What Is A Durable Power of Attorney For?

A durable power of attorney is used to give another person certain legal powers to manage your assets. It can give someone all powers to do everything you could do if you were able or it can give limited powers. Oftentimes we use a general power of attorney that gives someone complete power over our assets but it does not become effective until and unless we become incapacitated. This kind of power of attorney is part of your complete estate plan. See article below for definition of “incapacity.”

Even if you have a trust you will need a power of attorney to give someone control over basic things such as, changing your mailing address, transferring money from accounts that are not in your trust, talking to an institution regarding your affairs, like, the IRS, Social Security Administration, Veteran’s Administration, life insurance company, pension plan administrator, etc. Because of the privacy laws, if you don’t have the power of attorney for someone, like your parents, none of these institutions will divulge any information to you. Even your parents’ doctors cannot give you any information unless you have this document. This power is not always included in a medical power of attorney or “advance health care directive.”

Many times we see an elderly person, whose son or daughter helps with paying their bills and checking their bank balances. The son or daughter can do this because they sign on the bank account. But if they need to help with anything else not in the bank account they can’t. Many times the parent gets dementia or Alzheimer’s, becomes incapacitated and then it’s too late to have them sign a power of attorney form. At this point the child will have to go through the probate court process of getting a conservatorship for their parent, which takes many months and costs anywhere from $ 3,000 to $ 6,000. Again, with a little planning you can avoid this by getting a durable power of attorney now before your parent becomes incapacitated.

What Is a Durable Power of Attorney?

What Is a Durable Power of Attorney and How Does It Work?

A Durable Power of Attorney is a legal document giving certain powers to another person to act as your attorney in fact or as your agent with regards to your assets. That is, it enables the person you appoint to make decisions about your assets and liabilities and to sign documents, contracts, agreements, leases, etc. for you. The power of attorney is used like a trust, except you’re not dead. So when does it take effect and for how long does it last?

What Is a Durable Power of Attorney and How Does It Work?

A Durable Power of Attorney is a legal document giving certain powers to another person to act as your attorney in fact or as your agent with regards to your assets. That is, it enables the person you appoint to make decisions about your assets and liabilities and to sign documents, contracts, agreements, leases, etc. for you. The power of attorney is used like a trust, except you’re not dead. So when does it take effect and for how long does it last?

When does it take effect?

It takes effect and it ends when you say it does. You define the time limits and other terms in the document. Usually we use these powers of attorney for asset management to protect the family in case the creator (you) becomes disabled or incapacitated. That means you are not able to take care of your financial affairs. It can also mean that the creator, perhaps your parent, is not able to resist “undue influence.”

This can happen when an elderly person can’t say “No” when someone asks them for money. Or a caregiver or someone else may find out that your parent has some savings and uses their position as a friend to influence your parent to give them money. This is financial elder abuse. It happens more often than we want to admit. The scary part is that the county agencies in California that were helping to protect seniors against elder abuse have all been cut back and have let go most of their staff.

You may also use a power of attorney if you just don’t want to handle your affairs and want to appoint someone else to do it. The document usually includes terms providing that you will get your powers back if you regain capacity. So if you are temporarily ill and someone has to pay your bills for you, you will take back your powers when you recover.

Sometimes you want the power of attorney to take effect immediately even if you’re not a senior or disabled, such as, when you travel out of the country a lot. One of our clients who travels to South East Asia on a regular basis gave a power of attorney to her brother with whom she owns rental property. That way if anything happens while she’s gone her brother can handle it and sign any necessary documents to maintain the property.

What is Incapacity?

The document includes a definition of incapacity which you can tailor to your own needs. The standard definition is:

(1) The person is unable to provide properly for that person's own needs for physical health, food, clothing, or shelter; to manage substantially that person's own financial resources; or to resist fraud or undue influence.
(2) A medical doctor or psychiatrist, not related by blood or marriage to any trustee or beneficiary, examines the person and declares under penalty of perjury that the person is temporarily or permanently incapacitated, according to medical definitions.
(3) The person already has a conservator who has been appointed by the court.
(4) The court makes a finding that the person is either temporarily or permanently disabled.
However, you can define it any way you want by removing any of these items or adding some of your own.

When Does It End?

The power of attorney can end on a specified date, when the person regains capacity or under any other circumstance you describe in the document. Estate planning documents are to protect you and your family. So you decide what you want to include.

For more information call the Law Offices of Patricia Rowe at 925-256-1000 or go to our website at www.PatriciaRowe.com and sign up for our monthly newsletter. Or you can ask questions here in the comment section or email your questions to prowe@patriciarowe.com.

