Delegating Authority

When asked, I always tell clients that they should have a power of attorney document for financial decisions.  When a person signs a power of attorney, he is called the “principal.”  The person the principal names to make financial decisions for him pursuant to a power of attorney is called the “agent.”  If a person has failed to sign a power of attorney, then no other person can make decisions for him–not his spouse, not his children, no one.

A person can only sign a power of attorney document if he is mentally competent.  Specifically, the principal must retain what is called a contractual level of mental capacity in order to sign a power of attorney.  Contractual mental capacity is a rather high level of mental capacity.

If a person lacks contractual mental capacity and can no longer sign a power of attorney document, then he may need a legal guardian appointed for him if he can no longer manage his affairs.  A legal guardian is appointed through a court procedure.  While having a guardian appointed for an incapacitated person is a rather common procedure, the procedure is not without its drawbacks.

For one, a guardianship action costs about $5,000.  Aside from the financial costs, being appointed someone’s guardian is emotionally draining on the family, as well.

But whether someone has taken the time to sign a power of attorney document or whether someone had a guardian appointed for him, a question that is often overlooked is this:  What if the power of attorney agent or what if the guardian cannot serve in the role of agent/guardian for a temporary period?  For instance, what if the agent/guardian is on vacation and a decision needs to be made for the incapacitated person?

There are little know and little used provisions of the laws governing powers of attorney and guardianships that provide excellent answers to these questions.  If asked, I would wager that very few attorneys are aware of these provisions of the law.

With powers of attorney, there is a provision of the Revised Power of Attorney Act that permits an agent to delegate his authority to another individual if the power of attorney document permits such a delegation of authority.  I can tell you that very few power of attorney documents that I have reviewed contain such a delegation power.  I can tell you that the power of attorney documents that I have drafted do contain such a delegation authority.

The fact of the matter is, giving the agent the ability to delegate his authority is a very practical authority.  Agents are people with lives of their own.  They may get sick, they may go on vacation, they may have temporary issues in their own lives that make it impossible to attend to the affairs of the principal.  Giving the agent the ability to delegate his authority can serve a very practical purpose.

Similarly, the guardianship act contains a provision that permits a guardian to sign a power of attorney in favor of another individual giving this third-party the powers of the guardian.  The power of attorney can only be effective for a period of six months.

As with an agent’s ability to delegate powers under a well-drafted power of attorney, the ability of the guardian to sign a power of attorney in favor of another individual can serve a very practical purpose.  Knowing that such provisions exist in the law permit an attorney to better serve his client.

Does the IRS Have Integrity?

It is tax time, so I wanted to write about an interesting tax court case that was recently decided.  After reading this article, you be the judge.  Does the IRS have integrity?  To me, a big part of integrity is sticking by your word.

A recent decision of the federal tax court could have broad implications for taxpayers.  The court decision involves rollovers from individual retirement accounts or IRAs.

There are two methods for moving money between IRAs.  The taxpayer can transfer money from one IRA directly to another IRA.  A direct IRA-to-IRA transfer is a non-taxable event.

The second method involves an IRA rollover.  Through this method, the taxpayer removes money from his IRA and has up to sixty days to re-deposit his money into another IRA.  If the taxpayer re-deposits the money into a new IRA, then the distribution is not taxable.

Many taxpayers have multiple IRAs.  For instance, a taxpayer might have an IRA worth $10,000, an IRA worth $70,000, and an IRA worth $35,000.

For the past twenty years, the IRS has had a rule that a taxpayer can make an IRA-to-IRA rollover once every twelve months and that the twelve-month rule applies separately to each IRA that the taxpayer owns.

In other words, in my example above, the taxpayer could rollover the $10,000 IRA in January, the $70,000 IRA in June, and the $35,000 IRA in September, and as long as the taxpayer waited twelve months from the date of each rollover to rollover that same IRA again, then each of the rollovers would not be treated as a taxable event.  The twelve-month rule applied per IRA; it did not apply to the IRAs in the aggregate.

The IRS even stated this position in a publication, publication 590.  An IRS publication is a document that explains how a certain tax rule works.  Since the IRS stated this rule in a publication, many taxpayers took this position to be the law and made multiple IRA rollovers in the same year, but never involving the same IRA in any twelve-month period of time.

