The Pennsylvania Supreme Court has issued a decision holding that a third party that relies on a power of attorney is not immune from liability if the power of attorney is not valid. This decision calls into question third parties’ acceptance of powers of attorney.

In recent years I have been increasingly frustrated by the refusal of financial institutions to honor an agent’s authority under powers of attorney. Time after time my clients have run into situations where a third party such as a broker, bank, or title company simply refuses to honor instructions given by an agent under a power of attorney. Sometimes they ask for the principal to sign "their" form, which is, of course, impossible if the principal is incapacitated. Sometimes they ask for an affidavit from me certifying that a document is valid and currently in force – which I cannot and will not do. That is far beyond my authority and ability as I could never know if documents have been revoked or superceded.

The issue has become very troubling and has caused me to consider recommending revocable trusts to clients solely for the purpose of dealing with disability and incapacity when I would not recommend them for that tired old excuse of "avoiding probate."

Things have now gotten worse. On December 21, 2010, the Pennsylvania Supreme Court handed down its decision in Vine v. SERS Board ( 9 A3d 1150), a case brought to my attention by Attorney William Campbell.

First, some background: To protect third parties, like banks, brokerage houses and retirement plans, the Pennsylvania power of attorney statute includes two provisions. First, the law requires a third party to obey the agent’s instructions, absent good reason not to do so. Second, if the third party acts in good faith reliance on the document, the third party is immune. These provisions have been necessary to provide third parties important relief from liability from relying on powers of attorney. These provisions are what has made the system work. If the third party is not relieved of liability – it is not going to take the risk of honoring the authority.

Here is an example: Grandfather signed a power of attorney naming Son as his agent under a power of attorney document. Grandfather becomes incapacitated. Son needs to access Grandfather’s funds in order to pay Grandfather’s bills. Son takes the power of attorney to the bank as proof of his authority to make withdrawals from Grandfather’s account. Under the Pennsylvania statute, we thought (or at least most, if not all, of my colleagues thought) that the Pennsylvania statute would protect a bank who relied in good faith on a power of attorney. What if the power of attorney were forged, or what if Grandfather was incompetent before he signed the document? If either of those things are true, then the power of attorney is not valid, but how in the world would the bank ever know? If we require the bank or other third party to investigate and make a determination of whether or not Grandfather was competent on the date the power of attorney is signed, then the power of attorney is effectively useless. No prudent bank or other third party is going to rely on any power of attorney document. To prevent this from being the case, the PA statute includes the provision that relieves the bank from liability for relying on the instrument.

Not any more.

The Pennsylvania Supreme Court has announced that the statutory protection for banks and other third parties only applies if the power of attorney is in fact valid. Hard to believe, I know, but true nevertheless. The highest court in the state now says that a third party is taking a risk to act on a power of attorney without a determination that the power of attorney is valid. How would they do that? It’s not something you can tell by looking at the power of attorney. If the power of attorney was signed a year ago and the principal is now incapacitated, how can a third party satisfy itself that the principal was competent when the power of attorney was signed? How can a third party know if the power was subsequently revoked? This is absurd.

True, broad durable powers of attorney can be abused, and they can create opportunities for self-dealing. This decision by the Supreme Court could render powers of attorney virtually useless. This is not a reasonable interpretation of the statue. As dissenting Justice Todd states, the Pennsylvania legislature "does not intend an absurd or unreasonable result" and described the court’s construction as "impracticable."

Since this decision is rendered by the highest court in the state, the only way to remedy the situation is for the legislature to act and pass more legislation. We hope that they will do so promptly. I guess the law would have to say something like a third party shall not have liability for good faith reliance on a power of attorney and "we really mean it."

On January 31, 2010, Jackson Hewitt Tax Service filed a lawsuit against H&R Block (Jackson Hewitt Inc. v. H&R Block Tax Services LLC) to stop a new advertising campaign. The complaint is that H&R Block’s "Second Look" marketing campaign is deceiving customers and diverting business away from Jackson Hewitt. They claim that H&R Block has been disparaging Jackson Hewitt’s reputation and goodwill in the marketplace. The lawsuit also claims that H&R Block misleads customers about refund anticipation loans (RALs). The lawsuit is Jackson Hewitt Inc v. H&R Block Tax Services LLC, U.S. District Court, Southern District of New York, No. 11-00641.

