Keys to Your Kingdom

Choosing who will act for you financially under a power of attorney if you become incompetent is difficult. This person, known as the attorney-in-fact, has the keys to your kingdom. For example, they can pay your bills, make investment decisions, sign your tax returns, settle claims, enter contracts and hire help. They cannot vote for you, get married or divorced for you or write your will because the law considers these actions too personal to delegate.

Certain acts can only be performed if the power expressly allows them. These include the power to make gifts to others or to charities. The power should indicate to whom gifts may be made: your spouse, your children, the spouses of your children (not all choose this option), and grandchildren are some possible candidates. If you regularly give to charities, the document must indicate this can continue. Many powers limit the amount of the gift for a person to the annual gifting exclusion, which currently is $14,000 per recipient. Amounts above this can be allowed but will trigger the need for a gift tax return though tax is not likely to be owed. The amount above $14,000 will be applied against your lifetime/at death combined exemption from estate and gift taxes of $5,490,000. A person of limited means should consider including the power to make gifts in anticipation of applying for Medicaid.

The power of attorney can be valid upon signing or usable only if you are incompetent. Institutions are increasingly wary of powers that are usable only upon incompetency. The bank does not want to be in a position to determine whether the standard for incompetency has been met. Your best option is a power that is valid upon signing but the original should be guarded carefully. Without the original, the attorney-in-fact will be unable to do much. Many people leave the original with the attorney, who then acts as an escrow agent, only releasing it to the attorney-in-fact if it is clear to the attorney that it should be released. Generally the release is made if the client authorizes it or the attorney receives notice from a doctor that the client cannot act for himself.

The attorney-in-fact must be at least 18 years old and competent, and your best choice is someone local, though they can live elsewhere. The logistics are more difficult but can be overcome. Daily money managers serve the elderly by assisting with day-to-day finances. They can work with the attorney-in-fact by sorting the person”s mail, maintaining a Quickbooks register and preparing checks for the signature of the attorney-in-fact. You also can name coattorneys-in-fact though each is liable for the other”s actions. You can give them the power to act independently, though if you do this it seems more sensible to name one at a time. Many people worry about the emotional effect on children of choosing one child over another. The best approach is to discuss the issue with them. You may find that one child is relieved not to serve. Transparency about these issues results in the best situation for all involved.

Please think carefully before adding your child to your bank account as a joint owner so that they can write checks. Countless people do this at the bank’s suggestion. The arrangement creates estate issues. At your death, that child will become the owner of all of the money in the account. The will or trust you have will not control how that money passes. If you have more than one child, the others may be hurt or surprised to learn that all of the money in that account has passed to their sibling. You may expect the owner-child to “do the right thing” and pass out the money to their siblings. That places a burden on the owner-child. If the account is large, the money they may give to their siblings could trigger the need for a gift tax return to be filed by the child. Finally, the account could become subject to creditors of the child during your lifetime or become part of an equitable distribution if the child goes through a divorce.

Without a power in place, upon your incompetency, a judge will appoint a guardian of your finances. Annual court accountings are required, attorneys fees will be paid. You should make this choice rather than a court and avoid the unnecessary costs. Act while you can.

Originally published in Southern Neighbor, December 2013

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