Estate Planning: Essential Tools

There are several estate planning tools available today. You should choose the combination of documents that best meets your needs.

Wills

One of the earliest forms of estate planning tools, a will is your opportunity to decide who will inherit your house, car, bank accounts, investments, sports memorabilia and other items. In most states, a will is the legal document whereby you nominate the backup parents for orphaned minor children. A will can be short and simple or more complex.

In your will, you should designate someone to serve as your executor. This person will gather your assets, pay your last debts, file the tax returns for you and your estate, work with the probate court and distribute your assets, according to the instructions in your will. The executor does not have to perform all the work personally. He can hire professionals, like an attorney, accountant and appraiser to do some of the tasks.

Trusts

Many people choose a revocable living trust instead of a will. Such trusts, when “funded,” are not subject to probate. Unlike a will, which is filed with the court, a trust protects your privacy. Your trust will not be a public record. It can take less time to administer an estate that has a trust document, if you put all your accounts and property into the trust. You will need to retitle your house, car, bank and brokerage accounts, and other assets into the name of the trust.

Irrevocable Trusts, known as “testamentary trusts,” when created under a will, can continue to protect the eventual inheritance from and for your heirs for many years. You can make arrangements for college educations, set up protections in case a loved one does not manage money well and address special needs and disabilities. Some trusts reduce taxes, while other types of trusts manage charitable giving.

Powers of Attorney

A well-rounded estate plan can protect you, if you become incapacitated because of an illness or injury. You can create a durable power of attorney document that selects someone to handle your financial affairs, run your business, or perform other stated functions, if you cannot do so for yourself.

If you do not have such a document and something catastrophic sidelines you, your family will have to go to court to get a guardian and conservator appointed for you. This process can cost thousands of dollars and take months. During that time, your bills go unpaid and your investments are unmanaged.

A medical power of attorney can designate someone to make medical decisions for you, if incapacitated. You should accompany a medical power of attorney with a medical records release. Without a medical records release, the Health Insurance Portability and Accountability Act (HIPAA) will prohibit your healthcare providers from talking with or showing your medical chart to the person who needs to make decisions for you.

Advance Directives

If you have strong convictions about particular types of medical care, you can prepare an advance directive. This document tells the medical personnel, for example, that you do not want to be on life support. The forms for advance directives tend to list specific kinds of life support, like food, water and ventilators. If you prefer to have someone you trust make those decisions based on the circumstances at the time, you can provide for this in your medical power of attorney.

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Family Business Succession Checklist

Fact: a business owner may be a phenomenal entrepreneur and yet may not be equally gifted when anticipating future threats to the future continuation of that same business. Consequently, if you want your family business to exist and thrive when you no longer run it, then you need to engage in succession planning sooner rather than later.

Business succession planning is more about avoiding problems than setting goals for growth. While you do want to set a general course for the enterprise you nurtured and grew, you also need to anticipate challenges that might arise 10, 20, even 50 years down the road.

This checklist can help you to avoid common miscues with your business succession:

• Face the situation and choose a successor. Although almost every business owner acknowledges the need for succession planning, very few people actually complete the task.
• Choose your successor based on the current and future needs of your business, and not on emotion. Business founders often select a family member or a protégé as the person to take the reins, but this decision can be a big mistake.
• Choosing someone with the same strengths as your own, might not serve the needs of your business, particularly in a changing marketplace. For example, your strong tech background might have provided the skills your startup needed, but a candidate with sales and marketing ability might be what your company needs going forward.
• Resist the temptation to set up competition among several candidates for the leadership role. This method of decision-making can result in a toxic workplace that damages relationships and hurts your business. The candidates might also sacrifice the future health of the business, in the name of short-term gains during the competition.
• If you have more than one person in mind for the top role, be honest and transparent. Decades of earned trust can be destroyed in an instant, if your best employees feel that you are hiding some of the facts and decisions from them.
• Shift your focus from what will happen to you when you step away from the business, to what will happen to your business. This approach can help you overcome your fears about the unintended consequences of a change in leadership.
• Many successful entrepreneurs build their identity around their organizations. It can be hard to walk away. You will need to redefine yourself and think about ways to craft the succession plan, so it is a win-win for all stakeholders.
• Create a succession plan that will encourage the new leader to stay. One of the top reasons why succession plans fail, is that the successor leaves the organization.
• Make sure you step away as scheduled. The best succession plan in the world will fail, if you do not let the new person do the job.
• Have a Plan B, in case the new leader fails, because 40 to 60 percent of all CEOs fail within the first year and a half.
• Realize your business will need to be nimble to survive in today’s market. Do not make the mindset of the organization too rigid to adapt to changing conditions.

