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charitable contribution deductions from an estate

Family Farm Requires Complex Planning

The family is at the center of most farms and agricultural businesses. Each family has its own history, values and goals. The family farm requires complex planning. A good place to start the planning process is to take the time to reflect on the family and the farm history, says Ohio County Journal in the recent article “Whole Farm Planning.”

There are lessons to be learned from all generations, both from their successes and disappointments. The underlying values and goals for the entire family and each individual member need to be articulated. They usually remain unspoken and are evident only in how family members treat each other and make business decisions. Articulating and discussing values and goals makes the planning process far more efficient and effective.

An analysis of the current state of the farm needs to be done to determine the financial, physical and personnel status of the business. Is the family farm being managed efficiently? Are there resources not being used? Is the farm profitable and are the employees contributing or creating losses? It is also wise to consider external influences, including environmental, technological, political, and governmental matters.

Five plans are needed. Once the family understands the business from the inside, it’s time to create five plans for the family: business, retirement, estate, transition and investment plans. Note that none of these five stands alone. They must work in harmony to maintain the long-term life of the farm, and one bad plan will impact the others.

Most planning in farms concerns production processes, but more is needed. A comprehensive business plan helps create an action plan for production and operation practices, as well as the financial, marketing, personnel, and risk-management. One method is to conduct a SWOT analysis: Strengths, Weaknesses, Opportunities and Threats in each of the areas mentioned in the preceding sentence. Create a realistic picture of the entire farm, where it is going and how to get there.

Retirement planning is a missing ingredient for many farm families. There needs to be a strategy in place for the owners, usually the parents, so they can retire at a reasonable point. This includes determining how much money each family member needs for retirement, and the farm’s obligation to retirees. Retirement age, housing and retirement accounts, if any, need to be considered. The goal is to have the farm run profitably by the next generation, so the parent’s retirement will not adversely impact the farm.

Transition planning looks at how the business can continue for many generations. This planning requires the family to look at its current situation, consider the future and create a plan to transfer the farm to the next generation. This includes not only transferring assets, but also transferring control. Those who are retiring in the future must hand over not just the farm, but their knowledge and experience to the next generation.

Estate planning is determining and putting down on paper how the farm assets, from land and buildings to livestock, equipment and debts owed to or by the farm, will be distributed. The complexity of an agricultural business requires the help of a skilled estate planning attorney who has experience working with farm families. The estate plan must work with the transition plan. Family members who are not involved with the farm also need to be addressed: how will they be treated fairly without putting the farm operation in jeopardy?

Investment planning for farm families usually takes the shape of land, machinery and livestock. Some off-farm investments may be wise, if the families wish to save for future education or retirement needs and achieve investment diversification. These instruments may include stocks, bonds, life insurance or retirement accounts. Farmers need to consider their personal risk tolerance, tax considerations and time horizons for their investments.

The family farm requires complex planning, but coordinating your retirement, estate, business and transition goals will give you peace of mind.

If you would like to read more about planning for farm families, please visit our previous posts.

Reference: Ohio County Journal (Feb. 11, 2021) “Whole Farm Planning”

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Social isolation increases elder financial abuse

Social Isolation Increases Elder Financial Abuse

Social isolation increases elder financial abuse. Whether because of a pandemic or because an elderly person is alone, it is a leading factor contributing to the financial exploitation of seniors. The necessity of quarantining for older adults because of COVID has increased the number of people vulnerable to elder financial abuse, reports the article “Social Isolation and the Risk of Investment Fraud” from NASDAQ.com.

Financial abuse can take place at any time during a person’s life. However, scammers typically strike during times when seniors are more susceptible. It is usually during a health crisis, after the death of a loved one, or when younger family members live far away.

Scammers get information about their prospective victims by reading the obituaries and social media. They also become involved with senior social and support groups to ingratiate themselves into seniors’ lives.

Combine social isolation with lessening cognitive capacity and the situation is ripe for a scam. Senior investors are often flattered when their new-found friends praise their superior understanding of investment opportunities. Decreased judgment paired with a lifetime of savings is a welcome mat for thieves, especially when friends and family members are not able to visit and detect changes indicating that something bad is occurring.

