Has my brother exceeded his Authority as durable power of attorney?

Dear Len & Rosie,

After my father’s death, my mother gave my brother Stephen a durable power of attorney. Mom was never all that good with finances, and all of us agreed that it would be better for Stephen to take care of things in case anything bad happened to her.

Now I am wondering if my brother has exceeded his authority. He borrowed almost all of her life savings, over $32,000, to keep his home out of foreclosure.

Stephen signed a note for the money and agreed to pay interest at 10% per year. Mom has since reduced the interest to 7%. The problem is that she does not even know how much money Stephen pays each month, because he handles all of her finances. Mom hasn’t seen a checkbook or account statement for years.

I don’t know what I can do. Mom hasn’t got Alzheimer’s or anything and she seems happy with Stephen handling her money. I don’t know if I should sue or just leave it alone.

Edward

Dear Edward,

Stephen, as attorney-in-fact, has a very strong legally imposed fiduciary duty to your mother. Unless the power of attorney your mother signed specifically authorizes him to self-deal, he cannot loan himself your mother’s money. Of course, if your mother told him that it was OK to borrow the money, than it is perfectly legal.

An interest rate of 10%, or even 7%, is downright generous these days. Your mother is making more interest from Stephen than if she kept her money in a certificate of deposit, assuming that Stephen is making the payments like he promised. The fact that he asked your mother to reduce the interest rate implies that he is making payments. If he’s lying about it, why would he bother renegotiating the loan?

You said that your mother seems happy with the way that Stephen is handling things and that she even agreed to lower the interest on the money he borrowed. This is a free country and a competent person can do anything she wants to, even if it is not in her best interests. Still, you should talk to your mother. Make her aware of what you think is going on, and have her ask Stephen to give her the account statements showing his payments and what he’s doing with her money.

Then step back to see what happens. Hopefully everything is above board. If it isn’t, or if Stephen refuses to show your mother the books, then she should fire him. As long as your mother is still in possession of her faculties, she can revoke the power of attorney at any time. Should your mother sue Stephen if he isn’t making payments? Most parents don’t want to see their children get in trouble, no matter what they do. But if your mother is willing to go the distance, she should consult with an attorney and consider suing her son for a breach of fiduciary duty.

Len & Rosie

How an A/B Trust works

Dear Len & Rosie,

We have a trust dated 1997, which is an A/B trust. We had it reviewed and were told that the laws have changed. We were under the assumption that the way an A/B trust works is then when the husband dies all our assets go to the wife, or if the wife dies all the assets go to the husband.  We are now being told the way it works is that if one of us dies the A or B portion stays in the trust.

Carl

Dear Carl,

The most critical reason why people should hire experienced trusts and estates lawyers for their estate planning is that it’s the only way you can make sure that you understand what you’re getting into. Yes the laws have changed from 1997, but the law has not changed the way your trust works. From what you wrote, we don’t believe you understand how your trust works.

An A/B trust is designed to help reduce or eliminate the amount of federal estate tax due upon the death of the surviving spouse. The way it works is that when one spouse dies, the surviving spouse does not inherit everything outright the way you thought. Instead, the trust is divided up. The surviving spouse’s half of the community property and his or her separate property is held within the A trust, usually named the “Survivor’s Trust”. The dead spouse’s assets, up to the estate tax limit in the year of the first death ($600,000 for 1997) is held in the B trust, which can be referred to under many different names, such as “Exemption Trust”, “Bypass Trust” and “Credit Shelter Trust”. If the dead spouse has assets in excess of the estate tax limit, they either go to the A trust, or sometimes into a C trust referred to as a “QTIP” or Qualified Terminable Interest Property Trust.

After the split is completed, the survivor really owns only the A trust. The B trust is completely irrevocable, as is the C trust if there is one. The surviving spouse is usually in charge of all three trusts, and gets all the income earned by the B and C trusts but cannot change who inherits the B and C trusts when her or she dies. The tax benefit to an A/B trust comes after the surviving spouse’s death when the B trust will pass free to your chosen beneficiaries free of any estate tax liability.

But that was 1997. In 2018, up to $11,200,000 is exempted from the federal estate tax. Furthermore, if the surviving spouse of a married couple is a United States citizen, he or she can take the deceased spouse’s exemption as well, protecting up to $22,400,000 from the estate tax.

What this means to you is that you probably no longer want an A/B trust unless you want to prevent the surviving spouse from being in control of everything. You should consider restating your trust (amending it in full) so that when one of you passes the survivor will own everything and won’t be answerable to the children or other named beneficiaries.

Doing so will also make your trust much less expensive to administer after the first death, as the survivor won’t have to split the trust and won’t need to file an annual income tax return for the B trust. Updating your trust now will make it a lot easier to handle in the long run.


Len & Rosie