Sutton Robinson Freeman

Power of Attorney for Estate and Gift Tax Savings

As people live longer, the incidence of senility or other mental disability becomes more of an estate planning problem. Often, the elderly have the foresight to appoint an attorney in fact under a power of attorney (POA) to act fro them in financial and medical matters. In most of these cases, however, the attorney-in-fact is usually an adult child, which unfortunately sets up the ready-made problem of whether gift giving under a power of attorney is appropriate, especially if one of the recipients is the adult child who has the power of attorney.

In a "private letter ruling" issued by the IRS, the IRS allowed the annual gift tax exclusion ($11,000) to be taken in a situation involving gift giving by an attorney-in-fact to herself and to her children. Such a series of gifts can reduce the size of the eventual taxable estate by the amount of the $11,000 annual exclusion for each gift, plus any future appreciation on that amount. To be entitled to the power to make gifts in this relatively common situation, however, the IRS appears to require the presence of additional circumstances that may not be all that common for many taxpayers.

Typical fact pattern. A mother executed a durable power of attorney designating her spouse as agent and, in the alternative, her daughter. After the spouse died, the daughter, acting under the power of attorney, created two trusts on her mother's behalf a qualified personal residence trust that conveyed the residence to the daughter at the termination of the trust term, and a trust for the benefits of the daughter's children.

Within the document granting the power of attorney, in addition to specific authority to act in enumerated circumstances such as endorse checks, collect rents and execute deeds, was "the authority generally to do, execute and perform any other act, deed, matter or thing whatsoever, that ought to be done, executed or performed in and about the premises, of every nature and kind whatsoever, as fully and effectually as the Decedent could do if personally present."

The daughter had been named in her mother's will as the sole beneficiary of the estate. The decedent had a history of making gifts that extended over several years, twice in excess of the annual exclusion and, in fact, in excess of any gift given through the daughter's exercise of the power of attorney. The mother died with an estate much larger than the total value of all the gifts that had been made by the daughter.

IRS's holding. The IRS's analysis of whether the gifts were complete for tax purposes hinged upon its determination of whether a state court likely would determine whether the gifts made by the daughter on behalf of the decedent were authorized under the power of attorney. Hare are the criteria that the IRS used.

• Is the power to make gifts specifically authorized under a power of attorney? If not, the taxpayer has a higher burden to prove that gifts are authorized.
• Are the beneficiaries of any gift also the beneficiaries under the decedent's will? Such identity of the beneficiaries would point toward the intent of the decedent to authorize such gifts.
• Does the person who executed the power of attorney have ample assets to take care of living expenses or otherwise prevent the decedent from becoming economically disadvantaged after the gifts are made?
• Was there a previous gift giving program in place prior to the exercise of the POA that indicates that the subsequent gifts were consistent with the decedent's history of gift giving? In the ruling under consideration, the gifts were consistent since over the years the decedent had made a number of gifts, several of which were substantial.

One way to avoid tax litigation may be to draft a power of attorney that not only provides the specific power to make gifts, but also conveys the intention of the grantor that the attorney in fact should continue a certain gift giving plan set out in the document if it is appropriate. This would be particularly helpful when an estate is just within the taxable range (or it has the potential for doing so after another stock market run-up). Of course, more common may be the situation in which the grantor is not as concerned (particularly when the power is granted) about maximizing estate and gift tax savings as the potential heirs, one of whom is given the power of attorney. Without the added history of gift giving and a large estate, this latter situation will continue to draw scrutiny from the IRS.

When addressing any issues of estate planning at this time, it is important to understand whether the changes to the rules for estate taxation made by the Tax Relief Reconciliation Act affect a planning strategy that has effectively worked before the Act. Since the new tax act does not change $11,000 annual gift tax exclusion, drafting a POA to give the attorney in fact authority to make gifts that fall under this exclusion is still not necessary. However, since the new tax law does make some changes with respect to the gift tax law, to draft an air-tight document, the POA should mention that it gives the attorney in fact authority to make gifts that are subject as well to the new $1 million lifetime gift tax exclusion limit.

If you need any further explanation of how a properly-drafted power of attorney may save estate taxes, please do not hesitate to call.

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