What is the right kind of Financial Power of Attorney for You?

A June 2020 Transamerica Center for Retirement Studies survey showed that a mere 28% of retirees have a financial power of attorney (POA)—and many people don’t understand that there are two types of financial powers of attorney that serve different purposes.

MarketWatch recently published an article “Does your estate plan use the right type of Power of Attorney for you?” that says knowing how both types work is crucial in the pandemic, especially in the event that you get sick with coronavirus.

A Durable Financial Power of Attorney can be either “springing” or “immediate.” “Durable” refers to the fact that this Power of Attorney will endure after you have lost mental or physical capacities, whether temporary or permanent. It lists when the powers would be granted to the person of your choosing and the powers end at your death.

An “immediate” Financial Power of Attorney is effective as soon as you sign the document. In contrast, a “springing” POA  means it is only effective when you cannot manage your own financial affairs, usually based upon the written opinion of two physicians.

Therefore, to begin paying your bills, your agent must have written proof of from the physicians, and he or she doesn’t automatically have the authority to ask for them.  When issues, such as doctors’ letters, are required before the agent you chose can serve you, ask your estate planning attorney for guidance.

An obstacle that requires a Durable Financial Power of Attorney can come upon you very fast and possibly include you and your spouse at the same time. For example, you may both become ill, or one could become ill and the other is absorbed in caring for their spouse.

The powers granted by a typical Financial POA are often broad and permit selling and buying assets; managing your debt, car and Social Security payments; filing your tax returns; and caring for any assets not named in a trust you may have, such as your IRA.

If you recover your capacity, your agent must turn everything back over to you when you ask.

Remember that your power of attorney documents are only as good as the people who implement them. You should also make certain anyone named knows that they’ll have the job, if needed. They must know where to find your POA and all other important information.  If you aren’t sure of the type of POA you currently have, it is worth checking as part of an estate plan update.  See our recent article for when it might be time to do that!  https://galligan-law.com/when-to-update-your-estate-plan/ 

Reference: MarketWatch (Oct. 9, 2020) “Does your estate plan use the right type of Power of Attorney for you?”

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What’s the Best Way to Go with Loans to Family?

Loans to family must be treated like real, enforceable loans to third parties if you don’t want to run afoul of gift and estate tax.

Loans are a terrific way for parents to foster a child’s independence, encourage responsibility and signal their confidence that their child can succeed on their own.  They also don’t use any of your lifetime gift tax exemption ($11.58 million per person).  But, loans to family highlight some important tax and family concerns you should be aware of.

Kiplinger’s recent article entitled “Gifts vs. Loans: Don’t Be Generous to a Fault” tells the story of Mary Bolles. The case illustrates that parents’ actions and expectations as to repayment of the loan can recharacterize the “loan” to a taxable “gift.” That can mean unintended gift tax consequences. Mary was the mother of five who made numerous loans to each of her children. She kept copious records of each loan and any repayments. Between 1985 and 2007, she loaned her son Peter about $1.06 million to support his business ventures — despite the fact that it soon was clear he wouldn’t be able to make any more payments on the loans. None of the loans to Peter was ever formally documented, and Mary never tried to enforce the collection of any of the loans.

In late 1989, Mary created a revocable living trust, which specifically excluded Peter from any distribution of her estate when she died. While she later amended her trust to no longer exclude him, she included a formula to account for the “loans” he received in making distributions to her children. After her death, the IRS said that the entire amount of the loans, plus accrued interest, was part of her estate. They assessed the estate with a tax deficiency of $1.15 million.  The estate said the entire amount was a gift.

At trial, the court considered the factors to be weighed in deciding whether the advances were loans or gifts. Noting that the determination depends not only on how the loan was structured and documented, the court also explained that in the case of a loan to family, a major factor is whether there was an actual expectation of repayment and intent to enforce the debt.

The court compromised and held that any advances prior to 1990 were loans (about $425,000), since the evidence suggested that Mary reasonably expected that Peter would repay the loans, until he was disinherited from her trust in late 1989. The court said that the money given to Peter after he was disinherited — from 1990 onward — were gifts.

The decision shows that if you’re considering taking advantage of the elevated gift tax exemption before it sunsets, review any outstanding family loan transactions. You should see the extent to which those loans may have been transmuted into gifts over the years—which may adversely impact the amount of your remaining available exemption. The safest way to do this would be to consult an experienced estate planning attorney, who can help you safely navigate these complex rules.