Do not limit yourself to the items on this checklist. Feel free to consider other factors, depending on your business and its unique characteristics.

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Trust Administration Matters

If you have never served as a fiduciary before, it might feel somewhat daunting to be appointed to serve as the trustee of a trust. This is true whether the trust is created under a will (i.e., a “testamentary trust”) or is an irrevocable trust created under a revocable living trust, only after the maker of that trust dies.

It is preferable it the person establishing the trust notified you in advance of your appointment. If they did, then you should ask for a copy of the legal document appointing you and ask to have the preparing attorney provide you with an overview and address your questions. It is far better to know the responsibilities you will be taking on and politely refuse the appointment now, than it is to bail out when the appointment takes effect later. But first, what are some of those responsibilities?

Trustee 101

A trustee may be a person or a financial institution, or both. The trustee holds legal title to property for the benefit of another and acts according to the terms of the trust. The trust document will identify who the trustee is.  If the person who set up the trust was the initial trustee (as in a revocable living trust), then you might be named as successor trustee to administer the trust, when the original trustee becomes incapacitated or dies. For example, John might set up a living trust and put all his assets into the trust. He is the initial trustee. John handles all the administrative matters of the trust during his lifetime. When John dies, the person and/or institution appointed as his successor trustee assumes complete control.

If a trust appoints you as the successor trustee, you do not have to do all the work yourself. Handling the assets of another can monopolize your time, so many people hire and supervise specific professionals to do some or all the work. For example, you may have an accountant take care of the taxes. Alternatively, the trust may authorize you to appoint an institutional trustee to handle all the “heavy lifting” responsibilities, with you overseeing that trustee.

Trust Administration

The specific actions that a trustee must take require the utmost integrity and care, including the following responsibilities:

• Read the trust agreement. Make sure you understand what the trust directs you to do. Get professional advice, if you have questions. You need to know who the beneficiaries are, what they are supposed to receive and when you must make distributions to the beneficiaries.
• Marshal the assets. In other words, you need to find, secure and value all trust assets as soon as possible. You may be required to file a claim to collect certain assets, like the proceeds of life insurance policies. You may need to hire a professional appraiser to value some assets, like the contents of the home, jewelry and vehicles.
• Identify and pay all final expenses, personal and trust taxes and legitimate debts of the decedent. Some bills must be paid promptly. You also must provide proper notice to known and likely creditors.
• Distribute assets. Follow the trust agreement carefully, when making distributions to beneficiaries. Be prepared to say “no” to beneficiaries, when they demand distributions that are not authorized by the trust.
• Terminate the trust. After paying all expenses, debts, taxes and distributing all trust assets (if the trust so permits), you can terminate the trust and conclude your duties as trustee.

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Lifetime Gift Tax Planning

Lifetime gift tax planning allows you to give assets to loved ones, without paying gift taxes now or estate taxes later. Years ago, the federal government found that taxpayers were trying to avoid estate taxes, by giving away some of their property while still alive. As the donors saw their loved ones enjoying the gifts, the IRS saw the taxpayers avoiding or reducing estate taxes on these gifted assets at the death.

Consequently, the gift tax was enacted to keep people from avoiding the estate tax. The basic concept is this: when you give someone an asset that exceeds a permitted amount, you (the donor) must pay the IRS for that privilege, in the form of a gift tax.

If you are trying to use the lifetime wealth transfers to lower the total value of your estate and avoid or reduce estate taxes, here are three things you need to know:

• The annual gift tax exclusion is $15,000 in 2019.*
• The lifetime estate and gift tax exclusion is $11.4 million in 2019.*
• Some gifts are not subject to the gift tax at all.

