When Is A Power of Appointment Used?

Generally a power of apointment is used in estate planning.  For example, a donor may want to give authority to a fiduciary/donee to apoint assets in the fiduciary/donee's discretion to an incapacitated beneficiary.  A power of appointment can be included in a power of attorney, a will, or a trust.  Where a donor does not want to give a fiduciary a power of appointment, it is important to make that desire clear in estate planning documents in order to avoid an IRA argument that the assets the fiduciary is simply managing as a fiduciary are actually part of the fiduciary's estate for estate or gift tax purposes.

Power of Appointment Types

There are two types of powers of appointment:  a general power of appointment and a limited (special) power of appointment.  Each of these types of powers carries different and significant tax implications.

General Power of Appointment:
In a general power of appointment the donor gives the donee authority to appoint (transfer) the donor's rights, assets, or items to anyone the donee wishes, including the donee himself.  Potential adverse tax consequences accrue to a donee who possesses a general power of appointment: the rights, assets, or items which the donee has power to appoint are considered the donee's property for gift and estate tax purposes.

Limited (Special) Power of Appointment:
In a limited (special) power of appointment the donor limits the donee's authority to appoint (transfer) the donor's rights, assets, or items.  The authority may be limited in various ways.  For example, the donee may be limited in regard the the persons to whom he or she can appoint assets; or the donee may be limited in regard to the times at which he or she can appoint assets; or the donee may be limited in regard to the purposes for which he or she can appoint assets (for instance, the health, education, maintenance, or support of the appointee).  In certain circumstances the donee possessing a limited power of appointment and the appointee may be the same person.  With a limited (special) power of appointment, the Internal Revenue Service usually does not consider the rights, assets, or items subject to appointment to be owned by the donee in determining the donee's own gift and estate taxes.  In estate planning, generally a limited (special) power of appointment is preferred over a general power of appointment.

Power of Appointment

Parties involved with a power of appointment are:
"Donor" is the person who creates a power of appointment.  The donor is usually the owner of rights, assets, or items being ultimately appointed by the donee.
"Donee" or "holder" refers to the person who possesses a power of appointment--who has been named to appoint or transfer all or a portion of an owner's rights, assets, or items.
"Appointee" is the person who receives the rights, assets, or items as a result of the power of appointment being exercised.
"Taker in Default" is the person who receives the rights, assets, or items if the power of appointment is not exercised.

General Definition:
A "power of appointment" is a unique power given to a donee (holder) by a donor to distribute the donor's rights, assets, or items usually at the donor's death to appointees.  A donee of a power of appointment is different than a personal representative or trustee.  A donee of a power of appointment does not have the responsibility of managing a person's estate or trust assets.  Rather, the donee has the authority to appoint the donor's rights, assets, or items to appointees.  There are two types of powers of appointment: a general power of appointment and a limited (special) power of appointment.  Each of these types of powers carries different and significant tax implications.

Requirements of a Care Agreement

A care agreement is a formal agreement between two parties. One party is providing services. The other party is hiring said individual to provide said services. A care agreement
• must be a formal contract between parties;
• must name the parties involved in the care agreement.
• must outline service and duty terms.
• must outline payment terms.
• must outline breach of contract terms.
• must outline termination of contract terms.
• must outline length of time the contract is valid/active.
• must allow for mutual amendments or changes to contract.
• must be signed and dated by all parties (parent(s) and family member(s)).

Elements of Care in Care Agreements

Care agreements can be customized to each family’s particular situation. The following are basic elements of care that can be explained in a care agreement: 
• Personal Assistance
• Personal Hygiene
• Meals
• Laundry
• Housekeeping
• Transportation Services
• Yard Care
• Shopping
• Social Contacts
• Religious Needs
• Intellectual and Emotional Needs

Purposes of Family Care Agreements

There are many good reasons for families to enter into care agreements, particularly agreements in which a family member is paid for services rendered. 
First, a care agreement spells out for the parent, family, and third parties the details of care a family member will provide to an ailing parent. Caring for a parent even occasionally can be a physical, time-consuming, emotional, and financial burden for a family member. Acting as a parent’s full-time, primary caregiver can be deeply burdensome. A care agreement spells out details of care in a way that is illuminating and helpful for everyone involved.

