If you haven’t updated your power of attorney documents in many years, it might be worth having them reviewed to see if you can take advantage of some recent changes in the tax laws.
If you’re ever near death and unable to manage your affairs, your agent may be able to make some smart financial moves that will dramatically reduce taxes for your heirs. But your agent can do this only if your power of attorney documents allow him or her to – so you might want to consider whether to give your agent this authority.
For instance, your agent could:
• Convert your IRA to a Roth IRA. This would trigger an income tax bill, which would reduce the value of your estate for estate tax purposes. If you recover, you or your agent could undo the conversion, so you wouldn’t be socked with the tax. This could be particularly important if you have losses or carryforwards that otherwise couldn’t be used.
• Make gifts. Some power of attorney documents limit the power to make gifts, such as to the amount of the annual federal gift tax exemption. But you might be able to save more taxes by allowing additional gifts. This is particularly true in states that have recently “decoupled” their own estate tax from the federal estate tax, because larger gifts in these states could reduce amount of the state estate tax bill.
• Borrow money. Suppose your agent wants to make gifts for tax reasons, but most of your liquid assets are appreciated securities in a brokerage account. If your agent makes gifts of the securities, your heirs will owe capital gains tax when they sell. Instead, your agent could margin the securities and give your heirs the cash. The resulting debt would reduce the value of your estate for tax purposes, and when your heirs later inherit the stocks, they will get a stepped-up basis and owe much less tax if they sell.
• Buy assets in a grantor trust. If you have a grantor trust (an irrevocable trust that is not included in your estate for tax purposes, but on which you pay the income tax), and the trust owns appreciated assets, your agent could buy those assets for cash. Your heirs will ultimately get both the cash and the assets, but this way, the assets will get a stepped-up basis, and your heirs will be on the hook for much less in capital gains tax.
Thanks to new laws, these can all be smart moves – but again, many older power of attorney documents don’t allow them, so it might be wise to have yours reviewed.