Widowed or divorced seniors are more likely to be a victim of elder financial abuse. People who suffer from isolation, more and more often turn to the internet as a social outlet. Research shows that people are contacted by scammers through social media or pop-up messages on websites. Those who are dependent and engage more frequently in online life are more likely to engage with a scammer and lose more money than those who are targeted by phone or scamming emails.

How to protect yourself or your aging parents from fraud during quarantine

Scammers isolate their victims. Talk with family, friends, your estate planning attorney, or financial advisor for advice before making any decisions.

Do your homework first. If you don’t know how to do an internet search to see if the website or the person is a scammer, talk with a family member or professional advisor who can. Don’t invest money, unless you fully understand the risks and can verify the legitimacy of the offer and the company involved.

Educate yourself about finances and investments. This is a good project for people with too much time on their own. There are many worthwhile websites where you can learn about investments and finances. Look for well-known financial publishing companies. Don’t bother with marginal websites—that’s where fraudsters lurk.

Don’t be embarrassed to file a complaint. If you think you have been defrauded, you can file a complaint with the SEC, FINRA, and your state securities regulator. Your estate planning attorney will also know what resources you can tap to defend yourself.

Warning Signs of Elder Financial Abuse:

  • A new “friend” who suddenly appears and tries to keep family and friends away.
  • Someone who presses you to provide financial information and passwords to accounts.
  • Fear or anxiety when a certain person calls or sends a text.
  • Sudden and unexplained changes in estate planning documents or beneficiary designations.
  • Anyone who asks for passwords to financial accounts.

Generally speaking, anyone who promises a high return with no risk is not telling the truth. The same goes for anyone who tells you that you need to act fast.

Social isolation increases elder financial abuse.  Keep Seniors who are socially distant in touch with family and friends through phone calls, and if they can manage the devices, by video chat. Regular contact goes a long way in preventing strangers with bad intentions from insinuating themselves into your life or your parent’s lives.

If you would like to learn more about elder financial abuse, please visit our previous posts.

Reference: NASDAQ.com (Feb. 11, 2021) “Social Isolation and the Risk of Investment Fraud”

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selling a home after the death of a parent

Protect Assets from Medicaid Recovery

Medicaid is a government program used by Americans to pay for nursing home and long-term care. The Medicaid Estate Recovery Program (MERP) is used to recoup costs paid toward long term care, so that the program can be more affordable for the government, says the article “What is Medicaid Estate Recovery?” from kake.com. Beneficiaries of Medicaid recipients are often surprised to learn that this impacts them directly. How do you protect assets from Medicaid recovery?

Medicare was created to help pay for healthcare costs of Americans once they reach age 65. It covers many different aspects of healthcare expenses, but not costs for long-term or nursing home care. That is the role of Medicaid.

Medicaid helps pay the costs of long-term care for aging seniors. It is used when a person has not purchased long-term health care insurance or does not have enough money to pay for long-term care out of their own funds.

Medicaid is also used by individuals who have taken steps to protect their assets using trusts or other estate planning tools.

The Medicaid Estate Recovery program allows Medicaid to be reimbursed for costs that include the costs of staying in a nursing home or other long-term care facility, home and community-based services, medical services received through a hospital when the person is a long-term care patient and prescription drug services for long-term care recipients.

When the recipient passes away, Medicaid is allowed to pursue assets from the estate. That often varies by state, but for the most part it means any assets that would be subject to the probate process after the recipient passes. That may include bank accounts, real estate, vehicles, or other real property.

In some states, recovery may be made from assets that are not subject to probate: jointly owned bank accounts between spouses, payable on death bank accounts, real estate owned in joint tenancy with right of survivorship, living trusts and any assets a Medicaid recipient has an interest in.

An estate planning attorney will know what assets Medicaid can use for recovery and how to protect the family from being financially devastated.

While it is true that Medicaid can’t take your home or assets before the recipient passes, it is legal for Medicaid to place a lien on the property. Let’s say your mother needs to move into a nursing home. Medicaid could place a lien on the property. If she dies and you inherit the home, you’ll have to satisfy the lien before you can sell the home.

Heirs need to anticipate inheriting a smaller estate. Medicaid eligibility assumes that recipients are low income or have few assets to pay for long term care. However, if parents are able to leave some amount of assets to their children, the recovery program will shrink those assets.

