By David Galinis
So many people come in to see me and are convinced that they need a Durable Power of Attorney (DPOA). When I ask them why, they don’t know. Further probing usually reveals that they aren’t quite sure what a DPOA actually is. Let me see if I can explain the idea.
Simply put, a power of attorney is a legal document where you give power to someone else (your agent) to act on your behalf. It is similar to hiring an attorney. The attorney is your representative and performs acts or conducts affairs on your behalf. Also, just like an attorney, your agent is under a duty to act for your benefit. If the power of attorney is “durable,” the power you have given continues even if you become incapacitated. However, any power you have given to an agent under a DPOA terminates upon your death.
A DPOA is one of the three legal documents in a basic estate planning package along with a Will and an Advance Medical Directive. A standard DPOA is written to give your agent the power to do anything you could do. Thus your agent can talk to the cable company, access your bank accounts, and even sell your house! It goes without saying that the choice of an agent is an important one.
The DPOA is an essential tool to protect yourself in the case of future incapacity. Let’s face it, we all know someone who has been diagnosed with Alzheimer’s or dementia. Alzheimer’s and dementia are easily the most common causes of incapacity. The conditions are incapacitating when they prevent a person from being able to handle his or her financial affairs. By creating a DPOA now, while still healthy, you can make sure that someone you trust has the power to conduct your affairs and protect you during incapacity.
By David Galinis
Avoid Intestacy Laws
If you never get around to getting a Will, don’t worry – the legislature will write one for you. If you die without a will you are “intestate” and the intestacy laws of your state govern what happens to your property. In almost all situations the legislature’s idea of what should happen to your property is very different than yours.
Let’s just take one example involving a married couple in Maryland without a will. If the husband dies and leaves a wife with a minor child, the wife and minor child split the inheritance. Contrary to popular belief, the wife would not inherit the entire estate. This leads to some absurd results like the wife now owning the house 50/50 with the baby.
If the husband dies and leaves a wife and an adult child, again the wife would not inherit the entire estate. After a small spousal allowance, the wife would once again be splitting with the adult child. The ultimate absurdity occurs when there are no children. After a small spousal allowance, the wife then ends up splitting with the husband’s parents!
Trust to Protect Children
Without a Will, your property will pass directly to your heirs regardless of whether they have the ability to appropriately manage the property. Most people would not want their eighteen-year-old son or daughter to inherit $100,000 in cash. Instead of a college education, your child may end up with an expensive sports car. A Will allows you to control – through a testamentary trust –assets after your death. In a Will you could put that $100,000 into a trust for the child. A trustee could be named who would be prohibited from giving the money to the child until they reach their 25th birthday. The trustee would have the discretion during the interim to pay for appropriate expenses like tuition and medical expenses. The same technique can be used for anyone who may need help in managing his or her inheritance.
The “bond” is actually an insurance policy insuring the creditors and heirs against improper acts by the personal representative. In Maryland, the court will require your personal representative – even if it is your spouse – to post a bond in order to be appointed personal representative. The personal representative will be required to apply to a bonding company that will typically require a background and credit check. The bond can be expensive if there are significant assets in the estate. There are also circumstances where the personal representative may not be able to be “bonded.” This could be because of criminal problems, bankruptcy, or just bad credit.
In a Will, you can waive the requirement for a bond. While courts in Maryland still require a “nominal bond,” that is usually only $100 to cover court costs. This nominal bond also does not require any type of background or credit check.
Choice of Personal Representative
Without a Will, there may be a contest as to the appropriate personal representative of your estate. The personal representative (also known as executor) is the person with the responsibility to administer your estate. This is the person with the court-appointed power to gather up all of your assets, re-title them, and ultimately distribute them to your heirs. Without a Will designating that person, a person whom you do not trust or more than one person may petition to the court to be appointed. Battles over the appropriate personal representative can be both time-consuming and costly. By designating in your Will the identity of the personal representative, an estate can be opened up without a court hearing, usually the same day.
A Will can reduce estate taxes for married couples. The Will itself provides no tax advantages over dying without a Will (intestate). However, the Will can be used to maximize the amount married couples can pass on without paying estate taxes. The use of a bypass trust allows both a husband and spouse to use their maximum allowable exemption. Each spouse is allowed to give up to the exemption amount tax-free. In Maryland, the exemption amount is 1 million dollars. So the husband can give away 1 million dollars and so can the wife. The problem is that there is no limit on how much a spouse can give to the other spouse without estate taxes – its unlimited. This then prompts spouses to give everything to each other. And by doing that, the first spouse has now lost their 1 million dollar giveaway. When the second spouse dies, he or she only has a million to give away tax-free. The married couple should be able to give away 2 million dollars to their loved ones without tax. A bypass trust written into the Will preserves the first-spouse-to-die’s 1 million dollar exemption by putting it into a trust.
By David Galinis
- Blended Families: The Not-So-Simple Estate Plan
- How Does the New Fiscal Cliff Legislation Affect my Estate Tax Planning?
- What Happens to My Kids if I Become Incapacitated?
- Owning A Joint Checking Account With Your Child: A Road to Responsibility or A Road to Disaster?
- Preparing for a Grand Exit
- Are You Ready for ABLE?
- Transfers to Minors: Where Do I Start? What Should I Consider?
- Revocable Living Trusts: Are They Worth the Hype?
- The Do Not Resuscitate (DNR) Order Has Been Replaced With the New and Improved MOLST Form in Maryland
- The End of the 12 Year Maryland Estate Tax Experiment
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