Preface: “The best inheritance a parent can give his children is a few minutes of his time each day. “– Orlando Aloysius Battista
Estate Planning and Power of Attorney: Managing Gift Giving
As people live longer, dementia and other mental disabilities become more common, posing challenges in estate planning. To manage this, elderly individuals often appoint an attorney-in-fact through a power of attorney (POA) to handle their financial and medical affairs. Typically, the attorney-in-fact is an adult child, which can lead to questions about the appropriateness of gift giving, especially when the attorney-in-fact is a recipient of the gifts.
IRS Ruling on Gift Giving
In a private letter ruling, the IRS allowed the annual gift tax exclusion amount ($18,000 for 2024) in cases where an attorney-in-fact made gifts to herself and her children. This can help reduce the taxable estate by the exclusion amount for each gift. However, the IRS requires certain conditions to be met, which may not be common for all taxpayers.
Example Scenario
A mother executed a durable power of attorney, naming her spouse as the agent and her daughter as the alternate. After the spouse died, the daughter, using the POA, created two trusts on her mother’s behalf:
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- A qualified personal residence trust that would transfer the residence to the daughter after the trust term.
- A trust for the benefit of the daughter’s children.
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These transfers were reported on gift tax returns, and the applicable tax was paid.
The POA gave the daughter broad authority to perform any act her mother could do if personally present. The daughter was also the sole beneficiary of her mother’s estate. The mother had a history of making substantial gifts, exceeding the annual exclusion amount. When she died, her estate was much larger than the total value of the gifts made by her daughter.
IRS Criteria for Gift Authorization
The IRS’s decision on whether the gifts were complete for tax purposes depended on whether a state court would likely find the gifts authorized under the POA. The IRS considered the following:
Specific Authorization: Does the POA specifically authorize gift giving? If not, proving authorization is more challenging.
Beneficiaries’ Identity: Are the gift recipients also beneficiaries under the decedent’s will? This suggests the decedent’s intent to authorize such gifts.
Sufficient Assets: Did the person who executed the POA have enough assets to cover living expenses and avoid economic disadvantage after the gifts?
Previous Gift-Giving History: Was there a history of gift giving that aligns with the gifts made under the POA? Consistent past gift giving supports authorization.
Avoiding Tax Litigation
To avoid tax litigation, it’s beneficial to draft a POA that explicitly includes the power to make gifts and reflects the grantor’s intent to continue a gift-giving plan if appropriate. This is particularly useful for estates near or within the taxable range. However, if the grantor is less concerned about maximizing tax savings, as may be the case when the POA is granted, and the estate is not large, this situation may still attract IRS scrutiny.
Conclusion
Clear and specific provisions in a power of attorney help ensure that gift giving is authorized and consistent with the grantor’s intent, potentially reducing estate tax and avoiding IRS issues.