Strategic planning can be done in advance by the individual who may need Medicaid in the future. One way to do this is to purchase long-term care insurance, which is the strategy of personal responsibility. Another is removing assets from the probate process. Married couples can make that sure all assets are owned jointly with right of survivorship, or to purchase an annuity that transfers to the surviving spouse, when the other spouse passes away. An estate planning attorney can help create a Medicaid Asset Protection Trust, which may remove assets from being counted for eligibility.

Speak with an estate planning attorney to learn how to protect assets from Medicaid recovery and secure your parent’s future needs. The earlier the planning begins, the better chances of successfully protecting the family.

If you would like to learn more about Medicaid and long term care insurance, please visit our previous posts. 

Reference: kake.com (Feb. 6, 2021) “What is Medicaid Estate Recovery?”

 

the stretch IRA is not completely gone

Donor Advised Fund is a Win-Win for All Concerned

Many Americans are feeling charitable these days, and with good reasons. It’s a hard time for many, and if you are financially able, making donations may help you feel you are making a difference for others during uncertain times. There are many options when making donations, and the recent article “Choosing Charity: How Donor-Advised Funds Benefit Your Contributions” from Fort Worth Magazine explains your choices. A Donor Advised Fund is a win-win situation for all concerned.

Donor Advised Funds (DAFs) can be opened for varying amounts, that are set by the sponsoring organizations. Smaller community foundations would welcome a DAF for $5,000, for instance. DAFs can be funded with cash or other assets, but once the donation is made, the asset no longer belongs to you. However, you may be able to decide when donations are distributed, and which charities receive funding. There are no required distribution dates, so the funds could go unused for a long time, while you receive the tax write-off right away.

You may also determine the investments within the fund, level of risk and overall investment strategy.

Another good reason to use DAFs: the sponsoring organization becomes the donor of record. Therefore, DAFs are an excellent way to make anonymous contributions.

There are also DAFs that involve active involvement from an advisor, if that is of value to you.

Why is now a great time to use a Donor-Advised Fund?

Some investors have highly appreciated assets that could lead to a significant tax liability, if they were sold right now. DAF offers an alternative—rather than sell the assets and pay taxes, putting them into a DAF can achieve the following:

  • You receive a tax deduction,
  • There are no capital gains taxes, and
  • Your chosen the charity that fully benefits from the funds.

The pandemic has left many people facing uncertainty. Therefore, now isn’t the right time for everyone to open their wallets and a DAF. However, if you are charitably-minded and in a financial position to benefit, a Donor Advised Fund is a win-win for all concerned. If you would like to learn more about charitable giving, please visit our previous posts. 

Reference: Fort Worth Magazine (Feb. 3, 2021) “Choosing Charity: How Donor-Advised Funds Benefit Your Contributions”

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It is important to talk to your children about your estate planning

The Generation-Skipping Tax Can Make A Big Impact

The generation-skipping tax can make a big impact on the assets you’re able to leave to heirs. The generation-skipping transfer tax, also called the generation-skipping tax, can apply when a grandparent leaves assets to a grandchild—skipping over their parents in the line of inheritance. It can also be triggered, when leaving assets to someone who’s at least 37½ years younger than you. If you are thinking about “skipping” any of your heirs when passing on assets, it is important to know what that may mean tax-wise and how to fill out the requisite form. An experienced estate planning attorney can help you and counsel you on the best way to pass along your estate to your beneficiaries.

KAKE.com’s recent article entitled “What Is the Generation-Skipping Transfer Tax?” says the tax code imposes both gift and estate taxes on transfers of assets above certain limits. For 2020, you can exclude gifts of up to $15,000 per person from the gift tax, with the limit twice as much for married couples who file a joint return. Estate tax applies to estates larger than $11,580,000 for 2020, increased to $11,700,000 in 2021.

The gift tax rate can be as high as 40%, and the estate tax is also 40% at the top end. The IRS uses the generation-skipping transfer tax to collect its portion of any wealth that is transferred across families, when not passed directly from parent to child. Assets subject to the generation-skipping tax are taxed at a flat 40% rate.

Note that the GSTT can apply to both direct transfers of assets to your beneficiaries and to assets passing through a trust. A trust can be subject to the GSTT, if all trust beneficiaries are considered to be skip persons who have a direct interest in the trust.