When making a gift there are other considerations.  If you will make such a loan, treat it as such.  Have a lawyer prepare a loan agreement.  Create a reasonable expectation that the loan will be repaid and that you’ll enforce it.  This isn’t just for tax reasons, it is to maintain family harmony.  Giving a “loan” to one child may not sit well with the others, so make sure it is honored.  You should also consider the impact this will have on state taxes, income taxes, and long-term care planning if relevant to you.

To be safe, follow these simple steps:

  1. Document the loan transaction between the lender and borrower.
  2. Charge interest based on the government rates (AFR), which are published monthly.
  3. Make sure the borrower will have enough net worth to likely repay the loan.
  4. Get a copy of the borrower’s financial statement.
  5. If the loan sets out periodic payments, make certain these are made on time.
  6. Report the interest income you receive from the borrower on your income tax return.

Make sure that you do any intra-family loans properly to avoid any future issues.

Reference: Kiplinger (Oct. 7, 2020) “Gifts vs. Loans: Don’t Be Generous to a Fault”

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Can I Afford In-Home Elderly Care?

Most clients prefer to age at home. However, in-home elder care costs add up quickly, so be aware of other affordable housing options.

Staying at home isn’t always affordable, according to a recent US News and World Report article. The article, entitled “Can You Afford In-Home Elderly Care?”, says about 80% of seniors are concerned about being able to afford home health care costs, based on a 2019 SCAN Health Plan survey. Paying for personalized in-home senior care can add up quickly and isn’t always easy on a senior’s tight income.

If you’re thinking about in-home elderly care, review these criteria to determine what costs to expect and the different payment options available for this type of care.

Find Out the Services Included in Home Care for the Elderly. In-home care can vary a lot, depending on your health conditions and needs. You might get helpers if you’re recovering at home from an illness or injury, and you could also have home care workers help you with daily activities, such as preparing meals and personal hygiene. Home care services often include rides to and from appointments, monitoring heart rate and blood pressure and in-home physical and cognitive therapy sessions.

Think about the Level of Care Needed. If you can do most daily activities on your own, but could use help with certain activities, such as cooking or cleaning, home care might be a wise option. Home care is focused on the service, and it’s supposed to help those who are living on their own as long as possible. When more care is required, moving to a place with more health support may be necessary. People who have significant needs may often look to assisted living as an alternative. Assisted living facilities offer more services, like 24-hour emergency care and ongoing supervision for seniors with Alzheimer’s, dementia, or other disabilities, although funding options may be limited.

Check Out the Cost of In-Home Senior Care. Homemaker services cost about $22.50 per hour on average and include tasks to help a person with daily duties like laundry, grocery shopping and light housework. A home health aide charges an average of $23 per hour, and may help with administering medicine at scheduled times, supervising and monitoring chronic illnesses and helping with walking aids. Of course, the exact cost of these services depends on where you live and the amount of help you need. The monthly cost for in-home care ranges from $4,290 for homemaker services to $4,385 for home health aide care. This typically costs more than the monthly median cost for an assisted living facility—but less than the median cost per month for a room at a nursing home facility.

Know Your Insurance Coverage. If you’re on Medicare, you may be able to get coverage for some short-term home services. To do so, a doctor will need to indicate that skilled nursing care is needed for a short period of time. Medicare will cover speech therapy, occupational therapy, or physical therapy. You can also use it to help with the purchase of durable medical equipment and safety additions to your home. However, Medicare won’t typically cover long-term home care services.

Medicaid will cover some health services at home, like cleaning and meal preparation, rides to and from medical visits and personal care if you are financially eligible.  Depending on the program, it provides some care and services in the home to those who need it medically. If you have long-term care insurance, some in-home services may be covered by your policy.

Look at Other Payment Methods. If your insurance won’t cover in-home care, you might have to pay out-of-pocket. One way to lower costs, is by asking family members to help. If you need to hire more help over time, the cost for services will increase accordingly. If that doesn’t work, they may help pay for in-home elderly care.

Additionally, people often overlook government benefit options, such as Medicaid or Veterans’ benefits such as Aid & Assistance.  People wrongly assume they aren’t eligible for the benefits, and miss out on funds available to them.  See here for a fuller description of this issue.  https://galligan-law.com/medicare-basics-what-to-know/

Reference: US News and World Report (June 10, 2020) “Can You Afford In-Home Elderly Care?”

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