H&R Block’s ad campaign claims it found errors in 2 out of 3 returns prepared by other commercial tax preparers when the returns were reviewed by Block. The reviews in question are H&R Block’s "Second Look Review" service. For $29, Block will review returns prepared by other companies, to see if anyone missed anything. Jackson Hewitt in the complaint states: "H&R Block’s 2 out of 3 claim necessarily implies the false claim that two out of three Jackson Hewitt customers who are entitled to refunds have been short-changed due to Jackson Hewitt errors or incompetence."

Interestingly, the Block TV ad campaign never mentions Jackson Hewitt in the script- it refers to "other commercial preparers." However, there is a "fine print" disclaimer on the ad which refers to Block’s review of Jackson Hewitt prepared returns. The complaint alleges that Block has run print advertisements that say, "We found errors in 2 out of 3 Jackson Hewitt Tax Returns."

H&R Block is about five times bigger than Jackson Hewitt, which is the second largest commercial tax preparer. Jackson Hewitt said it prepared 2.53 million U.S. tax returns in 2010. H&R Block prepared 20.1 million U.S. returns in its 2010 fiscal year. H&R Block is based in Kansas City, Missouri, and Jackson Hewitt in Parsippany, New Jersey.

Speculation is that the H&R Block ad campaign is in response to their being prevented from giving out RALs. This highly profitable short term loan offered by many commercial tax return preparers has been criticized by many because of high fees and interest rates.

Taxpayers who get RALs often pay charges for the application, e-filing and a range of other costs, in addition to the bank’s finance charge. This can all add up to the equivalent of an interest rate in excess of 100% and sometimes multiples of that, according to the National Consumer Law Center. The Center reported that a $3,300 RAL carries a rate of about 72% when fees and charges are added up.

In December 2010, federal banking regulators Office of the Comptroller of the Currency informed HSBC Holdings Plc., H&R Block’s principal lender, that it must stop offering RALs.

The FDIC, which governs the bank funding Jackson Hewitt’s RALs, hasn’t made the same determination. This looks like a windfall for Jackson Hewitt whose RAL program is still going strong. Despite the government’s and financial advisors’ criticism of RALs, the public apparently still likes them. Hewitt was positioned to pick up lots of business from Block since Hewitt could offer RALs and Block couldn’t.

Block, in an attempt to aggressively market its services, began a new ad campaign. The campaign focuses on the Second Look Service. Taxpayers are urged to bring in their 2007, 2008 and 2009 returns. These returns can be amended if errors are found, and Block claims 2 out of 3 reviews result in refunds.

Jackson Hewitt’s complaint says: "H&R Block’s failure to offer a program comparable to Jackson Hewitt’s RALs has proven to be a significant disappointment to H&R Block’s prospective 2011 customers, with the result that H&R Block saw itself facing significant competitive disadvantage in competing with Jackson Hewitt as the peak tax return season approached. . . H&R Block’s response was to launch a massive promotional campaign based on false and misleading statements, designed to ‘trash’ both Jackson Hewitt and its RAL service."

Since they can’t offer RALs, H&R Block has some alternative products available for this filing season, including the Emerald card – you receive your refund on a prepaid MasterCard, and a Refund Anticipation Check (RAC) – Block gets your refund, deducts its fee and possibly your tax preparation fees and gives you either a check or a direct deposit. These are not loans. Block claims you get your refund in 8 to 15 days if you use one of these products.

This year the IRS says it expects more than 70% of returns to be filed electronically. Taxpayers can expect to get refunds in 7 to 10 days after filing. Let’s see – which is better 7 to 10 days or 8 to 15 days. Be careful out there.

The Trust Advisor Blog posted this excellent interview with Jonathan Blattmachr about the future of Estate Planning:  Visionary Predicts Future of estate Planning

Blattmachr on virtual law practice of "remote law":

"The next generation’s estate planners may serve a global clientele, without ever meeting a single client face to face.

More and more firms are already marketing to prospects and keeping their leads on the line by providing a rich experience through their website: an online newsletter, a blog, even a Twitter feed.

Down the road, Blattmachr sees these sites merging with the computerized decision-making software that is already helping mass-market clients write their wills.

“The law firm’s software will analyze the client’s responses and then advise the client whether he or she is an appropriate candidate for the strategy and state why,” he explains.

“Presumably, there will be an offer to meet with the client or prospective client to implement the strategy if that is what the client or prospect wishes to do,” he adds.

In effect, the estate planner will be providing basic advice — via the automated system — from anywhere in the world. As a result, Blattmachr expects a lot more work-at-home lawyers to do good business over the next decade.

And while many U.S. professionals are worried about having their jobs outsourced to India, there’s a secret to outsourcing, Blattmachr says.