The generation-skipping tax is a separate tax from the estate tax, but it applies alongside it. Similar to the estate tax, this tax begins when an estate’s value exceeds the annual exemption limits. The 40% GSTT would be applied to any transfers of assets above the exempt amount, in addition to the regular 40% estate tax.

That is the way the IRS gets its money on wealth, as it moves from one person to another. If you passed your estate to your child, who then passes it to their child then no GSTT would apply. The IRS would just collect estate taxes from each successive generation. However, if you skip your child and leave assets to your grandchild, it eliminates a link from the taxation chain, and the GSTT lets the IRS replace that link.

You can use your lifetime estate and gift tax exemption limits, which can help to offset how much is owed for the generation-skipping tax. However, any unused portion of the exemption counted toward the generation-skipping tax is lost when you pass away.

If you’d like to minimize estate and gift taxes as much as possible, there are several options. Your experienced estate planning attorney might suggest giving assets to your grandchildren or another generation-skipping person annually, rather than at the end of your life. That’s because you can give up to $15,000 per person each year without incurring gift tax, or up to $30,000 per person if you’re married and file a joint return. Just keep the lifetime exemption limits in mind when planning gifts.

You could also make payments on behalf of a beneficiary to avoid tax. For instance, to help your granddaughter with college costs, any direct payments you make to the school to cover tuition would generally be tax-free. The same is true for direct payments made to healthcare providers, if you’re paying medical expenses on behalf of another.

Another option may be a generation-skipping trust that lets you transfer assets to the trust and pay estate taxes at the time of the transfer. The assets you put into the trust must stay there during the skipped generation’s lifetime. Once they die, the trust assets can be passed on tax-free to the next generation.

There’s also a dynasty trust. This trust can let you pass assets to future generations without triggering estate, gift, or generation-skipping taxes. However, they are meant to be long-term trusts. You can name your children, grandchildren, great-grandchildren and subsequent generations as beneficiaries and the transfer of assets to the trust is irrevocable. Therefore, when you place the assets in the trust, you will not be able to take them back out again. You can see why it’s so important to understand the implications, before creating this type of trust.

The generation-skipping tax can make a big impact on the assets you’re able to leave to heirs. If you’re considering using this type of trust to pass on assets or you’re interested in exploring other ways to transfer assets while minimizing taxes, speak to an experienced estate planning attorney. If you would like to learn more about GSTT and other estate tax issues, please visit our previous posts.

Reference: KAKE.com (Feb. 6, 2021) “What Is the Generation-Skipping Transfer Tax?”

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Is it better to have a Living Will or a Living Trust?

Extend IRA distributions with a Charitable Remainder Trust

Since the mid-1970s, saving in a tax-deferred employer-sponsored retirement plan has been a great way to save for retirement, while also deferring current income tax. Many workers put some of their paychecks into 401(k)s, which can later be transferred to a traditional Individual Retirement Account (IRA). Others save directly in IRAs. You may also extend IRA distributions with a Charitable Remainder Trust.

Kiplinger’s recent article entitled “Worried about Passing Down a Big IRA? Consider a CRT” says that taking lifetime IRA distributions can give a retiree a comfortable standard of living long after he or she gets their last paycheck. Another benefit of saving in an IRA is that the investor’s children can continue to take distributions taxed as ordinary income after his or her death, until the IRA is depleted.

Saving in a tax-deferred plan and letting a non-spouse beneficiary take an extended stretch payout using a beneficiary IRA has been a significant component of leaving a legacy for families. However, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), which went into effect on Jan. 1, 2020, eliminated this.

Under the new law (with a few exceptions for minors, disabled beneficiaries, or the chronically ill), a beneficiary who isn’t the IRA owner’s spouse is required to withdraw all funds from a beneficiary IRA within 10 years. Therefore, the “stretch IRA” has been eliminated.

However, there is an option for extending IRA distributions to a child beyond the 10-year limit imposed by the SECURE Act: it’s a Charitable Remainder Trust (CRT). This trust provides for distributions of a fixed percentage or fixed amount to one or more beneficiaries for life or a term of less than 20 years. The remainder of the assets will then be paid to one or more charities at the end of the trust term.

