A few seats left for special edition of our workshop

Sykes Elder Law Resource & Education Center

Sykes Elder Law Resource & Education Center

For January we are presenting a special “New Year’s resolution” edition of our popular, free estate planning workshop.

The first one filled up quickly, and there are only a few seats left for the remaining workshop on Thursday, January 29, from 5:30 to 7:30 in the evening.

In addition to our usual information-packed instruction on how to achieve great estate planning and asset protection results, we will offer insight into why we tend to procrastinate estate planning and other important tasks, how to break inertia and get tasks done, and how you can use a simple device like a New Year’s resolution to break any type of productivity logjam.

We will offer extra assistance in helping attendees wrestle with difficult issues that could be holding them back, and will give an extra push toward getting estate planning done (and done well).

Before Spring, attendees can have completed his planning documents resting on a shelf at home and enjoy the satisfaction of knowing they have completed a vital life task that will benefit them and their family in the years to come.

So call soon to reserve one of the remaining spots. If you have been putting off your estate planning, you will not want to miss the session.


How will Pennsylvania’s new POA statute affect you?

sign-docAs we reported previously, Pennsylvania has adopted changes to its power of attorney law. Some changes have already gone into effect and others will take effect January 1, 2015.

Here are some thoughts on how the new law may affect you, depending on your situation.

You have a current POA
If the POA you have now meets your needs, there is no need to change it. The new forms, and the new rules about what powers may be authorized under a POA, apply only to POAs created on or after January 1, 2015. Existing POAs are grandfathered in, with their current powers intact.

You serve as the agent under a POA
If you are already someone’s agent under a POA, your duties have been changed and clarified somewhat. In most cases the new rules will make no difference to what you are doing.

However, if you have accounts that are not entirely separate from the accounts of the principal, you may need to change them. Under the new rules, your funds must be kept separate unless they “were not kept separate as of the date of the execution” of the POA, or “the principal commingles the funds after the date of the execution of the power of attorney and the agent is the principal’s spouse.”

You should already be keeping a record of all receipts, disbursements and transactions. Under the new rules, you are required by law to do so unless the POA provides otherwise.

You are presented with a POA
If you work at a bank, or other entity that is asked to take action by an agent under POA, you will need to become familiar with the new rules on honoring a POA. Within 7 business days, you must usually accept the POA or make certain requests for clarification as allowed by the statute. However, there are some circumstances under which you are not required to accept a POA (such as when you know for a fact that it has been terminated). You may not require an additional or different form of POA.

Entities that are regularly presented with POAs are well advised to train their employees on the new guidelines.

New PA power of attorney statute brings changes now, and in 2015

POA-imagesPennsylvania has adopted the most sweeping changes to its power of attorney statute since 1999. The new law, signed into law in July, made some changes that took effect immediately and others that will take effect January 1, 2015.

Changes effective now

For years, Pennsylvania law has encouraged the use and acceptance of powers of attorney. It does so by requiring any person who “is given instructions by an agent in accordance with the terms of a power of attorney” to follow those instructions or be subject to “civil liability for any damages resulting from noncompliance.” On the other hand, the law provides immunity to any person who acts in good faith reliance on such instructions.

Those concepts still apply, but the new law expands on each of them greatly and prescribes procedures that can be followed to verify the validity of a power of attorney. For example, a person offered a power of attorney must either accept it, or (within seven business days) request certain information such as an English translation, or an opinion of counsel as to “whether the agent is acting within the scope of the authority granted by the power of attorney.” Once the requested information has been presented, the person requesting it must then accept the power of attorney within five business days unless the information given “provides a substantial basis for making a further request.”

These procedures are new to Pennsylvania law, and it will no doubt take some time for banks, and other institutions who regularly receive requests from agents acting under powers of attorney, to learn the new rules. One new rule of particular significance is that a “person may not require an additional or different form of power of attorney for authority granted in the power of attorney presented.” Our clients have had legitimate requests for action denied because a company said “you have to use our power of attorney form.” That always struck us as contrary to the Pennsylvania statute. Now it clearly is.