“No lawyer in India is going to work as cheaply as a computer,” he adds. “So outsource yourself to the computer and keep the money.”

Of course, servicing clients outside of the lawyer’s own jurisdiction may require knowledge — whether derived from computer software) or affiliation with a lawyer in the client’s own jurisdiction — to adequately serve the client’s interest."

If the employer has the right to view the e-mails that were sent to the client at the place of employment, that could destroy the privilege. 

Randall Ryder reports for Lawyerist.com: 

"The California Court of Appeals recently found that a client’s e-mail to her attorney, regarding her plans to sue her employer, was not privileged. The court said her e-mail was the equivalent of consulting her attorney in her employer’s conference room using a loud voice and leaving the door open. Notably, this e-mail exchange occurred on the company’s servers, through the client’s work e-mail address.

In New Jersey, a court held that emails sent from a Gmail account, or another web-based account, were still private and confidential."

Read more here.

Jack Hough writes for SmartMoney:

"Douglas Shulman says he uses a hired tax preparer because the U.S. tax code is so complex. That’s a bad sign. He’s the I.R.S. commissioner."

Read more: Tax System: Too Complex To Be Constitutional? – SmartMoney.com

"Consider the following two sentences from different sources:

1. "[A] statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application, violates the first essential of due process of law."

2. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).

The first sentence comes from a 1926 Supreme Court decision that helped establish the right of citizens to known what laws mean. The second comes from the tax code."

Death of Female Partner Puts Cozen Firm in Center of Same-Sex Marriage Comity Case

Law partner in Philadelphia firm dies and her parents and wife to whom she was legally married in Toronto in 2006 fight over her profit-sharing account.

See Martha Neil’s article in the ABA Journal online:  Death of Female Partner Puts Cozen Firm in Center of Same-Sex Marriage Comity Case

See Gina Passarella;s article in New York Law Journal:  Fight Brewing Over Dead BigLaw Partner’s Benefits

COMITY – definition

Courtesy; respect; a disposition to perform some official act out of goodwill and tradition rather than obligation or law. The acceptance or adoption of decisions or laws by a court of another jurisdiction, either foreign or domestic, based on public policy rather than legal mandate.

In comity, an act is performed to promote uniformity, limit litigation, and, most important, to show courtesy and respect for other court decisions. It is not to be confused with full faith and credit, the constitutional provision that various states within the United States must recognize the laws, acts, and decisions of sister states.

Comity of nations is a recognition of fundamental legal concepts that nations share. It stems from mutual convenience as well as respect and is essential to the success of international relations. This body of rules does not form part of International Law; however, it is important for public policy reasons.

Judicial comity is the granting of reciprocity to decisions or laws by one state or jurisdiction to another. Since it is based upon respect and deference rather than strict legal principles, it does not require that any state or jurisdiction adopt a law or decision by another state or jurisdiction that is in contradiction, or repugnant, to its own law.

Comity of states is the voluntary acceptance by courts of one state of the decision of a sister state on a similar issue or question.

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Click here to read about the litigation over trusts in Walt Disney’s family.  Hat Tip to Gary Beyer at Wills Trusts and Estates Prof Blog.

Robert Anglen, writing for the Arizona Republic:  "The court battles revolve around the fortune of one of the legends of American entertainment, Walt Disney. They trace back to secret land deals in Florida. A prominent East Valley developer. A controversial Arizona real-estate baron. And two Disney heirs, his grandchildren, who inherited hundreds of millions of dollars.

The cases illustrate how even the most careful estate planning may not prevent vicious court fights from erupting when families feud. Relatives take sides, attorneys clash, and original estate terms may be altered."

Click Here to read the Wall Street Journal article about a defendant at a criminal sentencing hearing.

"The trial judge immediately found the defendant guilty of contempt for “uttering a profanity at me in my presence, in my sight, and in a calculated way.” He handed down a one-year prison sentence for contempt,  on top of the other sentences he had imposed for the defendant’s underlying criminal offenses."

The biggest changes from the 2010 Tax Relief Act that became law on December 17, 2010 were outlined in last week’s column: extension of the Bush individual and capital gains tax cuts for two years, a one-year payroll tax cut, a top federal estate tax rate of 35% and a $5 million exemption for the estate, gift, and generation-skipping tax. But wait, there’s more:

 

Adoption and Childcare Provisions

Taxpayers who adopt children can receive a tax credit for qualified adoption expenses. A taxpayer may also exclude from income adoption expenses paid by an employer. The credit and the exclusion from income were both previously raised to $10,000 (both for non-special needs adoptions and special needs adoptions and subject to inflation) and would have expired in 2011, but they are now extended through 2012.