Charitable Remainder Trusts can provide that a fixed percentage of the trust assets at the time of creation will be given to the current individual beneficiaries, with the remainder being given to charity, in the case of a Charitable Remainder Annuity Trust (CRAT). There is also a Charitable Remainder Unitrust (CRUT), where the amount distributed to the individual beneficiaries will vary from year to year, based on the changing value of the trust. With both trusts, the amount of the charity’s remainder interest must be at least 10% of the value of the trust at its inception.

Implementing a CRT to extend distributions from a traditional IRA can have tax advantages and can complement the rest of a comprehensive estate plan. It can be very effective when your current beneficiary has taxable income from other sources and resources, in addition to the beneficiary IRA.  It can also be effective in protecting the IRA assets from a beneficiary’s creditors or for planning with potential marital property, while providing the beneficiary a lengthy predictable income stream.

Ask an experienced estate planning attorney, if one of these trusts might fit into your comprehensive estate plan. If you would like to learn more about Charitable Remainder Trusts, please visit our previous posts. 

Reference: Kiplinger (Feb. 8, 2021) “Worried about Passing Down a Big IRA? Consider a CRT”

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time to consider business succession planning

You Need To Review Beneficiary Designations

For many people, naming beneficiaries occurs when they first set up an account, and it’s rarely given much thought after that. The Street’s recent article entitled “Secure your IRA – Review Your Beneficiary Forms Now” says that many account holders aren’t aware of how important the beneficiary document is or what the consequences would be if the information is incorrect or is misplaced. You need to review beneficiary designations regularly. Many people are also surprised to hear that wills don’t cover these accounts because they pass outside the will and are distributed pursuant to the beneficiary designation form.

If one of these accounts does not have a designated beneficiary, it may be paid to your estate. If so, the IRS says that the account has to be fully distributed within five years if the account owner passes before their required beginning date (April 1 of the year after they turn age 72). This may create a massive tax bill for your heirs.

Get a copy of your listed beneficiaries from every institution where you have your accounts, and don’t assume they have the correct information. Review the forms and make sure all beneficiaries are named and designated not just the primary beneficiary but secondary or contingent beneficiary. It is also important tomake certain that the form states clearly their percentage of the share and that it adds up to 100%. You should review beneficiary designation forms at any life change, like a marriage, divorce, birth or adoption of a child, or the death of a loved one.

Note that the SECURE Act changed the rules for anyone who dies after 2019. If you don’t heed these changes, it could result in 87% of your hard-earned money to go towards taxes. For retirement accounts that are inherited after December 31, 2019, there are new rules that necessitate review of beneficiary designations:

  1. The new law created multiple “classes” of beneficiaries, and each has its own set of complex distribution rules. Make sure you understand the definition of each class of beneficiary and the effect the new rules will have on your family.
  2. Some trusts that were named as beneficiaries of IRAs or retirement plans will no longer serve their original purpose. Ask an experienced estate planning attorney to review this.
  3. The stretch IRA has been eliminated for most non-spouse beneficiaries. As such, most non-spouse beneficiaries will need to “empty” the IRA or retirement account within 10 years and they can’t “stretch” out their distributions over their lifetimes. Failure to comply is a 50% penalty of the amount not distributed and taxes due.

You need to review beneficiary designations. For many, the beneficiary form is their most important estate planning document but the most overlooked.

If you would like to learn more about beneficiary designations, please visit our previous posts. 

Reference: The Street (Dec. 28, 2020) “Secure your IRA – Review Your Beneficiary Forms Now”

 

Should you sell your life insurance policy?

Should You Sell Your Life Insurance Policy?

It is quite common to buy life insurance. It may have been to protect your family financially or as a vehicle to provide liquidity for estate taxes. As we grow older and laws change, it is critical to determine if your policy has outlived its intended purpose. The traditional strategy of “buy and hold” no longer applies to the ever-changing world. Today, it may be a good idea to consider selling your policy. Should you sell your life insurance policy?

Forbes’ recent article entitled “What You Should Know Before Selling Your Old Life Insurance Policy” explains that a lesser-known alternative to abandoning or surrendering a policy is known as a life settlement. This gives the policy owners the chance to get a much bigger cash lump sum, than what is provided by the life insurance carrier’s cash surrender value.

Life settlements are not new. Third-party institutional buyers have now started to acquire ownership of policies, in exchange for paying the owner a lump sum of cash. As a consequence, the policy owner no longer needs to make future premium payments.