3 Reasons Why You Need a Trustee

1. To Take Care of Your Assets for Your Children- If you have minor children they will need someone to manage your assets for them. Even if you only have a house and a few investments, if both you & your spouse die in a car accident, say, your children will probably have to go live with someone else. In that case your house will have to be sold and the money will have to be reinvested in stocks, bonds, cd’s, etc.

Who will do that for them? You will need someone to deal with a real estate agent, sign a listing agreement, decide on a listing price, negotiate with buyers, sign the sales contract, perform all the tasks that a seller must do to complete a sale. So even if you have children who are no longer minors, would they be able to do all that? Probably not- many adults can’t do it. So if you haven’t appointed a trustee (by writing it in your trust document) the court will appoint a stranger to do it for your family.

After the house is sold the trustee will have to manage the investments of the trust to get the highest rate of return (income) possible while keeping the assets safe. That’s the main job of a trustee, to safeguard the assets for the beneficiaries of the trust (usually, the kids) and make distributions according to the trust document.

2. To Provide Flexibility in Making Decisions- If your children are young the trust will have to be managed for many years. Oftentimes parents will set up the trust to give discretion to the trustee regarding how much to distribute to each child each year, that is, the trustee decides. If children are young that would mean giving living expenses or a monthly allowance to the guardians of the children, the people who are taking care of them. If kids are going to college, they might need money to buy a car, for example. That would be an extra distribution that the trustee would have to decide on. Most trustees may give $ 12,000 to buy a used Honda but would not give $ 100,000 for a Lamborghini.

Even if your children are in their twenties, oftentimes, clients set up a time schedule for distributions of principal, that is, all of the assets that went from you or your estate to your trust. Usually if there are no problems with, say, drug or alcohol abuse, parents will write in their trust that the trustee should distribute one third of the principal when a child reaches age 25, one half when they reach age 30 and the balance when they reach age 35. This helps to give out the assets when the children become a little more mature. You must have a trust to do this.

3. To Give the Trustor (You) More Flexibility in Describing How To Distribute the Assets- You can also describe in your trust other reasons you would want your children to receive distributions, such as, for education. Your trust document can include a definition of education. You may not want to pay for basket weaving school but you may have a child or grandchild who you know will never go to college. However, if they were interested in a trade school, you would probably want the trustee to pay for that as well.

You can describe other things you would want your trust to pay for, such as, giving a child money to start or buy a business, or for the down payment on a house.

If you have a child who has a drug or alcohol abuse problem, you can provide that they must be clean and sober for one year subject to testing before they receive any distributions.


These are only three reasons to have a trust. There are many more. Stayed tuned for future blog postings! Or subscribe to our RSS feed. You can get more trust and tax tips from our monthly newsletter. Just subscribe below! Or you can always call us at the Law Offices of Patricia Rowe 925-256-1000. Or you can visit my website at www.PatriciaRowe.com !

How to Use Your Corporation to Save Taxes

First of all the name of the game is to have the corporation pay for as much as it possibly can so you are using pre-tax dollars. That means just what it sounds like, you are using money that you haven’t paid tax on yet. The corporation takes in income then gets to deduct all business related expenses and pays tax only on what’s left over, net taxable income.

C Corporation

If you have a C corporation, then the corporation will pay the tax on the net income. If you can leave some of the money in the corporation (as opposed to taking it out in the form of wages to you) this will save taxes because the corporation pays only 15 % federal tax on the first $ 50,000 of taxable income.

If the corporation makes $ 93,300 and if you can leave $ 50,000 in the corporation you will pay 15 % tax on all of the income, that is, the combined tax between you and the corporation. Here’s how:

Corporation net income $ 93,300
Less: wages to you ( 43,300)

Net taxable income to corporation $ 50,000 taxed at 15 %

Wages to you $ 43,300
Less: standard deduction
& personal exemption ( 9,350)

Taxable income to you $ 33,950 taxed at 15 %

So you’ve paid 15 % tax on $ 93,300 of income!

Remember, if you or you and your spouse are the sole owner/employees of the corporation it doesn’t matter who is paying the taxes you or the corporation. It’s all coming out of your pocket. For example, when you pay yourself wages the corporation will pay the FICA Social Security and Medicare taxes by withholding 50 % from wages and paying 50 % itself. It’s still all coming out of your pocket because you own the corporation.

S Corporation

If you have an S corporation, then the net taxable income and certain other items, like interest income and capital gains, will be passed through to you to be reported on your individual tax returns. If you can leave some of the money in the corporation (as opposed to taking it out in the form of wages to you) this will save taxes because the net income from an S corporation is not subject to self employment tax.

This is the great advantage to using an S corporation instead of a sole proprietorship that reports its income on your 1040 Schedule C. All of the income on the Schedule C is subject to self employment tax. It’s a killer!

