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March 28, 2002: Your Responsibilities as a Fiduciary

Q: My wife of fifty-six years is dying. My financial advisor says I must use my durable power of attorney from my wife to transfer all of her assets to me to avoid probate and taxes. I do not want to defraud the government and I know that if she knew I was taking her name off things, she would be very hurt.

A: I am sorry to hear about your wife and I want to extend my condolences. You should be careful using the durable power of attorney under these circumstances. Although I know some will disagree, an agent is a fiduciary, which means that the power must be used to benefit your wife, not yourself, especially when you know her feelings. And without going into the reasons, unless your power specifically permits you to make transfers to you as her agent without consideration, it is arguable whether you actually have the power to do what the financial planner has advised.

If your property is held in joint tenancy with right of survivorship, or if there are beneficiary designations in place (don't worry about joint tenancy ownership with anything having a beneficiary designation), then you will not have to face probate because the property transfers can happen outside of the Court system. If some property is held in tenancy in common, then use your power instead to put the property into joint tenancy or make sure the beneficiary designations are as intended by your wife.

Transferring your wife's property to you will not save taxes. One spouse can transfer any amount to the other spouse so there would be no tax difference if you inherit her assets or use your power to transfer assets to you. Remember, however, that the real problem is whether the survivor ends up with a taxable estate of more than a million dollars. In that case, you need to talk with your lawyer or CPA to put in place tax planning documents to eliminate taxes (currently possible on $2,000,000 of net worth and in about a year and a half $3,000,000 can be passed on tax-free).

I would correct one misconception: there is nothing fraudulent about doing the planning to eliminate estate taxes. Gifting is certainly one method and I have helped make a number of "death bed" transfers. In fact, the government eliminated the requirement that such transfers, to be effective, need to be made a certain period of time before death. But the rules need to be followed and the gifting needs to be done so estate taxes are really impacted.

In evaluating your financial advisor's advice, two major issues should be considered. First, there will be no estate tax when we lose your wife, but the half of the property that you inherit will get a stepped-up basis for income tax (capital gain) purposes. On her part of several rentals and on her share of stocks, the assets are worth $200,000 more than what was paid for them. If you transfer them into your name before her death, you will have generated about a $40,000 tax bill when the assets are sold, based upon current law. If you inherit them and then later sell, your tax bill will be zero ($0) on that gain from her share (you would still have the gain on your half of the appreciated assets). Thus, if you follow the advice given, you will have cost yourself $40,000 whenever the assets are sold.

The final issue is that your wife would be "crushed." Remember, we are talking about her assets, so her feelings need to be considered. In my opinion, as her fiduciary, that is the starting point. But you can still use your powers of attorney in a very effective manner.

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