The Patient Protection and Affordable Care Act (PPACA) passed in March 2010 increased the credit and exclusion by another $1,000 to $13,170 for 2010 and 2011 and the new act made the credit refundable for 2010 and 2011.

Existing law provided employers with a credit equal to 25% of qualified expenses for acquiring, constructing, rehabilitating or expanding property which is used for a child care facility. There is an additional 10% credit for child care resource and referral services. The credit is capped at $150,000. The new law extends the credit through 2012.

 

Expensing Versus Depreciation under Section 179

 

Under prior law, a taxpayer may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time. The 2010 Small Business Jobs Act increased the dollar and investment limits for the maximum amount that can be deducted as an expense to $500,000 and $2 million, respectively, for 2010 and 2011. The 2010 Tax Relief Act provides for a $125,000 dollar limit and a $500,000 investment limit for 2012.

Energy-efficient new homes credit. The new law extends the credit for manufacturers of energy-efficient residential homes purchased before January 1, 2012.

Energy-efficient appliances. The new law extends through 2011 and modifies standards for the credit for US-based manufacturers of energy-efficient clothes washers, dishwashers and refrigerators.

Energy-efficient existing homes. The bill extends through 2011 the credit for energy-efficient improvements to existing homes, reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act. Standards for property credit eligibility are updated to reflect improvements in energy efficiency.

 

Refund and tax credit disregard for means-tested programs.

 

The expiring law provided that the refundable components of the Earned Income Tax Credit and the Child Tax Credit do not make households ineligible for means-tested benefit programs. The new law extends these exclusions from income for purposes of means-tested programs through 2012.

Barring a technical correction, the requirement that GRATS be for a minimum term of ten years was not included. A GRAT is a special grantor trust that people use to transfer assets that are expected to increase greatly in value in a short period of time. To the extent that the appreciation outpaces inflation, leverage is gained in transferring the assets via trust at the end of a two year term. The donor gets the original funding back in an annuity plus two years of normal interest as it exists at the time of transfer, and the beneficiaries get the rest. The shorter the term of the trust, the better the leverage.

Also not included was "portability" of the Generation Skipping Transfer Tax (GSTT) exemption. Taxable transfers to beneficiaries two or more generations younger than the donor get not only the gift (or estate) tax burden, but also a second tax slice taken at the highest estate tax rate, which will be 35%. This is a heavy tax burden on such a transfer, but everyone has an exclusion amount (free pass, so to speak) of whatever is the current Estate tax exclusion amount. The Estate Tax exemption is now "portable", with the surviving spouse being eligible to use the deceased spouse’s unused exclusion amount. But, there is no such portability for the Generation Skipping Transfer Tax. If there will be a large transfer to second-generation beneficiaries in an estate plan, either directly or just in case the first generation doesn’t survive their parents, pre-death estate planning is the only way to use both parents’ full GSTT exclusion.

 

 

What Was Not in the Bill

Energy Credits

Education Incentives

Coverdell Accounts are tax-exempt savings accounts for paying education expenses of a beneficiary. The allowable contribution had been raised from $500 to $2,000 and elementary and secondary education expenses were included in 2001. Those changes will now be continued through 2012.

Exclusion of up to $5,250 from income and employment taxation for employer-provided education assistance is extended through 2012.

Student loan interest deduction up to $2,500 per year is allowed. The 2001 law eliminated the 60-month limit on deductions and raised the phase-out income range beginning at $55,000 AGI (the bottom number on page one of your 1040) for single filers and $110,000 for joint filers. These 2001 improvements are continued through 2012.

The American Opportunity tax credit is available for up to $2,500 of the cost of tuition and related expenses that are actually paid. All of the first $2,000 may be taken as a credit, and 25% of the next $2,000 may be taken. Phase out of the credit begins at an AGI of $80,000 for single filers, $160,000 for joint filers. This credit is now extended through 2012.

The new tax legislation passed by the House, December 15, and the Senate, December 16, (not to mention signed by the President) is referred to as a tax cut. That’s a misnomer. In fact, the legislation keeps taxes where they are. It prevents taxes from increasing. But a cut? No, not exactly.

Here are some highlights:

Estate and Gift Tax

 

In 2009, each person had an exclusion amount of $3.5 million they could pass on to their heirs free of federal estate tax and the tax rate on amounts over $3,500,000 was 45%. In 2010 there was no estate tax. With the new legislation, each person has a $5 million exemption, and the tax rate on amounts over $5 million is 35%. If the first spouse to die does not use all of his or her exempt amount, the unused exemption can be added on to the surviving spouse’s exempt amount. This feature is called "portability."