Now keep in mind, you are an employee of the corporation and you must pay yourself a “reasonable” wage for the services you perform for the corporation. This means it can’t be too high or too low. If you are the sole owner/employee then no wage is too high because all of the income was generated by your efforts. Under the same theory, if you don’t pay yourself all of the income in the form of wages, the IRS may say you didn’t pay enough.

If you do not take all of the income out in the form of wages you should be careful about taking other distributions. Although you are allowed to take distributions from an S corporation without paying tax on them, the IRS could recharacterize the distributions as wages and charge you payroll taxes on them.

These are just a few areas where you can save money by using a corporation. If you have any questions about your tax strategy call Law Offices of Patricia Rowe at 925-256-1000.

7 Tips To Reduce Corporate Taxes (Way After Year End)


The final extended due date for the 2008 corporate tax returns for calendar year corporations is September 15th. You finally looked at your profit and loss statement and it shows too much net taxable income. Your CPA says you’re going to owe a lot of tax, but you don’t know how you’re going to pay for it because your corporation doesn’t have any cash. You don’t know how the corporation could have ended up with net income because there’s no money in the bank.

What can you do now to reduce your corporation’s taxes now that you’re finally doing the returns?

1. Review Your Cash Expenditures- Go through your receipts (if you don’t have any- here’s the reason why you must save every receipt for anything spent during the year- start now!) pick out the ones for which you paid cash. Add the business-related expenses to the corporate books as “loan from shareholder.” That is debit expense, credit loan from shareholder.

2. Look Through Your Personal Checkbook- Look through your personal checkbook for any business-related expenses. Even if you don't have a receipt- you have a cancelled check or entry on your bank statement. (If you don't receive bank statements in the mail make sure you print out statements from online banking and keep them in your file for each month.) Add the business expenses you paid for the corporation to the corporate books as "loan from shareholder." That is, debit expense, credit loan from shareholder.

3. Review Your Credit Card Charges- Go through your credit card bills for your personal credit cards. (You should have a corporate credit card, but those expenses should already be recorded on the books.) Pick out any business-related expenditures and record them on the corporate books. Again, record as “loan from shareholder.” That is debit expense, credit loan from shareholder.

4. Think of Furniture or Equipment You Use in Your Business- Depreciation! Depreciation! Depreciation! Think of furniture or equipment you use for your business that is not recorded on the corporate books. If you have an office at home you have a desk, chair, computer, printer and maybe other equipment there that has never been recorded on the books. You have cell phones, iphones, cameras, camcorders, bookcases, shelving, storage boxes, file cabinets, etc. If anything can be remotely related to your business put it on the corporate books and depreciate it. It must be recorded at lower of cost or fair market value at the date you placed it in service, which is probably January 1.

5. Pay Yourself Rent for Storage or Office Space- You may be using parts of your house or garage for office or storage space for your business. You can have the corporation pay you the fair rental value of that space per month. Think what you would charge an unrelated party to rent such space. Even though you are way past the end of the corporate year, look to see if you have any outstanding loans you owe the corporation. An amount for rent can be transferred on the books from loan receivable shareholder to rent expense. Remember- you should have a written lease agreement between you and the corporation. In the current year start paying yourself monthly by writing checks from the corporation to you.

6. Pay Yourself A Year End Bonus- Again, you are way past the corporation's year end. But if you are desperate you can do this, although it's risky. If you have an outstanding loan receivable from shareholder you can pay yourself a year end bonus by recording an adjustment from loan receivable shareholder to officer salaries. The problem is you'll have to file amended payroll tax returns and this could cause you to be audited by federal or state taxing authorities. It's best if you have amounts that were paid to you by the corporation at the end of the year. You will still have to pay interest and penalties on the payroll taxes, but this may be worth it if you owe alot of corporate tax.

7. Pay Your Spouse for Outside Services- If you can say your spouse or children performed any kind of services for the corporation, such as, bookkeeping, telephone calls, sales meetings, interior decorating service, filing, modeling for advertisements or brochures, etc. pay him or her as an independent contractor. Again you'll have to have an outstanding loan receivable from shareholder balance. But this will avoid having to amend payroll tax returns. Again make the adjustment from the loan receivable shareholder account to the expense account.

If you are not sure how to do any of these adjustments yourself you can just list the items and give them to your CPA to make the adjustments. If your CPA doesn't know how or doesn't want to do these adjustments, or if you don't have a CPA- call Law Offices of Patricia Rowe at 925-256-1000. We can help! See our website at PatriciaRowe.com.