Annual Gift Tax Exclusion

You can give away up to $15,000 per year, per beneficiary, with no gift tax consequences to the recipient or yourself. This strategy can be as easy as writing a check to each of your loved ones during the holidays. The assets you give away using the annual gift tax exclusion do not count toward the lifetime exemption.

Lifetime Estate and Gift Tax Exemption

Gifts exceeding the annual gift tax exclusion can fall under the lifetime estate and gift tax exemption, but you must file a timely gift tax return. For example, if one of your children is in a financial crisis, you should first maximize your annual exclusion and then apply gift amounts over that limit against the lifetime exemption.

The lifetime exemption is $11.4 million for 2019.* Before the Tax Cuts and Jobs Act (TCJA), the limit was $5.49 million in 2017. Unless made “permanent,” the current exemption amount will expire at the end of 2025 and the exemption could go back to the pre-TCJA limit.

The IRS combines the estate and gift tax exemption for a total exemption of $11.4 million. In other words, if you do not use any of the gift tax exemption while you are alive and you die in 2019, your estate will have the full $11.4 million estate tax exemption. If you use $4 million of the gift tax exemption while you are alive and you die in 2019, your estate will have a $7.4 estate tax exemption remaining. In this way, the federal estate and gift tax exemption is said to be a “unified” tax.

Some Gifts Are Not Taxable

First, there is no limit to the amount you can give to your spouse, if you are both U.S. citizens. However, if you are a U.S. citizen but your spouse is not, you can give up to $152,000 to your spouse in 2019.* Other common non-taxable gifts are:

• Tuition costs you pay for another person have no limit, as long as you pay the institution directly.
• Healthcare costs you pay for another person have no limit, as long as you pay the hospital or medical professional directly.
• Charitable contributions are also limitless, as long as the charity qualifies.

*As indexed for future inflation.

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Joint Tenancy Alternatives

Joint tenancy might seem like a simple way for two or more people to hold property together. However, this form of ownership can create problems, like inheritance issues. For example, a son and daughter inherit a home from their father as joint tenants with right of survivorship (JTWROS). Later, the daughter dies. What happens to her interest in the home? Her children will not inherit their mother’s share, because their uncle now owns 100 percent of the house as the surviving joint tenant.

If you want your child to inherit your home without the delays and expense of probate, you might think that retitling the property to yourself and your child as JTWROS is a simple and inexpensive way to accomplish those goals. There are several dangers to this strategy.

A JTWROS is irrevocable. If things go sour between you and your child, you can only take your child off of the title to the home with his written permission.

Your child can sell his ownership interest to someone, and you will get stuck with that person having an equal right to live in the home with you. Your child does not have to get your consent to transfer his interest in the property. You gave up half of your right to your own home and all of the control over that one-half interest.

Creditors of your child can come after his one-half share of the home. You might have to pay off his creditors to keep them from foreclosing on the home. This scenario could play out repeatedly.

People who set up their wills or trusts passing property to two or more people as JTWROS might not understand the consequences of this designation. The person making the will or trust might not intend to “disinherit” their grandchildren, and the person who enters into a JTWROS with his adult child might not realize the pitfalls.  He might not have known he had other options. There are several alternatives to joint tenancy.

Beneficiary Deed

If you execute a beneficiary deed, instead of a JTWROS arrangement, your child has no current interest in the home (and neither do his creditors). He only receives rights to the property upon your death. You can revoke the beneficiary deed at any time, which makes this option a better choice than a life estate, which is irrevocable. Note: Not all states have statutes authorizing beneficiary deeds, but an increasing number of states are moving in that direction.

TOD and POD

For non-real estate assets, think TOD and POD to avoid probate. For example, you can name your child as the beneficiary of your bank or investment account with the magic words “transfer on death” or “payable on death” (depending on the type of account) on your account with the financial institution.

Community Property

For married couples who want to avoid probate, holding title to real property as Community Property with Right of Survivorship (CP-WROS) might provide some tax advantages over jointly titled property and allow you to avoid probate. The rules governing CP-WROS vary from state to state.

Trust Agreement

You can transfer your assets to someone upon your death and avoid probate, by using a living trust.  The trust will ideally be revocable, so you can change your mind at some later date. There are many types of trust agreements you can use, depending on the purpose of the trust and what you want to accomplish.

