Death and Taxes - The Blog

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Introduction to Powers of Appointment, Part 1

One of the unfortunate aspects of estate planning is the terminology.  There are lots of words and phrases that sound the same, which can be confusing to laypeople.  For instance, there are living wills and Wills -- these are two entirely different things.  And there are powers of attorney (by which you appoint an agent to do something for you) and powers of appointment -- again, these are two entirely different things. 

What is a power of appointment?  It's a power granted to the beneficiary of a trust to pass on his or her trust interest upon death.  For instance, let's say that I'm the beneficiary of a trust containing $5 million (hurray!).  I have the right to all income from the trust, and I get the entire principal when I turn age 40.  But what if I die when I'm 38, before the trust has been distributed to me?  In that case, the question is: what happens to the trust?  The trust document should explain where the money goes -- to charity, to my descendants, to other trust beneficiaries, etc.  But in some trusts, the beneficiary is given "first crack" at disposing of the property.  For instance, the trust might say something like:

Upon the death of the beneficiary, any property remaining in the trust shall be distributed to such persons and organizations as the beneficiary may by his Will appoint by specific reference to this power.

The above is a power of appointment.

There are two major issues involving powers of appointment.

1. Did the beneficiary exercise it?  You'll see the phrase "specific reference" in the above language.  This is intended to address a situation where the beneficiary dies with a Will that (for example) gives all of his property to his wife.  Does that include the trust property of which he is beneficiary?  No.  Instead, the beneficiary should have language added to his Will specifically mentioning the power of appointment, invoking the trust's name, the date it was created, the paragraph number that grants the power, etc.

2. How can the beneficiary exercise the power?  Can the beneficiary exercise his power of appointment by creating a new trust, of which his wife or children are beneficiaries?  Can the terms of this new trust be different from the terms of the trust that created the power in the first place?  These questions can be answered via careful drafting of the power of appointment language.

In my next post I'll talk a bit about the tax ramifications of powers of appointment.

You and Yours Blawg on Beneficiary Designations

I've been working on getting this blog transferred over to its soon-to-be new home, at www.jas-law.com, as well as trying my hand at some other types of writing, so posting will go down to 2-3 days a week for the near (and far?) future.  But I certainly couldn't have tackled one important estate planning topic any better than Deirdre R. Wheatley-Liss does over at the You and Yours Blawg, in her post on "Retirement Accounts and Beneficiary Designations - Myths and Misconceptions."

Organize Your Financial Life in 2007

While it's not all estate planning-related, here's my plan for organizing your financial life, one month at a time, in 2007.  Most of these items shouldn't take more than an hour to do.

JANUARY: Start the new year off right, with a focus on financial planning.  For most people, that means a checkup in planning for two areas: your kids' college education and your retirement.  A good, fee-only financial planner should be able to give you some guidelines re. how much you should be saving per month.

FEBRUARY: This month's focus is on taxes.  If you have an accountant, you should get him or her all of your information, so your returns can be prepared early.  If you don't have an accountant, get one!

MARCH:  Here's an easy task: open a safety deposit box if you don't already have one, and put your important papers (Wills, deeds, etc.) in it.  If you already have a box (or if you're opening one for the first time), keep a list of the box's contents -- and where the keys can be found -- at home.

APRIL: Tax time, part 2.  Review your completed returns, and ask your accountant if there's anything you should work on or consider for next year.

MAY:  Time to think insurance.  Make a list of all of the policies you own, in table form, with company name, policy #, beneficiary (if any), subject of policy (auto, home, disability, etc.), and contact information for your agent.  Put a copy of the list in your safety deposit box.  Every five years, consider sitting down with an insurance expert (NOT a hard-sell type) to review your coverage.

JUNE: Time for a mid-year check-up, via a net worth statement.  Figure the value of your assets (cars, houses, savings, investments, etc.) and your debts (mortgages, student loans, etc.).  Subtract, debts from assets to figure out what you are worth.  This might take a little effort the first time you do it, but the internet should make it simple on a going-forward basis.  And -- of course -- a copy should be in your safety deposit box.

JULY: Embrace the Independence associated with getting and being organized this month.  I recommend hanging files, although any system that works for you is a good one (like a bunch of big envelopes?).  A simple system works best -- disability insurance in one file, mortgage info in another, 401k statements in another.  Receipt files are also important (like one for charitable deductions, and one for big-ticket items).

AUGUST: Check in on your financial planning again.  How does the college fund look? What about your retirement accounts?

SEPTEMBER: Another month for insurance: walk through your house with a videocamera, taping all of your contents (and supplying a narrative).  Stash the tape in your safety deposit box.

OCTOBER:  Time to look at your estate plan.  If you don't have one, see an attorney.  If you do have one, review it to make sure it's up to date.

NOVEMBER:  Estate planning, part 2. Since the family is around for Thanksgiving, how about a talk with them regarding end-of-life decisions?  Hopefully you put these in writing last month or earlier when you executed powers of attorney for health care and property. 

DECEMBER: December means it's time to review this year's budget and set your budget for next year.   Did you overspend? If so, where? What can be cut next year without much pain?