Power of Attorney and Potential Estate Planning Issue
First, I want to thank Greg Phelps for inviting me to write another article on RetireWire. Last time, we discussed the importance of funding your trust and discussed our Asset Transfer Pyramid.
There is an important “feature” or power that is important for a Power of Attorney to incorporate. It’s simply the power for the agent to name your trust as the beneficiary. As a reminder, here is our pyramid of how an asset is transferred:
In general, most people have a goal of avoiding probate with the assets they own. That’s why we create expensive legal entities after all – to ensure our hard earned assets are transferred to the most appropriate beneficiaries.
The problem lies in what powers your successor trustees have with your trust.
Can a Power of Attorney Name or Change a Beneficiary?
In most cases, you do not want your agent to be able to change the beneficiary designations. Why? It’s simple. If they can change the beneficiary designations, you’ve now given them the ability to NOT follow your well laid estate plan.
Therefore, most powers of attorney limit the ability for the agent to create or change the beneficiary designation for assets that typically have beneficiary designations (retirement plans, IRAs, etc).
The problem comes when an agent is in a situation where a beneficiary designation needs to be named, but they do not have the power to and the estate will then possibly be subject to probate.
A couple, Joe and Mary, have their estate plan with a will, living trust, and power of attorney. They think they are covered.
Joe has an IRA with $1M. Mary doesn’t have any IRA’s, but she has a defined benefit pension plan that is paying her an annuity over her and Joe’s joint lifetimes.
Joe and Mary begin suffering from dementia. Their daughter Melanie is person named in the power of attorney to help with Joe and Mary’s financial affairs.
Several years pass as Mary dutifully performs her responsibility to help Joe and Mary with their financial affairs. Joe passes away.
He has named Mary the beneficiary of his IRA. Melanie opens an IRA in Mary’s name with the intent to transfer the IRA to Mary stretch it over her lifetime. Melanie names the trust as the beneficiary.
Unfortunately, Melanie receives a call from the custodian. They are unable to process her beneficiary designation request because the power of attorney does not allow her to name a beneficiary.
Melanie will have to use the “default” beneficiary of the custodian (which is usually the estate).
The $1M IRA is now subject to a probate proceeding
The good news is that the will and trust will still ensure the rightful heirs get the inheritance.
The bad news however, is they are subject to probate (and the fees associated with probate) for the IRA.
Solution: Allow Agent to name the Trust as Beneficiary
Look for language similar to the following:
The power to designate himself/herself as the beneficiary shall apply only if my spouse is acting as my attorney in fact. An attorney in fact who is not my spouse may name any trust created by me, or the beneficial shares of such trust, as beneficiary, even if my attorney in fact is a beneficiary of that trust.
With the language change, the estate plan can continue as originally intended with the trust as the beneficiary.
The Power of Attorney in Summary
Issues such as this issue are a reason why you want to get your estate plan done by an estate planning attorney experienced with these types of issues. Talk to your financial advisor and find a good estate planning attorney with the experience to help your build your estate plan.
About the Author
Stephen Reh CFA, MBA, CFP® is a financial planner in Southern California. Steve founded www.investwithsteve.com and Reh Wealth Advisors LLC in 2010 to provide fee only asset management and financial planning. If you are in the Southern California area looking for financial planning or investment advisory services, give Steve a call.
Disclaimer: Information above is for information purposes and should be reviewed with your advisor and attorney to make sure it’s accurate and applicable to you. I am not an attorney and I do not provide legal advice.