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Post-marital Estate Planning

Marriage is a contract that has more potential financial consequences than anything else most people experience in a lifetime. You do not have to accept the standard default provisions the law offers for inheritances, contracts, medical decisions, property and divorce. Through the savvy use of post-marital estate planning, you can craft a different roadmap for yourself and your family.

Post-nuptial Agreements

Many people think you can only enter into a marital agreement before marriage, a pre-nuptial agreement. In reality, you and your spouse can create a post-nuptial agreement, regardless of whether you have a pre-nuptial agreement. Some of the reasons people decide to get a post-nuptial agreement include:

• Birth of a baby. After you have a child together, you might want to sit down and talk about how you will raise the child, if the marriage breaks down. The stakes are obviously higher when you have a child, and it is usually better to talk about these issues when you are not yet facing the specter of divorce.
• Marital misconduct. What if one spouse commits marital misconduct, like infidelity or abuse? You might decide to continue living together but under agreed-upon conditions, or stay married but live separately, or divorce. You should cover all the essential terms for any arrangement you choose. Sometimes people choose one of the first two options, but eventually divorce, so your agreement should anticipate that possibility.
• Financial changes. If either of you experiences significant financial changes for the better or worse, you might want to enter into a post-nuptial agreement. If you discover after the wedding that your spouse has financial skeletons in the closet, you should also consider a post-nuptial agreement to protect your financial future. In this situation, you should both pull your respective credit reports and review them together before agreeing on terms.
• Taxes and business ownership. These are additional reasons to consider a post-nuptial agreement. What if you enter your family’s business after getting married? You and your family members want your interest in the company to pass to your children, not to your spouse. Put this provision in a post-nuptial agreement. You can also handle things like filing status for taxes in these agreements.

The Divorce Process

If you are anticipating or going through a divorce, you need to get your ducks in a row for the future. Try to visualize the long-term future without your spouse and what that will mean for the inheritance of your loved ones. Realize that in many states a divorce automatically nullifies existing wills and living trusts, so you should immediately review and update your current estate plan and beneficiary designations. Note: Regardless of what the laws of your state say, if your ex-spouse remains the designated beneficiary of your ERISA retirement plan at your death, then your ex-spouse will inherit your retirement plan.

Wills and Trusts

Independent of the stability of your marriage, you and your spouse should have wills or living trusts to control the distribution of your assets when you die. If you do not have a valid will or living trust at death, then you could die “intestate” and the laws of your state would decide who inherits your assets. Not only does that delay any inheritance transferring to your loved ones, but you may be leaving an “unintended inheritance” to attorneys and the probate court system.

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Medicare vs. Medicaid

There are significant differences between the two programs.
Medicaid is a hybrid program that receives some of its funding from the federal government and some from each state. Since each state runs its own Medicaid program, every state’s variation of Medicaid is unique. It is important to understand the nuances of how Medicaid works in your own state. Medicare is a federal program and its benefits are fairly uniform across the country.

Source of Funding

States and the federal government pay for the Medicaid programs out of their annual budgets. Taxes and other sources of revenue provide the funds that the state and federal governments use to pay for Medicaid.

Medicare’s funding comes from withholding from your paychecks, while you are employed. That withheld money is deposited into a trust fund that provides insurance to help pay the medical bills of eligible individuals.

Type of Program

Medicaid is an assistance program that helps people with low income, regardless of age and whether you have paid into the system. Depending on your income, you might have to pay a small co-pay, but there are no monthly premiums.

Medicare is an insurance program, not an assistance program. You are only eligible for Medicare, if you paid enough money into the program from the withholdings your employer took out of your paychecks for Social Security and Medicare taxes. Think of Medicare as health insurance that you pay for throughout your entire working life, but you do not start to access the benefits until you are 65. However, even then you continue paying monthly premiums, co-pays and deductibles.

Eligibility

Medicaid covers the elderly, people with disabilities, pregnant women, families and children who meet the low-income guidelines. Eligibility differs from state to state, so you might qualify in one state but not another.