The policy buyer then owns the life insurance policy and takes on the responsibility of future premium payments. They also get the full death benefit payable from the life insurance carrier when the insured dies.

Research shows that, on average, the most successful life settlement deals are with policies where the insured is age 65 or older. Those who are younger than 65 usually require a health impairment to receive a life settlement offer.

Knowing what your life insurance policy is worth is important, and its value is based on two primary factors: (i) the future projected premiums of the policy; and (ii) the insured’s current health condition.

Many policy owners don’t have the required experience with technical life expectancies, actuarial tables and medical knowledge to properly evaluate their life settlement value policies. This knowledge gap makes for an imbalance, since inexperienced policy owners may try to negotiate against experienced and sophisticated policy buyers trying to acquire the policy at the lowest possible cost.

To address this imbalance, the policy owner should seek help from an experienced estate planning attorney to help them with the process to sell the policy for the highest possible price.

Should you sell your life insurance policy? If you have an old life insurance policy that’s collecting dust, ask an experienced estate planning attorney to review the policy’s importance and purpose in your portfolio. This may be the right time to turn that unneeded life insurance policy into cash.

If you would like to learn more about life insurance and its usage, please visit our previous posts.

Reference: Forbes (Jan. 26, 2021) “What You Should Know Before Selling Your Old Life Insurance Policy”

 

charitable contribution deductions from an estate

Can You Amend a Power of Attorney?

The situation facing one family is all too common. An aunt is now incapacitated with severe Alzheimer’s disease. Her brother has been her agent with a durable power of attorney in place for many years. In the course of preparing his own estate plan, he decided it’s time for one of his own children to take on the responsibility for his sister, in addition to naming his son as executor of his estate. The aunt has no spouse or children of her own. So can you amend a power of attorney?

The answers, as explained in a recent article “Changing the agent under a durable power of attorney” from My San Antonio Life, all hinge on the language used in the aunt’s current durable power of attorney. If she used a form from the internet, the document is probably not going to make the transfer of agency easy. If she worked with an experienced estate planning attorney, chances are better the document includes language that addresses this common situation.

If you choose to amend a durable power of attorney, and it includes naming successor agents, then an attorney can prepare a resignation document that is attached to the durable power of attorney. The power of attorney document might read like this: “I appoint my brother Charles as agent. If Charles dies or is incapacitated or resigns, I hereby appoint my nephew, Phillip, to serve as a successor agent.”

If the aunt would make her wishes clear in the actual signed durable power of attorney, the nephew could relatively easily assume authority, when the father resigns the responsibility because the aunt pre-selected him for the role.

If there is a clause that appointed a successor agent, but the successor agent was not the nephew, the nephew does not become the agent and the aunt’s brother can’t transfer the POA. If there is no clause at all, the nephew and the father can’t make any changes.

In September 2017, there was a change to the law that required durable power of attorney documents to specifically grant such power to delegate the role to someone else. The law varies from state to state, so a local estate planning attorney needs to be asked about this issue.

If there is no provision allowing an agent to name a successor agent, the nephew and father cannot make the change.

Another avenue to consider: did the aunt’s estate planning attorney include a provision that allows the durable power of attorney to establish a living trust to benefit the aunt and to transfer assets into the trust? Part of creating a trust is determining who will serve as a trustee, or manager, of the trust. If such a clause exists in the durable power of attorney and the father uses it to establish and fund a trust, he can then name his son, the nephew, as the trustee.

Taking this step would place all of the aunt’s assets under the nephew’s control. He would still not be the aunt’s agent under her power of attorney. Responsibility for certain tasks, like filing the aunt’s income taxes, will still be the responsibility of the durable power of attorney.

If her durable power of attorney does not include establishing a living trust, the most likely course is the father will need to resign as agent and the nephew will need to file in court to become the aunt’s guardian. This is a time-consuming and slow-paced process, where the court will become heavily involved with supervision and regular reporting. It is the worst possible option, but it may also be the only option.

You should take care to amend a power of attorney. If your family is facing this type of situation, begin by speaking with an experienced estate planning attorney to find out what options exist in your state, and it might be resolved.

If you would like to learn more about powers of attorney, please visit our previous posts. 

Reference: My San Antonio Life (Jan. 25, 2021) “Changing the agent under a durable power of attorney”