Changes effective January 1

The most noticeable change effective on the first day of 2015 is the change in the power of attorney form itself.

For the past 15 years, the statute has required a “Notice” form that must precede every power of attorney, informing the person signing it (called the “principal”) that the POA gives “the person you designate (your “agent”) broad powers to handle your property, which may include powers to sell or otherwise dispose of any real or personal property without advance notice to you or approval by you.” The form also gives a brief explanation of the agent’s powers and duties. The principal must sign this form, acknowledging that he or she has read it (or had it explained) and understands it.

The new law still requires that form, but it must now contain additional language explaining more about the agent’s duties and informing signers that “the law permits you, if you choose, to grant broad authority to an agent under power of attorney, including the ability to give away all of your property while you are alive or to substantially change how your property is distributed at death.”

Similarly, the law has also required the POA agent to sign an “Agent Acknowledgement” form stating that the agent has read the POA and agrees to certain conduct when acting under it. The new law changes this form as well. It now reads that the agent agrees to “act in accordance with the principal’s reasonable expectations to the extent actually known by me and, otherwise, in the principal’s best interest, act in good faith and act only within the scope of authority granted to me by the principal in the power or attorney.”

These changes in the POA form reflect the new statute’s changes in the rules POA agents must follow and the rules under which POA signers can give authority to the agent. The new law identifies a number of specific powers that may only be given to a POA agent if they are given “expressly.” These powers include the power to:

• Give away money or property without receiving fair market value in return. • Create, amend, revoke, or terminate most kinds of trusts.

• Create or change a beneficiary designation.

• Create or change rights of survivorship.

• Disclaim property, including a power of appointment.

• Waive the principal’s right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan.

• Delegate authority granted under the power of attorney.

• Exercise fiduciary powers that the principal has authority to delegate.

These are powers that probably have the greatest potential for abuse in the hands of an unscrupulous agent. The new law also adds significant new rules about the duties POA agents must follow. No matter what the POA says, an agent must now always:

• Act in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, in the principal’s best interests.

• Act in good faith.

• Act only within the scope of authority granted in the power of attorney.

Under the new rules, an agent has a list of duties that must be followed unless the POA provides differently. In other words, these duties may be waived in the POA. These include the duty to:

• Keep the agent’s funds separate from the principal’s funds (unless they were not kept separate before, or the principal mingles the funds later).

• Keep a record of all receipts, disbursements and transactions made on behalf of the principal.

• Attempt to preserve the principal’s estate plan, to the extent actually known by the agent, if preserving the plan is consistent with the principal’s best interest based on all relevant factors.

• Act with the care, competence and diligence ordinarily exercised by agents in similar circumstances.

An agent must disclose “receipts, disbursements or transactions conducted on behalf of the principal” when ordered by a court, or upon request by the principal; a government agency having authority to protect the welfare of the principal; or by a guardian, conservator, or “another fiduciary acting for the principal.” Upon death of the principal, the agent must disclose such information to the executor “or successor in interest of the principal’s estate.” If the agent follows the rules of the new law, an agent will not be liable if the principal’s property declines or if the principal’s estate plan is not preserved.

The essence of rules starting in 2015 is that a POA may give broad powers to give gifts of money and property, and make other substantial changes to the principal’s estate, but only if the POA gives those powers explicitly. Otherwise, the agent must refrain from making such changes and in any case must always act in accordance with the principal’s reasonable expectations and best interest.

The new statute contains a rule that will be enormously useful in the digital age: “a photocopy or electronically transmitted copy of an originally executed power of attorney has the same effect as the original” (except for the purpose of recording the power of attorney with a court or recorder of deeds).

Why use an IRA trust?

Andrew Sykes presents "12 Cool IRA Protection Strategies" to Pittsburgh area financial advisors on October 17, 2013

Andrew Sykes presents “12 Cool IRA Protection Strategies” to Pittsburgh area financial advisors on October 17, 2013

Qualified retirement plans, like IRAs, can have superior advantages when left to a loved one. Chief among those advantages is the ability to “stretch” distributions, which can double or triple the lifetime value to the beneficiaries.