Estimated Tax Payments

Individuals:

There are two ways to pay your income taxes- through withholding, like on wages, or by making estimated tax payments. Estimated tax payments for individuals are due kind of quarterly on April 15th, June 15th, September 15th and January 15th of the following year.

If Your Income Is Less Than Last Year

The amount of estimated tax you are supposed to pay is 90 % of what you “estimate” you will owe for that year, say 2009. You compute how much you think you will owe, then divide by four and pay that amount. Just use your tax return software for last year and put in your numbers for this year. This is a good method to use if your income in 2009 is a lot less than that of 2008.

If Your Income Is the Same or Higher Than Last Year

But if your income is about the same or higher than last year you should use one of the “exceptions” to penalty for underpayment of estimated tax. That is, pay an amount equal to 100 % of prior year’s tax. (You can pay less but I don’t recommend it- it’s temporary and you never know what they’re going to do with the tax code.) Take the tax on your 2008 1040 line 61, divide by four and pay that each quarter. Then you’re covered- even if you owe $ 1 million on April 15, 2010 you won’t get a penalty. If your prior year’s tax was zero, then that’s all you have to pay for estimated- zero. But be careful, you’ll have to include form 2210 with your return to prove it.

Corporations:

The rules for estimated tax payments for corporations are a little bit different from those for individuals. For a calendar year corporation (one whose tax reporting year ends on December 31) the estimated tax payments are due on April 15th, June 15th, September 15th and December 15th of the current year.

So, use the same rules as above for individuals, i.e., estimate the corporation’s actual tax if income is less than prior year or pay an amount equal to 100 % of prior year’s tax if income is equal to or greater than the prior year.

Unfortunately the “exception” to penalty for underpayment of estimated tax that allows you to pay zero if prior year’s tax was zero is not available to corporations. Attach completed form 2220 to the corporate return to prove your exception.

7 Ways to Avoid Being Audited By the IRS

We’ve all talked to the next door neighbor who has his brother in law preparing his tax returns. He always gets all his withholding back because his brother in law comes up with very creative deductions, like his cat for a dependent, his kid’s private school tuition for child care credit and the cost of his built-in pool for medical expense.

Well, the truth is you can deduct whatever you want on your returns until you’re audited. Then you’re screwed!

Keep in mind, the federal statute of limitations is three years and states are three to four years. That means the IRS has three years to audit your return. They don’t even look at your return until two years after you’ve filed it. So, by the time they audit you, disallow your deductions, recalculate your tax and assess a deficiency it’s three years after you filed and you’ve got to pay interest and penalties in an amount almost as much as the additional tax.

It’s better to keep receipts and records and deduct only what you’ll be able to defend in an audit. Another bit of advice is watch how you report your income and deductions on your tax return:

1. It’s all in the presentation! Schedule C “Profit or Loss from Trade or Business” is the area that usually gets people audited. The IRS is looking at deductions. Give as much detail as possible on the schedule of expenses. Don’t have a lot in “miscellaneous expense” or “office supplies.”

2. Report all of your income. Sounds simple- but many people miss a basic check you should do before you file. If you have 1099 income make sure your income reported on schedule C equals or exceeds the total of your 1099’s. The 1099’s are recorded on the IRS’ computer so it’s an automatic letter to you if your income is less than the total reported to the IRS on 1099’s.

3. If you have received income that really belongs to someone else- usually interest income- report the total amount per the 1099-INT and subtract the “nominee interest” that belongs to the other person. A lot of tax prep software has this feature and will do it for you.

4. Again- they’re looking at your deductions- check Schedule A- itemized deductions- review the standard percentages used by the IRS and make sure you don’t exceed them.

5. Office-In-The-Home- yes- the IRS has made a special form to “flag” the fact you are taking this deduction. But don’t let that stop you! If you have an office in the home you are entitled to this deduction. As long as the percentage of business use (computed by taking the square footage of your office divided by the square footage of the whole house or apartment) is a “reasonable” amount you won’t be audited. Make sure it’s a “reasonable” %- I wouldn’t go over 20 %.

6. Vehicle Expense- another flag- but complete the detailed schedule showing how you computed the deduction and make sure it’s attached to your return. If filing electronically find software that includes the detail.

7. Non-cash Charitable Contributions- IRS hot topic right now- gifts of used clothing and stuff to Goodwill- yes another form to flag it- but complete the form 8283 with name and address of charity, date of donation and estimated value. Put descriptions of items given- use the large items like sofa, desk, TV, video recorder, instead of “miscellaneous.” Enter the cost- we usually estimate this a three times the value.

These are just a few areas where you can avoid an audit by being careful with your presentation. If you have any questions about your deductions or presentation call Law Offices of Patricia Rowe at 925-256-1000.