Who we name as our agent under a Durable Power of Attorney (DPOA) document is more than important, it’s vital to our financial, legal and tax well-being. I engage in serious conversations with my clients about who they should name in the important roles of Trustee and Durable Power of Attorney.
Typically, DPOAs are not used unless the person who created it is incapable of conducting her own financial affairs, although the document is legal and valid at the time that it’s signed.
I’ve had several conversations with clients about the importance of selecting the proper person to act. I’m not exaggerating when I tell you that some clients name their eldest son or daughter simply because they are the oldest and would be offended if they’re not named in this important role. Sometimes that same oldest child has no business acting as a DPOA since they’re not responsible with money, not responsive, or for a variety of other reasons.
Most importantly, you never want to give legal authority over your legal and financial affairs to someone who’ll take advantage of you. Most of us trust our children, but a recent case demonstrates what can go wrong.
Mary Ellen Nice, a resident of Louisiana, granted a DPOA to her son, Chip. She did this after her husband of sixty-one years died. A few years after granting Chip the DPOA, Mary Ellen slid into Alzheimer’s, after which time Chip exploited his mother financially, diverting her income (largely from Individual Retirement Account (IRA) distributions) for his own personal use. Chip filed his mother’s tax returns, and paid her income tax from her funds even though the monies he withdrew from the IRAs were not largely used for mother’s care but for his own.
The IRA distributions went into Mary Ellen’s checking account, but because she had Alzheimer’s, Chip controlled that account. He had the authority to sign her checks. Unfortunately, many of those checks were to him or were payments for his benefit and not hers.
Upon discovering Chip’s malfeasance, Mary Ellen’s daughter Julianne filed an action in Louisiana Court to remove Chip. She also filed amended tax returns seeking a refund of over $519,000 on the theory that Mary Ellen didn’t benefit from the IRA distributions, rather her son did.
Julianne relied on a prior case, Roberts v. Commissioner of the IRS, where an ex-spouse stole IRA distributions on similar facts but the taxpayer was found not to have received the income. In Roberts the IRA distributions went into a joint account with the taxpayer controlled by the ex-spouse.
Mary Ellen Nice’s court rejected the argument. While it seems completely unfair to tax someone on funds they arguably never benefited from, the US District Court in Louisiana found the theft of Mary Ellen’s IRA amounts to be irrelevant and the evidence regarding the theft inadmissible at trial. The court reasoned that the IRA distributions were paid to Mary Ellen’s checking account, so what happened thereafter is irrelevant. The decision did not discuss whether a theft loss deduction would be permitted.
Theft losses, incidentally, will not reduce the tax dollar for dollar.
The court differentiated Mary Ellen’s case from Roberts because the monies went into Mary Ellen’s individual account, this despite the fact that she had Alzheimer’s and was at the mercy of her son, Chip. The Court also reasoned that Chip didn’t steal all of the income, as some parts were used for Mary Ellen’s care.
The lesson learned is that sometimes you can’t even trust your own children. Trusts and DPOAs are vehicles used to avoid the expense and time related to court supervision over our personal legal, tax and financial affairs. But because there is no court supervision, fraud is much easier to commit. Be sure that the parties you name to help you when you are most vulnerable will only have your interest at heart, and not their own.
© Craig R. Hersch, 2023. Learn more at www.floridaestateplanning.com
