Power of Attorney - What It Is and Why You Need One

Many of us worry, with good reason, that we might one day become incapacitated and unable to attend to our own affairs. How can we be sure our bills are paid, our investments are managed, or our property sold if the need arises?

A power of attorney is a document that delegates legal authority to another person. You may be familiar with a limited non durable power of attorney from attending a property closing when one of the parties is absent. The Power of Attorney allows the principal (person granting the Power of Attorney) to name an Attorney in fact (the person to whom the legal authority is being delegated) to sign documents to effect a property closing on their behalf.

Non Durable Powers of Attorney can be granted for a wide variety of tasks, and they remain in effect until canceled by the Principal or until the Principal becomes incompetent or dies.

A durable Power of Attorney is often granted between spouses or between a parent and a trusted child or other relative. The durable Power of Attorney as the name implies enables the Agent to act on the Principals behalf even if the Principal becomes mentally or physically incompetent. This is an important distinction. Should the Principal become incompetent through disease such as Alzheimer's or as the result of an accident or illness, there is someone in place who can make legal decisions, access funds, and pay bills on behalf of the Principal. As with non durable POA's a durable Power of Attorney ends when revoked by the Principal or when the Principal dies.

If you have not executed a Durable Power of Attorney and you become unable to handle your own affairs your family will probably have to go to court to have you declared incompetent - a very public airing of a very private matter. The court must then appoint someone, maybe not the person you would choose to handle your affairs. Sometimes a bond must be posted, an attorney or CPA hired to prepare detailed financial reports that must be filed with the court, and the court must give permission for certain transactions like the sale of real estate. All of this can be a long and expensive undertaking that can easily be avoided with proper planning.

You should consult with an attorney to have this important estate planning document prepared in accordance to your wishes and personal situation. You also should be sure to update the document from time to time. If a Power of Attorney is over three years old your agent could run into problems with some financial institutions refusing to honor it because of a concern it may have been revoked. Your attorney should be able to guide you.

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Estate Planning
Financial Planning
Power of Attorney

Pension Protection Act

The Pension Protection Act of 2006 was recently signed into law by President Bush. The act contains numerous provisions that benefit individuals including:

• Made permanent the increased IRA contribution limits that were set to expire in 2010 and provides for indexing contributions to inflation after 2008.
• Made permanent the tax free withdrawal status for qualified distributions from 529 college savings plans that were scheduled to expire in 2010.
• Allows non-spouse beneficiaries of qualifies plan assets to rollover the proceeds to their own IRA.
• Allows for automatic enrollment in 401k plans, requiring workers to opt out rather than opt in.
• Allows employers to pay advisors to counsel participants in qualified plans without becoming liable for the advise given to participants as long as the company performs due diligence when hiring advisors and the advisor is a fiduciary accepting person liability for the advise provided.
• Allows members of the military called to active duty to take penalty free distributions from IRA, 401k, and similar qualified plans.
• Permanently allow for Roth 401k and 403b plans.
• Made permanent the Savers Credit under which low and moderate income tax payers can receive a non refundable credit for contributions to retirement savings plans and IRAs based on income and filing status.

For more information look here and here.

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Rebalancing Act

My previous entry on reversion to the mean may have seemed a little academic, but it has a very practical application in managing your portfolio. Over time investments, like closets, tend to become disorganized. You may have spent considerable time and effort in setting up an asset allocation for your 401k, but if you stop there you will eventually have a portfolio that no longer meets your needs, and could potentially expose you to much more risk than you originally intended.

Rebalancing your portfolio can insure that your risk remains tolerable, and can actually improve your investment returns over time. There is always disagreement over when you should rebalance, some prefer quarterly, some monthly, some have complicated formula's that trigger rebalancing. You can put me in the annual camp. When I have looked at hypothetical portfolios and compared annual to quarterly rebalancing I usually find that annual rebalancing provides more return, while quarterly rebalancing does a better job of reducing risk. No matter what choice you make, the process of rebalancing can benefit you.

The reason rebalancing works is that "reversion to the mean" shows that different asset classes and subsets within those classes go through periods of under performance and out performance. By rebalancing your portfolio you force yourself to take some profits in areas that are outperforming, and purchase securities that have become relatively cheaper. This goes against human nature because we all tend to want all our money in whatever is providing the best return right now. Just remember that all things in life have cycles. You may not be able to predict when a cycle will begin or end, but you do know that it will. Rebalancing provides discipline to your investment process and can keep you from making the big mistake of being late to the party and late to leave, like the dot com investors of the last bull market.

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