To be eligible for Medicare, you must be at least 65 years old, (unless you have a disability), or have End Stage Renal Disease. Either you or your spouse must have worked for at least 10 years at a job that paid Medicare taxes to get Part A (hospital coverage), without having to pay a monthly premium. If the time worked was fewer than 10 years, you will pay a monthly premium for inpatient coverage (Part A).

There are some ways around having to pay the monthly premium for Medicare Part A. People with certain disabilities are exempted. If you are receiving or are eligible for Social Security or Railroad retirement benefits, you can also receive Part A premium-free.

Medicare does not care how much money you make for purposes of eligibility. Having a high income can affect the premiums you pay for Part A or Part B (outpatient care), but there is no limit to the amount of income you can have and still be eligible for Medicare. After all, you earned the right to get Medicare by paying Medicare taxes out of your paychecks for all those years.

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Estate Planning for Young Adults

It seems strange to think of your own mortality — especially when you are in the prime of your life. This is probably the reason why 78% of millennials do not have even a simple last will and testament in place. While the old must die and the young may die, most people mistakenly believe that estate planning is just for super-rich folks with gray hair and a lot of assets. Nothing could be further from the truth. Regardless of your age, whether you are a newly-minted adult or a “seasoned” citizen, proper estate planning is essential to protect everyone you love and everything you leave behind at death.

Planning for Important People

If your adult child is single with no children, then the “people” planning component of his estate plan can be very simple. In fact, he is the most important person in his estate plan. For example, has he at least discussed and reduced to writing what his wishes would be in terms of cremation, burial, and any final send-off ceremony? Making difficult decisions today, makes them much easier on grieving family members later.

If an adult child is married without children, has she made arrangements to provide for her spouse? Has she legally appointed her spouse to wrap up any final affairs and to inherit everything directly with the least amount of legal “administrivia”?

Does your adult child have a minor child? Whether your son is single or married, has he made proper legal arrangements to nominate a guardian (back-up parent), should his child be orphaned? In most states, a last will and testament is the legal document used to make this important nomination. Your son should be sure to select someone who shares his fundamental beliefs, values and approach to child rearing. In the absence of his written legal guidance, this decision will be made by a judge who likely does not know your son or his family. This can be critical, if the other biological parent and her family are irresponsible and unfit to rear your grandchild.

Planning for Important Property

If your adult child has specific wishes for the distribution of her assets at death, then she must make proper legal plans for them while alive. Does she have any collections she would want a family member or friend to inherit? In the absence of her written legal instructions, those valuable collections could end up sold online or in a “garage sale,” because no one in the family knew their actual or sentimental value.

For many young adults, “digital assets” may have considerable value. These assets are not physical computers and iPhones, but rather the information stored on such digital devices. For instance, e-mail accounts, websites, software programs, social media accounts, online photos, and Bitcoin accounts are examples of digital assets. The fate of these unique assets varies, depending on where your son lives. However, it is important to address what happens to these assets, if something happens to him, or all access could be lost.

Sometimes the actual planning of an “inheritance” itself is important. For example, if your daughter wants to leave an inheritance to a someone who is a minor child, is financially immature, or has special needs, then a “trust” should be created to administer, protect and distribute the inheritance.

Some Final Thoughts

Nobody wants to think about losing their children, least of all during this exciting time of life. This also may be a good time for you to take a look at your own estate plan. Estate planning does not have to be complex at any stage of life.

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Cohabitation Challenges:
Protecting Minor Children

According to the Pew Research Center, in 2017 about seven percent of children in the U.S. are living with cohabiting parents. With more than five million minor children living with cohabiting parents, issues of income stability, custody and inheritance have likewise increased.

The issues are only magnified by the fact that cohabiting relationships tend to be less long-lasting than married relationships. Children of cohabiting parents tend to be adversely affected, when it comes to separation or death of a biological or non-biological parent.

Breaking Up

In the U.S., cohabiting individuals are treated as strangers under the law. What if the two of you break up, but only one of you has a biological tie to a minor child and the other does not. What happens to the family relationships? Barring a second-parent adoption, the non-biological parent may have no right to see the child or otherwise participate in the child’s life. This can be emotionally damaging to the child, who may have a strong connection with the non-biological parent.

