Last year the Alabama Legislature passed two laws that you need to be aware of, one of which you need to give serious consideration regarding updating your estate plan.
One of the most basic documents in your estate plan is a Power of Attorney. With this document you appoint someone; known as your agent, to act on your behalf for all financial matters should you become incompetent due to illness or accident. If you were to become incompetent and not have a power of attorney, someone, presumably a family member, must hire an attorney; go to court; and have the court grant a power of attorney. This court-granted document typically has a number of restrictions including a periodic court review detailing how money has been used by the agent for the benefit of the incompetent person. As you can imagine, this process is very time consuming and can be costly.
The simple and least expensive solution is to have a power of attorney drawn and executed while you are competent. This is what most people do and it worked beautifully until the past few years. What has emerged is a trend where financial institutions are refusing to accept the typical power of attorney stating that the document was too broad in its scope and lacked the detailed instructions the financial institutions require. This has created significant problems for those attempting to use a power of attorney on behalf of an incompetent person.
We had a case where a wife had become incompetent due to Alzheimer’s disease and the husband, who was her agent under a power of attorney, was seeking to have funds transferred out of her IRA account in order to satisfy her Required Minimum Distributions. When you turn age 70½, federal law requires you to take a percentage from your IRA each year or suffer a 50% penalty of the amount that should have been dispersed. In our case example, the financial institution refused to accept a power of attorney because it did not explicitly refer to Required Minimum Distributions in the document. You can see the potential magnitude of this problem.
To craft a solution, a number of Alabama attorneys got together and drafted a new power of attorney that would mandate any financial institution accept. Failure to do so would subject the financial institution to financial penalties. These attorneys rallied our state legislators who passed the bill effective January 1, 2012. Everyone should consider contacting your attorney regarding replacing your current power of attorney with the new version.
The second development involves how long Alabamians are able to hold money in a trust for the benefit of heirs. The old rule was governed by what’s known as ‘The Rule Against Perpetuities’. This stated that money can remain in trust for the lifetime of any currently living beneficiary plus twenty-one years. In effect, this meant that a trust you establish for your heirs could last about seventy-five years. Contrast this to many other states that allow a trust to last in perpetuity. Again a group of Alabama attorneys wrote new proposed rules which our legislature passed that now allow a trust to last 360 years.
Some of you may ask, “Why would anyone want to set up a trust that would last for 360 years?” I’ve seen hundreds of families do this for a variety of reasons. You’ve heard the saying, ‘Shirt sleeves to shirt sleeves in three generations’. This saying reflects the too-often experience where one generation works hard all their life to create wealth but by the third generation of inheritors, it’s all been spent. In our practice, we created a concept we call the Legacy Trust whereby wealth is held in trust as a financial safety net for multiple generations of family members. This trust has special language that protects the assets from lawsuits or divorcing spouses but normally distributes income on a monthly or quarterly basis to the trust beneficiaries. Special provisions shelter a portion of the assets from estate taxes of beneficiaries and allow for distributions for education expenses of downstream beneficiaries such as grandchildren and great grandchildren.
If you’d like a 7-page report outlining more information of the benefits of multigenerational trusts, email me at [email protected] and place ‘Legacy Trust’ in the subject line.