Monthly Archives: July 2009

A Powerful Document: The Power of Attorney

Power of Attorney

Power of Attorney

A power of attorney is a legal document in which a person (the principal) designates and authorizes another person (the agent or attorney-in-fact) to transact business or make certain decisions on his or her behalf.

When a power of attorney is in effect, the agent essentially steps into the shoes of the principal and makes decisions that are legally binding on the principal.  Powers of attorney can grant a broad, general authority (known as a general power of attorney) or they can limit the attorney-in-fact’s power to act on behalf of the principal to particular situations (known as a special power of attorney). Because there are many different types of powers of attorney available to address a variety of situations, powers of attorney are extremely useful estate planning tools.  If you are interested in drafting a power of attorney, contact me to schedule a consultation to discuss which may be the best fit for you.

Different types of Powers of Attorney can include:

Powers of Attorney: Durable vs. Springing
A springing power of attorney becomes effective at the time of the principal’s incapacity. On the hand, a durable power of attorney becomes effective immediately without requiring the principal’s incapacity.  This is a major difference, which should be thoroughly discussed with any principal prior to executing a power of attorney.

Powers of Attorney for Medical Care also known as Health Care Proxy
A power of attorney for health care (also called a medical directive, an advance directive, or a durable power of attorney for health care, and health care proxy) allows a person to grant another person the authority to make health care decisions on his or her behalf while he or she is unconscious or if he or she becomes mentally incompetent or otherwise incapacitated.

Limited Powers of Attorney for Financial or Property Transactions
A power of attorney can also be used by a person to grant another person the limited authority to manage his or her finances, buy or sell property, file tax returns, or handle other legal transactions on his or her behalf.  However, there are a few powers that a person may not typically delegate to his or her agent.

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Paying your Estate Taxes

If you have done everything possible to minimize any estate tax liability and ultimately still owe estate tax, the question that often arises is “what is the best way to pay the estate tax?”

One of the most important goals of estate planning is to provide for sufficient liquidity in a decedent’s estate.  In addition to probate costs, funeral expenses, legal fees and debt that may come due at death, the federal estate tax is generally due nine months after the date of death.  Without liquidity in the estate, the executor and the heirs of the estate may need to sell illiquid assets such as real estate, or liquidate marketable securities in an unfavorable market, such as we are experiencing now, to raise cash within a short period of time.

I will explore some funding options for paying the federal estate tax:

  1. Borrow money to pay the estate tax liability: Most banks and financial institutions will provide an individual or an estate loan as long as there is sufficient collateral (estate assets) against the loan.  If the estate tax liability is $1,000,000, you may be able to get a loan for the $1,000,000 estate tax liability, but it comes at a price… large payments of interest.
  2. Selling estate assets to pay the estate tax liability: This is the often the most logical choice to fund the liability when no formal plans have been made to pay the tax.  It can, however, have drastic financial consequences.  On the same $1,000,000 estate tax liability, the executor or trustee would need to sell $1,000,000 of the estate assets to pay the tax.  The problem with this approach is that you may be forced to sell property and securities possibly at depressed values.  Housing values and investment portfolios have taken a severe beating over the last few years.
  3. Use discounted dollars: By setting up an Irrevocable Life Insurance Trust (ILIT) with crummy provisions, you could fund the potential $1,000,000 estate tax liability in a more cost efficient manner.  For most clients, it would work like this:  You and/or your spouse would set up the ILIT and fund it with annual gifts of $13,000 each totaling $26,000 per year.  These gifts are gift tax free.  The life insurance death benefit is income tax free.  The trust, because it is outside of your estate, is estate tax free.  The trustee would purchase an insurance policy on one or both spouses and use the annual gifts to fund the premiums.  For example, a couple, both age 70 and in average health, gifts $26,000 per year could allow the trustee of the ILIT to purchase a life insurance policy with a death benefit of $1,250,000.  This death benefit would be income and estate tax free as it would be owned by the trust and  outside of their estate.  So in this situation, if both spouses died at age 90, they would have paid $520,000 ($26,000 x 20) and the death benefit would be $1,250,000.  Thus they have funded their estate tax liability and saved $730,000.00.

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