In the recent court case, however, the IRS sought to tax an individual who made multiple IRA rollovers in the same year, even though no one of the taxpayer’s IRAs was rolled-over more than once in a given twelve-month period of time.  Stated otherwise, the IRS was seeking to tax the individual in contravention of the rules and examples provided in its own publication.

In this case, the IRS contended that the rollover rule only permits a taxpayer to make one IRA rollover per twelve-month period of time, no matter how many IRAs a taxpayer owns.  So, for instance, if the taxpayer owns three IRAs and rolls over one of those IRAs, then the taxpayer cannot rollover any other IRA for twelve months without the distribution from the subsequent IRAs being treated as a taxable distribution.

Stunningly, the tax court agreed with the IRS.  So, the taxpayer in this case, who took his actions based upon a longstanding interpretation of the law, an interpretation that the IRS published to taxpayers, was taxed on the subsequent distributions he took in the given tax year.

Personally, I have no problem with the IRS limiting rollovers to once every twelve months.  What I think is unconscionable and wrong is the IRS publishing a document that tells taxpayers doing “this” is all right, then litigating against a taxpayer who relies on the IRS’s publication, claiming the taxpayer did something wrong.

You’re Welcome

Recently, I sued the state of New Jersey on behalf of several clients of mine in federal court over an issue involving the Medicaid program.  This past week, my clients—and thousands of other residents of New Jersey who are applying for Medicaid or who will apply for Medicaid in the future—saw the benefit of this federal lawsuit that I filed.

Medicaid is a health insurance program for needy individuals.  In order to qualify for Medicaid, an individual must have limited assets and must have income that is insufficient to pay for his care.  Medicaid pays for long-term care costs.  Long-term care can cost a lot of money, up to $12,000 a month.

Given the costs associated with long-term care, it is not surprising that a person who may have never thought—or wanted to—qualify for Medicaid seeks to qualify for Medicaid when he requires long-term care.  It is these costs that drive a great number of people to my office.  They come looking to qualify for Medicaid benefits and looking to preserve a portion of their estate for themselves and for their family.

When an individual applies for Medicaid benefits, the Medicaid office looks at his finances for the past 5 years.  The Medicaid office requests 5 years worth of his financial records and scours those records to see if the applicant has given away any money in the past 5 years.

This five-year period of time that the Medicaid office is looking at to see if the Medicaid applicant made any gifts is called the “lookback period.”  It is called the lookback period because the five-year period of time is, quite literally, the period of time that Medicaid is looking at to see if the applicant made any gifts.

If the applicant made gifts during the lookback period, then the Medicaid office will aggregate the value of those gifts and punish the applicant for having made the gifts by making the applicant ineligible for Medicaid benefits for a period of time.

For instance, assume that Mr. Smith applies for Medicaid in April 2014.  The Medicaid office will request financial records for the period of time from May 2009 through April 2014, which is the five-year lookback for an application that was filed in April 2014.  Let’s further assume that Mr. Smith made the following gifts during the lookback period:  $10,000 in January 2010, $20,000 in December 2012, and $15,000 in March 2013.  The total of these gifts during the lookback period is $45,000.

Based upon $45,000 worth of gifts occurring during the lookback period, the Medicaid office will assess a “penalty period” against Mr. Smith.  A penalty period is a period of ineligibility for Medicaid benefits.

Prior to my federal court case, Medicaid would calculate the penalty period by taking the aggregate gifts ($45,000) and dividing it by a divisor number, which was supposed to represent the average cost of a nursing home room in New Jersey.  Prior to my lawsuit, the State used a divisor figure of $7,787.  Based upon that divisor figure, Mr. Smith would be ineligible for Medicaid for 5.7 months ($45,000/$7,787 = 5.7).

I can tell you for a fact that a nursing home room in New Jersey costs far more than $7,787 a month.  In fact, as a result of my federal lawsuit, the State conducted a survey of every nursing home in New Jersey and found out that the average cost of a nursing home room in New Jersey is $9,405.

Beginning April 1st, the State will use the figure of $9,405 to calculate penalty periods, so for instance, Mr. Smith’s penalty period for a $45,000 gift will go from 5.7 months to 4.7 months ($45,000/$9,405 = 4.7).  This is the first time in my career that I can say the penalty divisor number is accurate.

You’re welcome, Mr. Smith, and the thousands of other Medicaid applicants my suit helped.  It was my pleasure.