GeriLaw | Robert Fleming, Tucson elder law attorney, and colleagues

Family Generosity and the Gift Tax

A recent New York Times article highlighted the potential gift tax implications for baby boomers who are subsidizing parents or less fortunate siblings.  Most gifts can easily fall within the donor’s annual gift tax exclusion of $12,000 in cash or other assets per donee.  There is also a lifetime exemption of $1 million ($2 million for married couples) before a 45 percent gift tax applies. 

There are several strategies that donors can use to assist family members without paying gift tax:

• Maximize use of the annual exclusion.  You can do this by writing a check, but you can also put assets (including income-producing assets such as bonds or shares of a closely held company) into trusts for the benefit of the family members.   You can also use Section 529 education savings plans to assist siblings burdened by the costs of their children’s education.

• Pay medical and educational expenses for the family members.  You do not need to use your annual exclusion to pay for these expenses, but you must pay them directly to the providers of the services.  This strategy can be helpful with regard to elderly parents.  You can pay for anything that the parents would be allowed to deduct on their income tax returns as an unreimbursed expense.  This includes home-care attendants, medically necessary home improvements, or part of the parents’ long-term care insurance premiums (up to $3,080 for someone 61 to 70 years old, and up to $3,850 if over 70).

• Employ family members.  You can employ family members to provide such things as child care, managing real estate, or handling the books, but the compensation must be reasonable (what you would pay a stranger for the same work).

• Lend and borrow money.  This requires the same formalities of a loan from a bank, but you must use the applicable federal rate.  This is a minimum interest rate set by the Treasury each month.  You could also borrow money from family members and pay them more interest than they could receive from money markets or bank certificates of deposit.  You should probably pay what a bank in your area would charge for a comparable personal loan.

• Make a family member your dependent.  You must pay at least 50% of that person’s support, but this is not available if the person’s gross income is more that $3,400 per year.  Required withdrawals from IRAs and 401(k)s count toward this income limit, but Social Security does not.  If you are able to claim a relative as a dependent, then you can deduct the dependent’s unreimbursed medical expenses above the 7.5% of adjusted gross income floor.

• Provide a safety net.  If family members are depending on you for assistance, then you may want to make sure you have life insurance in place or include them in your estate plan  just in case something happens to you.

Andrew Hook
Oast & Hook
www.oasthook.com

Using Your Power of Attorney

One of the most frustrating experiences for the clients of elder law attorneys can come when a properly prepared and completely valid power of attorney is rejected by a bank, brokerage house, insurance company or other financial institution. Clients (and, more to the point, their spouses, children or other agents named in their powers of attorney) frequently call to report that "mom's bank says I can't use the power of attorney because it's not on their form."

This common problem is the topic of this week's Elder Law Issues article at the elder-law.com website. This (blog) setting allows us to collect stories from readers who have had similar problems, and it allows us to invite -- and share -- solutions from other contributing lawyers (and agents who have successfully dealt with the problem).

Under the law in most states, a financial institution can not be compelled to honor a power of attorney. In some states, however, there is authority for an action against an uncooperative bank -- though the damages may be limited to a court order requiring the bank to accept the document. Of course, one of the primary reasons clients sign powers of attorney in the first place is to avoid the cost and hassle of court proceedings, and when court involvement is required to enforce the power of attorney -- well, the whole point of simplicity and ease of administration can sometimes be lost.

Who are the culprits? Over the years it has been our experience that most brokerage houses have become comfortable with powers of attorney -- at least those drafted by a lawyer. Sometimes the lawyer may be asked to sign an affidavit that the document was properly signed, and that the lawyer is unaware of any revocation of the power of attorney; most attorneys are happy to sign such an affidavit on request (assuming, of course, that those assertions are correct).

Insurance companies may be somewhat less likely to accept a power of attorney, though that may be appropriate. Changing beneficiaries on an insurance policy may be outside the scope of the agent under most powers of attorney. The other kinds of things an agent may be trying to accomplish with an insurance company might include: (a) cashing in an annuity, or an IRA or tax-qualified retirement plan, or (b) converting an existing life insurance policy to paid-up status, or transferring ownership to the owner's living trust, or making other administrative changes to a policy. In most cases, insurance companies eventually bring themselves around to an appropriately cooperative position.

Other financial institutions may present special problems. Title insurance companies often resist transfer of real estate interests using a power of attorney, though this problem seems less common in recent years. If you want to use a power of attorney to transfer U.S. Government securities -- well, good luck.

That leaves banks. Oddly, the most recalcitrant banks seem to be the largest ones. You might assume that a larger bank would have access to good -- and responsive -- internal legal advice, and resources that let the teller figure out what local law and practice require. You'd be wrong. The very worst banks to deal with (in our experience, anyway)? Well, think stagecoaches. And San Francisco. And Italian heritage. That's two banks, if you're having a hard time counting.

Why do banks resist accepting powers of attorney? The answer is speculative, and tinged with cynicism. As the banking industry has become less personalized and more, well, impersonal, it seems to have come to rely on untrained, short-term and high-turnover staff. Rather than try to train, retain or support front line bank employees, the big organizations seem bent on reducing every policy to the simplest and most enforceable answer. That means the "answer" is usually: "no!"

Bank legal departments used to be a good resource for customers and their lawyers. No more. National banks do not like to acknowledge the existence of a legal department, and it is virtually impossible to ever get to talk to even a receptionist in the in-house legal offices they do maintain. When, by begging, flattering, cajoling and threatening, you finally get to talk to the "legal department," it almost always amounts to a trainee legal assistant who seems never to have met a lawyer, either professionally or socially.

So banks tend to insist on the use of their two-paragraph "powers of attorney," sometimes referred to as their "short-form" or "signature card" powers. There is nothing in the law of any state requiring anyone to rely on those documents, of course -- but that doesn't stop the banks. Those are the forms they are most familiar with, and the training curve is very simple if you only accept one, standardized document as a power of attorney.

Related to this phenomenon is the growing practice by some banks (and a handful of other financial institutions) to rely on their own playbooks for other legal proceedings. Death in the family? Produce "letters testamentary" (forget that your state may not use that language -- that's what the playbook written in North Carolina, or Missouri, or wherever, says to ask for). Does your state have a "small estates affidavit" procedure to avoid the necessity of probate proceedings (and, therefore, the issuance of "letters")? Don't expect anyone except at the highest echelons of the bank to have any idea what you're talking about. You have the "letters of personal representative" (that's what we would call them in Arizona)? Oh, good -- but you'd better have a certified copy of the death certificate, too. What, you say? It's impossible to get a probate started on a living person? Of course it is -- but the bank's playbook says you need to prove the death to the bank, too. It's not good enough to satisfy the probate court that the account owner is deceased.

We could go on and on. Perhaps, if there are comments, questions or an invitation to tell horror stories, we will. But the bottom line is this: dealing with banks, and sometimes with other financial institutions, can be difficult and even sometimes nearly impossible. Despite the best efforts of legislators to simplify the probate process, and to provide for non-court alternatives like powers of attorney, the frustrating reality is that in recent years it has gotten harder, rather than easier, to get even simple financial transactions completed when you are dealing with an incapacitated or deceased account holder. We wish it wasn't that way, and that we didn't spend so much of our time dealing with this frustration, but the only way we see to fix the problem is to buy a bank. Sadly, we're a little short of pocket change just now.

Robert B. Fleming
Fleming & Curti, PLC
Tucson, Arizona
www.elder-law.com
www.specialneedsalliance.com