 

Before anyone starts figuring out how to chain together five or six deceased spouses’ excess exclusion amounts, know this. A surviving spouse may only use the excess exemption amount of his or her last spouse to die. Consider Herman’s Hermit’s ditty about a man named Henry marrying the widow next door who had married seven previous Henrys. If Henry VII just passed away, and the fair widow had $4 million in excess exclusion amount from Henry VI, that $4 million is gone with the death of Henry VII, to be replaced, with the excess amount, if any, from Henry VII. Also consider that if Henry VII’s Executor refuses to elect to assign the excess amount to the fair widow, she gets no excess amount from Henry VII and Henry VI’s excess exclusion amount is still eliminated.

The changes are retroactive to the beginning of 2010, and carryover basis is repealed. However, for estates of 2010 decedents; executors will have an election. They may choose to have the law apply as it was in 2010 without the change made by this legislation. In general, executors of 2010 estates larger than $ 5 million will have to decide whether to pay no estate tax and use carryover basis, or to pay estate tax and get a basis step-up. There is an extension of time to make the election, pay estate tax and file returns of 9 months after enactment. The extension also applies to ancillary planning matters such as disclaimers.
 

In the new law, the gift tax and the estate tax are "re-unified." The gift tax exemption is $5 million, the same as the estate tax exemption. (There is one $ 5 million exemption which can be used for making life-time gifts or for death-time transfers.) In 2010, the gift tax exemption was $1 million. The annual exclusion from the gift tax for present interest gifts remains at $13,000 per donee.

Generation-Skipping Transfer Tax

The Generation Skipping Transfer Tax (GSTT) is levied on transfers to recipients two or more generations below the donor. The exempt amount for the GSTT is the same as the Estate Tax at the time of the transfer, so for the next two years it will be $5 million. While the estate tax exemption is "portable", the GSTT exemption is not.

Income Tax

•   The lowest bracket, 10%, is continued through 2012, rather than reverting to the 15% level. The 10% bracket applies to individuals making up to $8,500 and couples making up to $17,000.

•   The 25%, 28%, 33% and 35% brackets would have increased 3%, but now they’ll remain through 2012.

•   Phasing out of the personal exemption for those with higher adjusted gross income (AGI, the number at the bottom of page one of the 1040) was repealed for 2010 and now will continue to be repealed for two more years.

•   Phasing out of itemized deductions for those with higher AGI was repealed for 2010 and now will continue to be repealed for two more years.

•   The Alternative Minimum Tax (AMT) threshold for 2011 is $48,450 for single filers and $74,450 for joint filers.

•   Long term capital gains and dividends have been taxed at 0% for those in the 15% tax bracket and at 15% for those above that bracket. This favorable treatment is extended for two more years.

•   Child care credit for low income earners with children under 17 had been raised from $500 to $1,000. This increase is extended through 2012.

•   The marriage penalty relief for the standard deduction, the 15% tax bracket and the Earned Income Tax Credit (EITC) has been extended through 2012.

•   The dependent care credit for those with children under 13 and disabled dependents is $3,000 for one child and $6,000 for two children, and those levels have been extended through 2012.

•   EITC for families with three or more children is 45% of the couple’s first $12,570 of AGI, with a phase-out that begins at a higher amount. The new law extends the three child credit and raises the phase out point somewhat through 2012. The two-child credit remains unchanged.

•   Above-the-line deductions for teachers for $250 for school supplies was renewed for 2010 and 2011.

•   Itemized deductions for state and local general sales taxes in lieu of itemized deductions for state and local government income taxes was renewed through 2011.

•   Tax free charitable contributions directly from IRAs up to $100,000 per taxpayer per tax year was extended through 2011. Due to the late passage of the bill, such transfers made in January 2011 may be treated as made in 2010 if the taxpayer so elects.

•   The unemployment insurance section provides a one-year extension of the federal unemployment insurance benefits

 

•   Employee-paid payroll taxes are reduced. The rate for 2011 had been 6.2% of all wages earned up to $106,800 and 12.4% for self-employed individuals. The new law reduces these rates two percentage points; 4.2% for social security and 10.4% for self-employed individuals. This change is for 2011 only.

•   Additional provisions of the "tax cut" will be highlighted in next week’s entry.

Unemployment Insurance and Payroll Taxes