To lessen the emotional turmoil of a cohabiting parent breakup, where one parent is not a biologic parent, consider second-parent adoptions, if available in your state, or a co-parenting agreement that takes into account custody and support.

On the other hand, if both cohabiting parents are biologically related to the minor child, standard child-custody laws apply. If the two of you cannot agree to a co-parenting plan, you may ask a judge to determine custody, support and visitation arrangements.

Death of Partner

One of the biggest issues that comes up in cohabiting families is that of inheritances. This is especially true, when a non-biological parent is involved. For example, say that you and your partner co-parented a son who is biologically related to you, but not your partner. If your partner dies without a will affirmatively leaving assets to your son, your partner’s assets will be distributed according to your state’s intestacy laws — not to your son. To make matters worse, if your partner owned the home where you cohabitated, then you may receive an eviction notice from that partner’s family as the new owners.

The same holds true for non-married couples rearing a child who is biologically related to both of them. In some states, if the mother dies, then the child automatically inherits, regardless of whether there is a will. If the father dies, however, absent a will or paternity/parenthood statement, the child may not inherit.

Estate Plan Essentials

If you are in a non-married relationship involving minor children, be sure to have the essential estate planning legal documents created, to potentially include the following:

• A will (include a guardian appointment for minor children)
• A trust (to avoid probate of certain assets)
• A parenthood statement (to establish a parental relationship)
• A co-habitation agreement (to work out distribution of assets, custody and support issues)
• An appropriate healthcare authorization (for each of you AND your minor children)

Do not forget about reviewing the beneficiary designations on financial accounts and life insurance policies.

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Disability Legal Planning for All Ages

A life-altering disability can strike at any time, regardless of your age. From a complicated pregnancy to a serious automobile accident to a cancer diagnosis, these situations can have a significant impact on your life and the lives of your loved ones. Because one-in-four working-age adults may become disabled before they retire, there is a chance you may become disabled. Prior legal planning is essential to reduce the legal hardships caused by a debilitating illness or injury. Here are a few tips to help you make proper disability legal plans.

Create Powers of Attorney

If you were disabled due to an injury or illness, who would make your personal, health care, and financial decisions? Would you rather it be someone you know and trust, perhaps a family member or friend, or would you prefer someone appointed for you by a judge who likely knows nothing about you, your family and your circumstances? If you are like most people, you would choose the former alternative over the latter. Unfortunately, without proper advance legal planning, the latter is the default and more common result.

Since none of us knows when to expect the unexpected, you need to create a durable power of attorney for health care decisions and a durable power of attorney for financial decisions. The word “durable” means the authority that you give the person appointed in your power of attorney, will continue in force should you become disabled. After all, that is when you would need them to act for you, right? This is an important point to remember.

Health Care Matters

Creating a durable power of attorney for health care decisions is truly a matter of life and death. Who better to advocate your health care needs than someone selected by you, who knows you better than the doctors and nurses treating you? As a result, you should share with your agent the nature of treatments you would want (or not want) under a variety of scenarios.

A health care treatment directive is a document commonly completed with the durable power of attorney for health care decisions. Its purpose is to provide written evidence and guidance regarding your end-of-life medical care. Be as general or specific as you wish. While you are at it, do not forget to include a HIPAA authorization as part of your health care disability planning. Such an authorization is necessary under federal law to allow your health care providers to disclose otherwise confidential and protected information to your agent.

Financial Matters

If the durable power of attorney for financial matters is “general,” then your agent (also known as an “attorney in fact”) may have very broad authority to act on your behalf. For example, the agent may be able to sell your home, sign and file your tax returns and pay ongoing bills from your account. On the other hand, if the durable power of attorney is “special or limited,” then your agent will have authority restricted to the acts you specify in the document. The scope of the authority you authorize is worthy of careful reflection. There have been cases where agents have exceeded the intended authority.

In addition to controlling the extent of authority you are authorizing under your general durable power of attorney, you may control when it becomes activated. If you want the authority to begin only when you become disabled, then you will want to create a “springing” power of attorney requiring some specific proof of your disability defined in the document itself. Otherwise, the authority of your agent may become effective immediately.

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