exactly what you need done and nothing else.  Therefore, it is a good habit to periodically review ALL of your legal instruments (power of attorney, will, etc.)  A little time spent reviewing and revising may save you a great deal of trouble later.

It is important to note that a power of attorney does NOT take away the rights of the principal.  It is similar to handing the keys to ones car to someone else. Just as the keys can be taken back, so can a power of attorney be revoked.  Both a standard and a durable power of attorney will terminate upon the principal’s death.

The post The Importance of a Power of Attorney appeared first on .

Using a Credit Card When You Have a Special Needs Trust

25 May, 2023
A special needs trust (SNT) allows you to meet your needs while receiving government benefits, such as Medicaid/MassHealth and Supplemental Security Income (SSI). When you have a special needs trust, you can use it to pay for goods and services government benefits do not cover, such as therapy, education,and housing. Since receiving income directly from your trust would jeopardize your eligibility for benefits, your trustee cannot give you cash from your SNT. When you use a credit card for permitted transactions, and your trustee pays off the balance with funds from your trust, these payments to a credit card company are not considered income. An SSI or Medicaid/MassHealth recipient who is capable of managing their own affairs can therefore use a credit card to make small purchases, and the trustee of the special needs trust need not micromanage every transaction. In the past, beneficiaries of SNTs sent their bills to their trustees for payment. Today, an individual with an SNT who qualifies for a personal credit card may find that using a credit card is more convenient. Credit cards have several benefits. Using a credit card to manage payments from your special needs trust allows you to maintain independence, gain access to some of the advantages of a credit card, and easily keep records while preserving your eligibility for Medicaid/MassHealth and SSI. Although credit cards can help people manage their special needs trusts, there are also several important restrictions and considerations to keep in mind. Consult with a special needs planner to ensure all transactions are acceptable under the trust's rules and comply with government regulations. The Benefits of Using Credit Cards When You Have a Special Needs Trust If you have a special needs trust, using a credit card has many benefits, including: Independence : Allowing you to maintain your independence. You can use your card to make qualifying purchases yourself. Your trustee does not have to make the transactions for you. Access to the Typical Advantages of a Credit Card : Using it responsibly can help you establish or build credit history, which may be important for your future financial needs. Record-Keeping : Credit cards provide easy record-keeping and a convenient way to monitor transactions from your special needs trust, which can also help special needs trustees fulfill their duty to maintain records. When you use your card, your trustee can observe your purchases and ensure that all expenses are allowable under the trust’s rules. Your statements can help your trustee keep track of funds leaving the trust. Benefits Eligibility : While adhering to Medicaid/MassHealth and SSI’s income and asset limits, you can access funds from your SNT. Credit cards can help prevent your trustee from accidentally providing you with cash payments that could affect your eligibility for government benefits. Considerations When Using a Credit Card for Your Special Needs Trust While you can use a credit card to access funds from your special needs trust for certain transactions , restrictions apply. If your trustee sees a charge on your card that could affect your benefits eligibility , they can flag it for review. You cannot use your credit card to pay for food and shelter, which SSI would cover. When administering your funds, your trustee must ensure that any expenditures are for your sole benefit if you have a first-party special needs trust. While using a credit card is appropriate, you should not use a debit card. Debit cards are considered cash income. Best Practices When using a credit card for a special needs trust fund, remember several best practices. Choose a card with low fees and interest rates. Set a clear budget and monitor transactions regularly. Keep thorough records and receipts of expenses. Consult with your special needs planning attorney. A special needs planning attorney can help you navigate the rules that apply to your trust and understand how to use a credit card to preserve your Medicaid/MassHealth and SSI eligibility. 

How an ILIT can help offset estate taxes

12 May, 2023
With the Federal estate tax exemption possibly about to be lowered, it may be time to think about steps you can take to keep your estate from being taxed. An irrevocable life insurance trust allows you to pass on money to your heirs while avoiding both the federal estate tax, as well as any applicable state estate tax which is currently $1 million in the Commonwealth of Massachusetts. Senate Democrats have proposed lowering the current estate tax exemption from $11.7 million for individuals and $23.4 million for couples to $3.5 million for individuals and $7 million for couples. While it is unclear if this proposal will pass, it is likely that some change to the estate tax is coming. Even if Congress does not take any action, the current rate will sunset in 2026 and essentially be cut in half, to about $6 million per individual. In the Commonwealth of Massachusetts, the current estate tax exemption is $1 million for individuals and is taxed at dollar $1.00. A proposal to raise it to $3 Million and the tax to start at $3 Million (not at $1.00) has been submitted in the legislature but has not yet been voted on or enacted. One way to make up for any estate tax your estate may have to pay is by setting up an irrevocable life insurance trust [ILIT]and funding it with a policy that has a death benefit that would pay your heirs some or all of the amount your estate will be taxed. If you purchased such a life insurance policy directly, it could end up being taxed as part of your estate. But if a trust owned the policy, it could pass outside your estate. While a life insurance trust can be highly beneficial, it is also complicated to set up and maintain properly. The following are some of the requirements: Trustee . If you are setting up the trust, you cannot also serve as a trustee. If you are the trustee, you have control of the trust, which could lead to the trust being included in your estate. You will need to name another trusted person or financial institution to act as trustee. Policy ownership . The trust must own the life insurance policy. If you transfer an existing policy to the trust and die within three years, the policy will still be considered a part of your estate. To avoid this risk, the trust can purchase a policy directly rather than receive an existing policy. Premiums . You need to transfer funds to the trust to pay the policy premiums, which creates an issue with gift taxes. A transfer to a trust is usually not subject to the $15,000 yearly gift tax exclusion. For a gift to qualify for the exclusion, the recipient must have a "present interest" in the money. Because a promise to give someone money later does not count as a present interest, most gifts to trusts aren't excluded from the gift tax. To avoid this, you can use something called a “Crummey” power which gives beneficiaries the right to withdraw the funds transferred to the trust for up to 30 days. As part of the process, the trustee needs to send them a letter, known as a Crummey letter, letting them know about the trust funding and their right to withdraw the funds. After the 30 days have passed, the trustee can use the funds to pay the annual insurance premium. You run the risk of the beneficiaries withdrawing the funds, but if they know that by allowing the money to stay in the trust they will receive more money later, it shouldn’t be a problem. Beneficiaries . The beneficiary of the life insurance policy is usually the trust. Once the funds are deposited in the trust, the trustee can distribute the assets to the beneficiaries in the way specified by the trust. For example, if your beneficiaries are minors, you can wait to have the trustee distribute the assets. Keeping the assets in the trust will also protect them from your beneficiaries’ creditors. The downside of an irrevocable life insurance trust is that you do not have the ability to change it once it is set up, although the policy would effectively be canceled if you stopped paying the premiums. If you are considering this type of trust, discuss it with your attorney.
Share by: