Does Power of Attorney Perform the Same Way in Every State?

A power of attorney is an estate planning legal document signed by a person, referred to as the “principal,” who grants all or part of their decision-making power to another person, who is known as the “agent.” Power of attorney laws vary by state, making it crucial to work with an estate planning attorney who is experienced in the law of the principal’s state of residence. The recent article from limaohio.com, titled “When ‘anything and everything’ does not mean anything and everything,” explains what this means for agents attempting to act on behalf of principals.

When a global or comprehensive power of attorney grants an agent the ability to do everything and anything, it may seem to the layperson they may do whatever they need to do. However, each state has laws defining an agent’s role and responsibilities.

As a matter of state law, a power of attorney does not include everything.

In some states, unless certain powers are explicitly stated, the POA does not include the right to do the following:

  • Create, amend, revoke, or terminate a trust
  • Make a gift
  • Change a beneficiary designation on an account
  • Change a beneficiary designation on a life insurance policy.

If you want your agent to be able to do any of these things, consult with an experienced estate planning attorney, who will know what your state’s law allows.

You’ll also want to keep in mind any gifting empowered by the POA. If you want your agent to gift your property to other people or to the agent, the power to gift is limited to $16,000 of value to any person in one year, unless the POA explicitly states the power to gift may exceed $16,000. An estate planning attorney will know what your state’s limits are and the tax implications of any gifts in excess of $16,000.

These types of limitations are intended to give some common-sense parameters to the POA.

Most people don’t know this, but the power of attorney can be as narrow or as broad as the principal wishes. You may want your brother-in-law to manage the sale of your home but aren’t sure he’ll do a good job with your fine art collection. Your estate planning attorney can create a power of attorney excluding him from taking any role with the art collection and empowering him to handle everything else.

Reference: limaohio.com (April 30, 2022) “When ‘anything and everything’ does not mean anything and everything”

Should I Have a Roth IRA?

Roth IRAs are powerful retirement savings tools. Account owners are allowed to take tax-free distributions in retirement and can avoid paying taxes on investment growth. There’s little downside to a Roth IRA, according to a recent article “10 Reasons to Save for Retirement in a Roth IRA” from U.S. News & World Report.

Taxes are paid in advance on a Roth IRA. Therefore, if you are in a low tax bracket now and may be in a higher bracket later, or if tax rates increase, you’ve already paid those taxes. Another plus: all your Roth IRA funds are available to you in retirement, unlike a traditional IRA when you have to pay income tax on every withdrawal.

Roth IRA distributions taken after age 59 ½ from accounts at least five years old are tax free. Every withdrawal taken from a traditional IRA is treated like income and, like income, is subject to taxes.

When comparing the two, compare your current tax rate to what you expect your tax rate to be once you’ve retired. You can also save in both types of accounts in the same year, if you’re not sure about future tax rates.

Roth IRA accounts also let you keep investment gains, because you don’t pay income tax on investment gains or earned interest.

Roth IRAs have greater flexibility. Traditional IRA account owners are required to take Required Minimum Distributions (RMDs) from an IRA every year after age 72. If you forget to take a distribution, there’s a 50% tax penalty. You also have to pay taxes on the withdrawal. Roth IRAs have no withdrawal requirements during the lifetime of the original owner. Take what you need, when you need, if you need.

Roth IRAs are also more flexible before retirement. If you’re under age 59 ½ and take an early withdrawal, it’ll cost you a 10% early withdrawal penalty plus income tax. Roth early withdrawals also trigger a 10% penalty and income tax, but only on the portion of the withdrawal from investment earnings.

If your goal is to leave IRA money for heirs, Roth IRAs also have advantages. A traditional IRA account requires beneficiaries to pay taxes on any money left to them in a traditional 401(k) or IRA. However, those who inherit a Roth IRA can take tax-free withdrawals. Heirs have to take withdrawals. However, the distributions are less likely to create expensive tax situations.

Retirement savers can contribute up to $6,000 in a Roth IRA in 2022. Age 50 and up? You can make an additional $1,000 catch up contribution for a total Roth IRA contribution of $7,000.

If this sounds attractive but you’ve been using a traditional IRA, a Roth conversion is your next step. However, you will have to pay the income taxes on the amount converted. Try to make the conversion in a year when you’re in a lower tax bracket. You could also convert a small amount every year to maintain control over taxes.

Reference: U.S. News & World Report (April 11, 2022) “10 Reasons to Save for Retirement in a Roth IRA”

What Needs to Be Reviewed in Estate Plan?

When it comes to drafting a will and other estate planning documents, note that you probably should revisit them many times before they actually are needed, advises, CNBC’s recent article entitled “Be sure to keep your will or estate plan updated. Here are 3 key reasons why.”

You should give these end-of-life legal papers a review at least every few years, unless there are reasons to do it more often. Things like marriage, divorce, birth or adoption of a child should necessitate a review. Coming into a lot of money (i.e., inheritance, lottery win, etc.) or moving to another state where estate laws differ from the one where your will was drawn up, mean that you should review your plan with an experienced estate planning attorney.

About 46% of U.S. adults have a will, according to a 2021 Gallup poll. If you are among those who have a will or full-blown estate plan, here are some things to review and why.

Even though your will is all about you, there are other people you need to rely on to carry out your wishes. This makes it important to review who you have named to be executor. He or she must liquidate accounts, ensure your assets go to the proper beneficiaries, pay any debts not discharged (i.e., taxes owed), and sell your home. You should also be sure that the guardian you have named to care for your children is still the person you would want in that position.

As part of estate planning, you may create other documents related to end-of-life issues, such as powers of attorney. The person who is given this responsibility for decisions related to your health care is frequently different from whom you would name to handle your financial affairs. You should look at both of those choices.

Even if you have experienced no major life events, those you previously chose to handle certain duties may no longer be your best option.

Remember that some assets pass outside of the will, including retirement accounts like a 401(k) plan, IRAs and life insurance policies. This means the person named as a beneficiary on those accounts will generally receive the money no matter what your will states. Bank accounts can have beneficiaries listed on a pay-on-death form, which your bank can supply.

If a beneficiary is not listed on those non-will items or the named person has already passed away (and there is no contingent beneficiary listed), the assets automatically go into probate.

Reference: CNBC (Jan. 27, 2022) “Be sure to keep your will or estate plan updated. Here are 3 key reasons why”

How Do I Avoid Probate?

Probate can tie up the estate for months and be an added expense. Some states have a streamlined process for less valuable estates, but probate still has delays, extra expense and work for the estate administrator. A probated estate is also a public record anyone can review.

Forbes’ recent article entitled “7 Ways To Avoid Probate Without A Living Trust” says that avoiding probate often is a big estate planning goal. You can structure the estate so that all or most of it passes to your loved ones without this process.

A living trust is the most well-known way to avoid probate. However, retirement accounts, such as IRAs and 401(k)s, avoid probate. The beneficiary designation on file with the account administrator or trustee determines who inherits them. Likewise, life insurance benefits and annuities are distributed to the beneficiaries named in the contract.

Joint accounts and joint title are ways to avoid probate. Married couples can own real estate or financial accounts through joint tenancy with right of survivorship. The surviving spouse automatically takes full title after the other spouse passes away. Non-spouses also can establish joint title, like when a senior creates a joint account with an adult child at a financial institution. The child will automatically inherit the account when the parent passes away without probate. If the parent cannot manage his or her affairs at some point, the child can manage the finances without the need for a power of attorney.

Note that all joint owners have equal rights to the property. A joint owner can take withdrawals without the consent of the other. Once joint title is established you cannot sell, give or dispose of the property without the consent of the other joint owner.

A transfer on death provision (TOD) is another vehicle to avoid probate. You might come across the traditional term Totten trust, which is another name for a TOD or POD account (but there is no trust involved). After the original owner passes away, the TOD account is transferred to the beneficiary or changed to his or her name, once the financial institution gets the death certificate.

You can name multiple beneficiaries and specify the percentage of the account each will inherit. However, beneficiaries under a TOD have no rights in or access to the account while the owner is alive.

Reference: Forbes (March 28, 2022) “7 Ways To Avoid Probate Without A Living Trust”

Can You Keep Your Children from Inheriting Your Money?

What if you want to exclude your children and give your assets to a charity or a college after you pass away? You also don’t want your children to be able to contest your will.

Nj.com’s article entitled “My kids are brats. I don’t want them to inherit. What’s next?” explains that a person with this intention has a number of options for their estate.

First, you should understand that, unless there is a pre-existing contractual agreement or other obligation to do so, a person typically isn’t required to leave anyone other than their spouse anything in their estate.

A properly drafted will by an experienced estate planning attorney allows a person to name the beneficiaries of their estate. This can include charities. It also includes the amount or specific items and in what way each beneficiary will inherit.

You really can’t do much to prevent a child from challenging a will. However, your estate planning attorney can take steps to mitigate the risk that a challenge may be successful. This can include ensuring the testator — the person who establishes a will — has the requisite capacity to sign a will (“being of sound mind”) and that they’re signing it free of any undue influence or duress.

An experienced estate planning attorney will usually meet with a client several times to discuss the client’s assets and intention of disinheriting a child. The attorney will take notes that may be offered as evidence in the event of a will contest and even conduct the meeting in the presence of another attorney or staff member of the firm who could act as another witness.

A will should include specific language that it is the testator’s intent to disinherit a person, and that this individual should be treated as predeceasing the testator for purposes of the will. This helps ensure that the disinherited individual doesn’t somehow benefit.

Note that not all assets pass through the estate and pursuant to the terms of a will. Assets like retirement accounts, life insurance, annuities, and other financial accounts pass by beneficiary designation.

Real estate usually passes by operation of law, such by joint tenancy with right of survivorship.

Reference: nj.com (Dec. 22, 2021) “My kids are brats. I don’t want them to inherit. What’s next?”

Will Moving to a New State Impact My Estate Planning?

Since the coronavirus pandemic hit the U.S., baby boomers have been speeding up their retirement plans. Many Americans have also been moving to new states. For retirees, the non-financial considerations often revolve around weather, proximity to grandchildren and access to quality healthcare and other services.

Forbes’ recent article entitled “Thinking of Retiring and Moving? Consider the Financial Implications First” provides some considerations for retirees who may set off on a move.

  1. Income tax rates. Before moving to a new state, you should know how much income you’re likely to be generating in retirement. It’s equally essential to understand what type of income you’re going to generate. Your income as well as the type of income you receive could significantly influence your economic health as a retiree, after you make your move. Before moving to a new state, look into the tax code of your prospective new state. Many states have flat income tax rates, such as Massachusetts at 5%. The states that have no income tax include Alaska, Florida, Nevada, Texas, Washington, South Dakota and Wyoming. Other states that don’t have flat income tax rates may be attractive or unattractive, based on your level of income. Another important consideration is the tax treatment of Social Security income, pension income and retirement plan income. Some states treat this income just like any other source of income, while others offer preferential treatment to the income that retirees typically enjoy.
  2. Housing costs. The cost of housing varies dramatically from state to state and from city to city, so understand how your housing costs are likely to change. You should also consider the cost of buying a home, maintenance costs, insurance and property taxes. Property taxes may vary by state and also by county. Insurance costs can also vary.
  3. Sales taxes. Some states (New Hampshire, Oregon, Montana, Delaware and Alaska) have no sales taxes. However, most states have a sales tax of some kind, which generally adds to the cost of living. California has the highest sales tax, currently at 7.5%, then comes Tennessee, Rhode Island, New Jersey, Mississippi and Indiana, each with a sales tax of 7%. Many other places also have a county sales tax and a city sales tax. You should also research those taxes.
  4. The state’s financial health. Examine the health of the state pension systems where you are thinking about moving. The states with the highest level of unfunded pension debts include Connecticut, Illinois, Alaska, New Jersey and Hawaii. They each have unfunded state pensions at a level of more than 20% of their state GDP. If you’re thinking about moving to one of those states, you’re more apt to see tax increases in the future because of the huge financial obligations of these states.
  5. The overall cost of living. Examine your budget to see the extent to which your annual living expenses might increase or decrease in your new location because food, healthcare and transportation costs can vary by location. If your costs are going to go up, that should be all right, provided you have the financial resources to fund a larger expense budget. Be sure that you’ve accounted for the differences before you move.
  6. Estate planning considerations. If this is going to be your last move, it’s likely that the laws of your new state will apply to your estate after you die. Many states don’t have an estate or gift tax, which means your estate and gifts will only be subject to federal tax laws. However, a number of states, such as Maryland and Iowa, have a state estate tax.

You should talk to an experienced estate planning attorney about the estate and gift tax implications of your move.

Reference: Forbes (Nov. 30, 2021) “Thinking of Retiring and Moving? Consider the Financial Implications First”

What’s the First Step in Estate Planning?

 

Forbes’ recent article entitled “A Love Letter to Your Heirs” explains that not having an estate plan is risky, almost like riding in a speeding car on the freeway without wearing a seatbelt. However, it’s never too late — or too early — to put one together.

The first step is to create a vision of your future. Consider the most important people in your life or your charitable goals. This should help with the distribution of your assets. Then, plan who gets what, both when and how.

Remember that you can modify your estate plan over time. You should also develop and implement a financial plan to provide ongoing guidance for your long-term wealth accumulation goals. This means reviewing your will regularly, especially if your investment portfolio becomes more complex and when your family situation changes, such as the birth of a child or even a divorce.

Work with an experienced estate planning attorney to implement tax mitigation strategies to reduce or eliminate taxes. Keep in mind that different types of assets can and should get different treatment. For instance, you should handle assets you own outright with care. Consider assigning ownership for each treasured heirloom, even as that can seem tedious. Another option is to allow heirs to place bids on items, using money allocated to them from the estate.

Based on the asset and how liquid it is, the executor could either sell it to raise cash or retain it and then distribute it to heirs under the terms of the will. Other assets, such as those held jointly, will go directly to the surviving joint tenant, while qualified retirement plan assets — like IRAs, 401(k)s, 403(b)s, profit-sharing plans, and pension plans will go directly to a named beneficiary. Similarly, life insurance proceeds pass directly to a named beneficiary.

In addition any assets subject to a lien can be sold to pay off outstanding debt, or your executor can use cash from the estate to pay off the debt and retain the asset.

Bequeathing your estate to your chosen beneficiary or contingent beneficiary can be one of the most important life decisions you can make for their future.

Even singles without children should have a will, so that you can pass your wealth to a relative or someone else about whom you care deeply.

Reference: Forbes (Jan. 10, 2022) “A Love Letter to Your Heirs”

What are Biggest Blunders in Wealth Transfer?

When it comes time to transfer what we’ve work so hard to accumulate, the way in which we transfer our wealth can have a big impact on how much of our wealth is actually received by our heirs and how much is transferred to the federal government.

Forbes’ recent article entitled “Top 7 Tax Mistakes Made in Planning a Wealth Transfer” says that tax mistakes can mean losing a lot of hard earned money, if you’re not careful. Here are some of the biggest mistakes made in wealth transfer planning.

  1. IRD Taxes. Most people are unaware of this tax. It stands for “Income in Respect of the Decedent.” It’s the income tax your heirs will pay on tax-deferred assets, such as traditional IRAs, 401k’s and annuities. In many cases, these taxes will push heirs into a higher marginal tax bracket. You should plan to reduce or eliminate the IRD Tax, if you have a 401k, IRA or annuities. For example, if you gift IRA and 401k assets to charity and non-IRD assets to your heirs, you can save them in IRD Taxes! The use of a Charitable Remainder Trust can provide a tax-efficient way to create a “charitable stretch IRA” for your children or grandchildren.
  2. Charitable Giving Mistakes. Most people do charitable giving with after tax cash from their income. However, this isn’t the most efficient way to give. Gifting highly appreciated securities, real estate, or even business interests can give you a double tax benefit: it can eliminate capital gains taxes and still get the charitable tax deduction.
  3. Dying without a Comprehensive Estate Plan. About three-quarters of Americans die without a will. A will, by itself, subjects your assets (and your heirs) to probate. A well-designed estate plan can help reduce or eliminate both probate and estate taxes. Ask an experienced estate planning attorney about creating a comprehensive estate plan for you or review the one you have.
  4. No (or Improper) Beneficiary Designations. This can result in a loss of inheritance for your family. With retirement accounts like IRAs or 401(k)s, properly designating beneficiaries is essential to avoid the loss of further income tax deferral at death. If you don’t have primary and contingent beneficiaries named on all your accounts, these assets will have to go through probate and could cost unnecessary IRD taxes.
  5. Improper Titling of Business Interests. A business is frequently titled only in the name of the business owning spouse. However, when that spouse dies, the business itself must go through the costly process of probate, which can create issues for the operation of the company.
  6. Bad Choices for Ownership & Beneficiary Designations on Life Insurance. Life insurance can be a great financial planning tool and provide liquidity. It can also be a great wealth transfer tool in estate planning or business planning. However, if the ownership and beneficiaries are done incorrectly, the life insurance benefits can be subject to estate taxes. Ask an experienced estate planning attorney about an irrevocable life insurance trust (ILIT).
  7. Giving the Wrong Assets to your Heirs. A common mistake that people make in wealth transfer planning, is to leave a percentage of their estate to their children, another to their grandchildren and another to their favorite charities (or Donor Advised Fund) in their will or via a trust. However, this isn’t the smartest way to distribute your assets from a tax perspective. Doing so could subject them to IRD taxes. Instead, use IRA (and other IRD assets such as 401k) for your gifts to charity and, give non-IRD assets (such as cash, real estate, life insurance, or a Roth IRA) to your children and grandchildren.

Reference: Forbes (Dec. 15, 2021) “Top 7 Tax Mistakes Made in Planning a Wealth Transfer”

Can I Use a Roth IRA in Estate Planning?

There are a number of reasons to consider Roth IRAs as part of your estate planning efforts, says Think Advisor’s recent article entitled “How and Why to Use Roth IRAs in Estate Planning.” Let’s take a look:

One of the biggest estate planning benefits of a Roth IRA is the fact that there are no required minimum distributions or RMDs. This is a big estate planning tool and lets the money in the Roth grow tax-free for the benefit of a surviving spouse or other beneficiaries. This also eliminates the taxes that would otherwise need to be paid on these distributions.

Because the rules for inherited IRAs for most non-spousal beneficiaries under the Setting Every Community Up for Retirement Enhancement (Secure) Act went into effect at the beginning of 2020, Roth IRAs have become a very viable estate planning tool because beneficiaries who aren’t classified as eligible designated beneficiaries must withdraw the entire amount of their inherited IRA within 10 years of inheriting it. The Act eliminated the ability to “stretch” inherited IRAs for IRAs inherited prior to 2020 for most non-spousal beneficiaries.

For inherited traditional IRAs, the whole amount will be taxed within 10 years of inheriting. The 10-year rule also applies to inherited Roth IRAs. However, if the original account owner satisfied the five-year requirement prior to his or her death, the withdrawals from the inherited Roth IRA are tax-free. It makes a Roth a beneficial estate planning tool because taxes that are bunched into a 10-year period can substantially erode the value of an inherited traditional IRA.

For those who already have a Roth, they’re set in terms of their spouse being able to inherit the account and use it as their own. For non-spousal beneficiaries, there’s a five-year rule. For those with a Roth 401(k), it’s important to roll this account over to a Roth IRA once you leave your employer to avoid RMDs.

For those who are eligible to do so, contributing to a Roth IRA each year can help you build a Roth balance to pass on to your beneficiaries. For those who have access to a Roth 401(k) account with an employer-sponsored plan or a solo 401(k) for the self-employed, contributing to a Roth 401(k) can offer a higher contribution limit with no income restrictions, when compared to a Roth IRA. The amount in the Roth 401(k) can later be rolled over to a Roth IRA with no tax consequences, which also avoids RMDs.

A Roth IRA conversion is a strategy to looking at for passing IRA assets to non-spousal beneficiaries, either directly or as contingent beneficiaries upon the death of a surviving spouse. It’s a good way for you to prepay taxes for beneficiaries. Beyond prepaying the taxes, the five-year rule can come into play if you didn’t previously have a Roth IRA.

Whether a Roth IRA conversion makes sense as an estate planning tool depends on several variables, including your current tax situation, your age and the taxes that would be incurred by the conversion. Roth IRAs have many potential benefits as a planning tool. With the Secure Act and the changing tax and estate landscape, a Roth IRA can play a key role in your estate planning in the right circumstances. Ask an experienced estate planning attorney about whether it’s right for you.

Reference: Think Advisor (November 9, 2021) “How and Why to Use Roth IRAs in Estate Planning”