Second, when a parent needs help, family members often rally around and provide service for their parents free of charge. But caring for a parent can be a significant financial burden, not to speak of the physical and emotional burdens (in taking time off work or in taking time away from their own family duties, for example). A wise parent will set forth in a care agreement details regarding compensation of family members for care services the family performs on the parent’s behalf.

Third, a memorialized care agreement prevents family resentments and disagreements regarding said payments. Misunderstandings and hurt feelings often occur in families during the time an aging parent is being cared for by family members. A carefully drafted care agreement protects in numerous ways a family member serving an aging parent.

Fourth, a care agreement has Medicaid advantages. Without a formal care agreement, the funds used to pay family members are treated as part of the ailing parent’s assets or income for Medicaid eligibility purposes. On the other hand, if an ailing parent is paying a family member (or anticipates paying a family member in the future) for services, a formal care agreement ensures that funds used to pay family members are not treated as the ailing parent’s assets or income for Medicaid eligibility requirements.

Family Care Agreements

A care agreement (also known as a family care agreement, personal care agreement, personal services agreement, care contract, etc.) is an agreement between a parent (or parents) and a family member (or members) in which the family member agrees to care for the parent and the parent agrees to pay the family member for the services performed on behalf of said parent.

Inheriting Retirement Accounts

Transferring a retirement account to beneficiaries upon your death is complicated and if it is not done right can have adverse control and tax consequences.

For example, one issue most people do not consider is minor beneficiaries of retirement accounts. By law, if a child is a minor, the child cannot inherit assets of any kind until said child becomes an adult. If estate planning is not done, the state laws and the retirement agreement default policies will dictate how the minor child will receive the retirement account upon adulthood. The parents will lose the control of how the minor child receives retirement account funds.

Another example is whether or not the retirement agreement policies allow the retirement to pass to beneficiaries per stirpes (to the children of a specific deceased beneficiary) or per capita (to all the issue of one generation) if the estate becomes the beneficiary. If estate planning is not done, the retirement agreement default policies will apply, which might not agree with your planning preferences.

A final example deals with coordinating a retirement account with a trust (which usually gives a person the most control in how assets are distributed to individuals). In coordinating a retirement account with a trust, there are funding issues that can botch up a beneficiary's chance to roll over or stretch a retirement account if the funding is done wrong.

These are just a few examples of issues that effect the transfer of retirement accounts to beneficiaries. It is to a person's advantage to consider the complexities of retirement accounts with an expert estate planning attorney to ensure their retirement accounts get to their beneficiaries in the best possible way.

Here are a few Wall Street Journal articles regarding retirement accounts:
Trust as Beneficiary of IRA Is a Polular Strategy
What a Gift: How to Name a Minor Your IRA Beneficiary
Inherited IRAs: a Sweet Deal

How to Handle Social Media Accounts at the Death of a Loved One

Social media accounts like Facebook or Twitter set up private contracts between the user and the company. These private contracts can make it difficult to deal with a person's social media account once they have died. Each social media company looks to their private policies when dealing with a deceased person's account. As survivors of a decased person try working with the social media companys, they are finding there are not many laws out there covering social media death issues. A very interesting article in the Wall Street Journal titled, "Deaths Pose Test for Facebook" by Steve Eder covers this facinating issue.

Estate Planning And The 529 Plan

A 529 education plan is a great way to start saving money for a child's education and can be a valuable estate planning tool. For estate planning purposes, a 529 education plan can be used to reduce estate taxes if estate taxes are an issue for you or prepare for your child's education in the event you die before your child becomes old enough to get a secondary education. In estate planning, it is important to look at all the "what if" scenarios and try to prepare for those scenarios. It is the same with a 529 plan. One "what if" scenario that must be addressed is what if the 529 funds outlast the child's 529 education plan. The Wall Street Journal has a great article covering this very "what if" scenario. The article entitled, "What to Do With Leftovers in 529 Plans," written by Georgette Jasen gives options enabling an individual to make an educated decision if a 529 plan ends up with "leftover" funds.

Who Gets Dad's Old Anvil

Once both parents have died, the children have a big job ahead of them. It litterly can take years to wade through all the accumulated stuff. And the stuff might really be valuable (not just monetarily). The sentimental value of a certain item can help ease the lose of the loved one as family reminisces, or it can cause the dreaded family fight that keeps family members from talking to each other for years. An article written by Kelly Greene of the Wall Street Journal entitled, "The Pearls Are Mine!" gives some good suggestions for working through the mountain of stuff in an timely and friendly way.