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SENIOR ADVOCATE

By Liza Horvath

 

Plans Must Consider All Outcomes

 

When doing estate planning it is important to consider every implication of the plan. When lawyers prepare wills and trusts, the documents can be voluminous for this very reason – the lawyer is trying to address all conceivable outcomes.  

 

Tom and Susan Madison executed an estate plan that would allow their heirs to benefit from the excellent advice they had received from their team of trusted money managers. To accomplish this, the Madisons instructed their attorney to name the bank trust department with whom their money managers were affiliated as their successor trustee, executor and financial power of attorney agent in their estate documents.  

 

During their lifetimes, the Madisons accumulated a substantial estate that included real estate, stocks, bonds, and individual retirement accounts. After Tom died and later – when Susan became mentally incapable - the family needed the bank to step in as trustee.  However, a little known fact is that a named trustee – whether that is a person or a bank – is not required to accept an appointment as trustee and the bank in the Madison’s case did just that. The bank’s policies had changed and they declined to step in as trustee or agent under the financial power of attorney. This left Susan Madison without representation by a trustee or a power of attorney agent when she needed them most.

 

Fortunately, the Madison’s money managers were committed to the family and found a professional that would step in as trustee and who would honor the longstanding relationship the Madisons had with their money managers.

 

However, in the Madison’s situation, finding a new trustee turned out to be the easy part. When the bank declined to act under the financial power of attorney, this caused problems with regard to Susan’s IRA. In most estate plans, a trustee cannot deal with or manage an IRA – only an agent under the power of attorney has this authority and the absence of a power of attorney agent had significant consequences for Susan. To explain - the power of attorney agent was the only one that could direct the holder of the IRA to make annual minimum required distributions. If you fail to take your required IRA annual distribution – the IRS may penalize you by up to 50 percent of the amount you should have taken!

 

In Susan’s case, not taking the required distributions would result in a penalty of thousands of dollars each year that she failed to take the distribution. Also, Susan needed the funds for her care and – with no agent in place under her power of attorney – she did not have access to her IRA assets.

 

The two options for fixing the problem would be expensive - and certainly not what the Madisons had intended. The court could appoint a conservator for Susan to receive the annual distribution or the second option was that the trustee could file a court petition to be appointed to act under Susan’s power of attorney. Legal fees and court costs would be incurred. The Madisons’ situation clearly demonstrates that we must consider every possibly – and do our best to plan accordingly.

 

Liza Horvath has over 30 years experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust management company. This is not intended to be legal or tax advice. If you have a questions call (831)646-5262 or email liza@montereytrust.com

 


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