Durable Powers of Attorney and Retirement Plans

Take-Away: It comes as no surprise that much of our client’s wealth these days is now tied up in IRAs (traditional, Roth, SEP and SIMPLE) as well as in 401(k) accounts. Control of these retirement assets, by default, passes to a conservator, or agent acting under a durable power of attorney, if the retirement asset owner becomes incompetent. When reviewing an individual’s durable power of attorney and the powers that are delegated to the agent, pay close attention to those powers that expressly deal with the principal’s retirement assets, including the power to take distributions or change beneficiary designations.

Background: A durable power of attorney instrument is more than a basic, one-form-fits-all instrument. Durable powers of attorney are authorized under MCL 700.5501 et. seq. When you consider the magnitude of assets held in retirement accounts, be they IRA,  401(k) or 403(b) accounts, relying on a generic form durable power of attorney may prove to be insufficient to efficiently deal with these unique assets and their tax attributes.

Key Powers to Consider: When looking at the provisions of a durable power of attorney that address the principal’s retirement assets, consider if some of the following provisions should be included to the ‘basic’ delegation of powers.

What’s Covered? Does the durable power of attorney cover all retirement type assets including IRAs, Roth IRAs, defined contribution qualified plans, defined benefit qualified plans, 401(k), retirement annuities including 403(b) annuities,  or IRC 457 governmental accounts?

What Powers Does the Agent Hold? Does the agent possess the express power to:

1. Direct qualified charitable distributions from the principal’s traditional IRA in order to satisfy the required minimum distribution obligation for the year?
2. Establish and make contributions to the qualified plan or IRA or to terminate a qualified plan?
3. Convert a traditional IRA to a Roth IRA?
4. Select payment options, or subsequently change payment options previously made by the principal?
5. Make an annual rollover from an IRAs or direct a custodian-to-custodian transfers of retirement assets between or among IRAs?
6. Take withdrawals from the qualified plan or account larger than the principal’s required minimum distribution for the year?
7. Determine what investments to make with regard to the assets held in the retirement account, including the ability to open, fund,  and administer a self-directed IRA?
8. Make a ‘back-door’ Roth IRA contribution by making an after-tax contribution to a traditional IRA?
9. Change beneficiary elections or designations made by the principal, such as directing the payment of the retirement account to a see through trust after the principal’s death?
10. Make other possible elections available under the qualified plan or custodial account?
11. Take substantially equal installment payments from an IRA in order to avoid the 10% penalty on distributions prior to age 59 ½?
12. Take a loan from a qualified plan account if the plan permits loans to its participants?

To Whom Does the Agent Account?

If the agent acts under the durable power of attorney and exercises one of these extraordinary powers delegated to the agent with regard to the principal’s retirement accounts, to whom does the agent account or report such actions taken?

If the account owner is incapacitated, accounting to that incapacitated individual by the agent who exercised such a power with regard to retirement assets makes little or no sense. Accounting to a trustee if there is a companion revocable trust may be helpful, but technically the trustee has no  real control over the agent. There should be some obligation imposed on the agent to report/account/disclose actions taken under the durable power of attorney, e.g. the a named ‘back-up’ agent under the instrument, if only to avoid implications of self-dealing that does not become apparent until after the principal’s death.

Conclusion: In light of the amount of wealth that is currently held in retirement accounts across the nation, and the size of the amount that will pass on the owner’s death ‘outside’ probate, a Wills or a Trust, more time needs to be spent thinking about the scope of power given to an agent under a durable power of attorney to ‘manage and administer’ the principal’s retirement assets and the income tax consequences that they carry.