But your plan to leave retirement assets to your beneficiaries may get tripped up in various ways. Here are a few:

Rapid depletion. Rather than carefully stretching distributions over allowable life expectancy, the beneficiary may take down all the money much sooner (perhaps right away). Rapid depletion will foreclose long-term tax deferral, and could very well mean the beneficiary pays more in taxes on the amount distributed. Early depletion can also diminish the chances that proceeds from the inherited IRA will benefit grandchildren or other heirs.

Divorce. Depending on state law, some portion of the distributions could be lost to former in-laws if a beneficiary divorces. (The “lifelong probability of a marriage ending in divorce is 40%-50%,” according to statistics cited in Wikipedia.)

Creditors. Creditors may be able to reach inherited IRAs. A ruling earlier this year in the Seventh Circuit Court of Appeals for the Seventh Circuit held that inherited IRAs do not fit the Bankruptcy Code’s exemption for “retirement funds.” Other appeals courts have held the opposite. But unless the Supreme Court overrules the Seventh Circuit’s ruling, creditor protection for inherited IRAs will depend on where your beneficiaries happen to live.

A well drafted IRA trust can mitigate the effects of these pitfalls by controlling how and when distributions are taken from the trust, and providing an additional layer of protection from the effects of divorce, creditors, and other unexpected occurrences.

Best planning tips for IRAs, 401(k)s, and other retirement plans

Here are three tips I picked up at a talk by Natalie B. Choate, a Boston lawyer and author who is nationally renowned for her expertise in retirement benefits. She addressed a packed house of financial professionals at the Financial “Four”um in Pittsburgh a few months ago.

Many of her tips were quite sophisticated or applied in rare circumstances only, so I’m including only those that apply to a wide array of retirees. These tips are aimed at qualified retirement plans such as individual retirement accounts, 401(k)s, 403(b)s, and similar plans, which have rules different from “defined benefits” pension plans.

“If you do these three things,” Ms. Choate said, “you will be 95% of the way toward happy IRA ownership.”

Take your RMDs

Starting at age 70½, most plan owners need to start taking a required minimum distribution (RMD) each year. The RMD is an amount taken from a plan based on your life expectancy and the total amount you hold in all your plans. You need to request a distribution, which is then paid to you out of your plan and is taxable.

You can defer your first year distribution until April 15 of the next year. As Ms. Choate pointed out, deferral may make sense unless it puts you in a higher tax bracket.

The penalty for not taking your distribution on time is severe: an additional tax equal to 50% of the amount you should have taken.

So you really need to take your proper RMD each year.

Fill out your beneficiary form

One of the most valuable wealth-preserving features of IRAs and similar plans is the ability of your beneficiary to stretch distributions over many years (or in the case of a surviving spouse, the ability to roll it over and make it their own).

But your beneficiaries will have these abilities only if you do one thing: put your beneficiaries’ names on your beneficiary form.

Sounds simple, and it is, but it mustn’t be neglected. Without named beneficiaries, the retirement plan administrator may require your funds to go to your estate. In that case, all funds must be paid out in five years and your beneficiaries’ wealth-preserving advantages will be lost.

Be careful with rollovers and transfers

IRS rules allow you to transfer or roll over your funds from one plan to another, such as rolling over your 401(k) funds into your own IRA when you retire.

However, you must take care to follow some strict rules.

For example, if you retire and ask for a lump sum distribution of your 401(k) plan, you have 60 days to roll it over into an IRA. If you accomplish that within the 60 days, you keep all the many tax and savings advantages that come with these retirement plans. If you miss the deadline, those advantages are lost and you will have to pay tax on your whole lump sum distribution. (A better alternative in this example is to roll over your 401(k) to an IRA with a direct “trustee-to-trustee” transfer, meaning the funds go from one bank to another without being paid to you in the interim.)

Bad things happen with rollovers and transfer, Ms. Choate reminds us, so make sure you follow the rules to the letter.

Ms. Choate’s book, Life and Death Planning for Retirement Benefits, is widely considered the “Bible” of retirement plan law. It is available for order online at http://www.ataxplan.com/.