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Retirement Perspectives

Along with naming beneficiaries, account owners need to be vigilant in choosing a power of attorney to protect their retirement account savings.

Many investors have accumulated a substantial amount of wealth in various tax advantaged retirement accounts (e.g. 401(k), IRAs, etc.). With an aging population and retirement account assets reaching all-time highs, it’s increasingly important to review and update (as needed) beneficiary designation forms. Estate planning should not end there. A power of attorney (POA) is a vital part of an account owner’s planning; if the owner becomes mentally incapacitated, his/her family won’t have access to the retirement accounts without one.

If an account owner becomes debilitated and loses the ability to manage affairs including his/her finances, the owner’s family won't be able to manage (access) these assets unless the owner has authorized one or more individuals to act on their behalf. Typically, this is done via a power of attorney. In addition, a POA lets an account owner name or appoint someone to handle important legal and financial issues, either now or in the future, if the owner is unable to make decisions. Therefore, it’s essential to discuss, address, and execute a POA in an individual’s overall estate plan, particularly if he/she or a family member (e.g. parents, siblings, grandparents, etc.) are in poor health and the owner assists them with their finances.

A POA in its simplest terms is a legal document that is generally prepared by an estate planning attorney that allows a person, referred as an “attorney in fact” or agent, to act in place/on your behalf to make important decisions.  Therefore, great thought and consideration should be given to who is named as the “attorney in fact.” In addition, an equal amount of thought should be given to the provisions that you choose to include in your POA. The individual giving the authority to act on his/her behalf is referred to as the principal or grantor.

 

Tip: A revocable living trust (or living trust) is created to hold ownership of an individual's assets. An IRA can’t be held in a revocable trust without being subject to immediate taxation. Instead, a POA is needed to manage these accounts if an owner becomes incapacitated.

 

POAs are not all or nothing. An owner (grantor) has the flexibility to limit the control of the agent in respect to his/her IRA. For example, the owner’s agent can be given oversight to manage all IRA needs such as investments, required minimum distributions (RMDs), and account maintenance, etc. on the owner’s behalf. Consideration must also be given to placing limits on the agent’s power. For example, do you want your agent to have the authority to liquidate certain investments, move assets to more aggressive or riskier investments or take more than your RMD for the year? Notably, a POA is not permanent; therefore, an account owner can change it at a later date if his/her situation changes.

With so much leeway to draft a POA based on an account owner’s specific situation, we believe it’s imperative to hire an estate attorney who is both knowledgeable and experienced in working with retirement accounts and creating an overall estate plan. If an account owner previously executed a POA, but it has been a while since reviewing it, schedule time to meet with the estate attorney to verify that it meets the owner’s needs and specifically covers the management of his/her retirement accounts.

A durable POA goes into effect immediately and continues to be in effect in the event the owner becomes incapacitated, but expires after his/her death. Some clients may not feel comfortable having someone (even though they gave the individual control in the first place) to make financial moves on their behalf. Therefore, some states offer a “springing,” which only becomes active in certain specific circumstances. Notably, a POA dies with its creator.

 

Tip: Many custodians will accept a POA, but only for certain transactions. For example, some will not allow a change in beneficiary, whereas other will only permit transactions that are clearly stated in the POA.

 

Will your IRA custodian accept a power of attorney?
Before you finalize a POA covering your IRAs, it’s crucial that an account owner checks with the IRA custodian to make sure t the POA will be accepted. Why?

Some IRA custodians choose not to accept a POA because there is no requirement to do so; Whereas other custodians have specific paperwork, process, and procedures regarding the “when” and “how” upon receiving a POA. Therefore, if a POA plays a role in an account owner’s overall estate planning, confirm that the IRA custodian will accept a POA. If an IRA custodian will not accommodate a POA, consider transferring IRA assets to a more client friendly custodian.

POA Checklist
Here’s a handy checklist for financial advisors to use with clients, written by Steven Gorin, JD in Ed Slott’s IRA Advisor (June 2018).

  • Ask clients: Do you have a durable power of attorney in place?
  • Once a client has a durable POA, suggest an estate planning document review with the attorney who drafted the POA.
  • Introduce yourself to the attorney and request a document review as part of your client financial/tax planning routine.
  • If the durable POA could be stronger in the retirement planning areas, ask the attorney to consider including more specific coverage, to help satisfy current or future requirements of any IRA’s back-office.
  • Follow up to see if a suitable agent is named on the durable POA, and that the power be accepted by the IRA or plan administrator (in the case of a 401(k) plan).

A vital part of preparing for your financial future is planning for the unexpected. Designating a POA brings you one step closer to this goal. For more information, please check with your financial advisor and/or estate planning attorney about establishing a POA for your retirement accounts.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY

power of attorney (POA) is a legal document that states that the account owner (principal) designates another person (called the agent or attorney-in-fact) to act on the owner’s behalf to make decisions in specified matters or in all matters.

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally has to start taking withdrawals from a retirement plan account at age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

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