The Strategist
2nd Quarter 1995 - Volume 2 Issue 3
A Power of Attorney is a legal document that
allows an individual to designate another person or persons as his or her
"attorney-in-fact". In other words, individual "A" executes
a Power of Attorney naming individual "B" as his
"attorney-in-fact" authorizing individual "B" to act on
behalf or as individual "A".
A Power of Attorney can contain limited
powers or very broad powers including signing tax returns. An example of a
limited Power of Attorney would be one that authorizes a named individual to
act on your behalf in a specific transaction such as a real estate transaction.
On the other hand, an unlimited Power of Attorney would be one that states that
the individual named in the document has unlimited rights to act on your behalf
on any matters.
In most circumstances, a Power of Attorney
terminates once the person that granted it becomes incapacitated or disabled.
A Durable Power of Attorney is a Power of
Attorney which does not terminate when the grantor of this document becomes
disabled or incapacitated. It is generally a wise move to have a Durable Power
of Attorney naming at least one close family member, if not several family
members, as the holder of this power. This type of document could be useful in
the following scenario.
Assume that Grandfather is 75 years old and
is very wealthy. In November, Grandfather has a major stroke and is left
totally incapacitated with no chance of recovery. In the past, Grandfather has
made 10 tax-free annual exclusion gifts every Christmas of $10,000 each to his
son, daughter, their spouses, and 6 grandchildren. Grandfather has previously
given his son a Durable Power of Attorney with a broad range of powers.
On December 24th, the son, acting under the
authority of the Durable Power of Attorney, writes 10 checks for $10,000 from
the Grandfather's checking account to the Grandfather's 2 children, the
children's spouses, and 6 grandchildren. In other words, the son gifted
$100,000 tax-free out of his Grandfather's estate to the various family members
by writing checks on his Grandfather's account. These 10 gifts should qualify
as annual exclusion gifts since Grandfather had not, to date in that calendar
year, made any gifts.
On January 1st (7 days later), the son
writes 10 more checks for $10,000 each to the same 10 family members. The son
has gifted an additional $100,000 tax-free out of his Grandfather's estate
since each check is for the annual exclusion limit and falls in a different
calendar year.
Grandfather dies on January 15th. The son
has removed $200,000 from Grandfather's estate, tax-free. If the son had not
done this, Grandfather's estate would have been $200,000 larger and subject to
potential estate taxes in excess of $100,000.
It is important that you review your Durable
Power of Attorney. In a recent Private Letter Ruling (PLR-9509034), the IRS
indicated that a Durable Power of Attorney for a Florida resident did not allow
the holder of the power to make gifts of any kind (charitable, annual exclusion
gifts, or even taxable gifts). Although the Durable Power of Attorney in
question granted the holder very broad powers, there was no specific mention in
the document that allowed gifts to be made.
The IRS determined that the Florida Supreme Court
had not addressed this issue and then looked to lower courts in the State of
Florida to determine if the lower courts had addressed gifting under a Durable
Power of Attorney that did not specifically grant the authority to make gifts.
The IRS found a case dealing with very similar circumstances in which a lower
court had previously held that an agent, also known as an attorney-in-fact, had
no power to make gifts unless that power was specifically mentioned in the
Durable Power of Attorney.
The IRS decided that they did not believe
that the Florida Supreme Court would interpret the Durable Power of Attorney in
a manner that would provide the holder of the Power of Attorney the ability to
transfer property without full and adequate consideration. In the case in
question, it appears as though more than $6,600,000 will be brought back into
the estate. The IRS did say that had the Durable Power of Attorney specifically
granted the authority to make gifts, the entire issue would have been moot.
For those of you that may reside in the
state of Florida or hold a Power of Attorney from a Florida resident, please
review the Power of Attorney to see if it grants the specific authority to make
gifts and/or transfers without any consideration. It is generally wise to also
make sure that the Power of Attorney authorizes gifts or transfers without
consideration even to the person that holds the Power of Attorney.
For those residing outside the state of
Florida, re-examine the Power of Attorney you may have granted to someone to
see if making gifts are specifically authorized. If they are not, call your
attorney to determine whether or not he or she feels it would be wise to
include this specific authority. Executing a Power of Attorney specifically
authorizing gifts and/or transfers without consideration should avoid this
potential trap.
Although a Durable Power of Attorney,
containing the proper gifting language, can avoid potential pitfalls for many
people, it is important that the holder of this power and you coordinate
potential planning steps with the proper documentation. Many times, more than
just a Durable Power of Attorney is needed. This is particularly true for those
individuals that have taken the step of creating Revocable Living Trusts and
transferring assets or changing the title of their assets into the name of the
Revocable Trust.
For example, assume you have retitled most
of your assets into a Revocable Living Trust. Your Revocable Living Trust names
you as the original trustee and perhaps a child as a successor trustee in the
event of your incapacitation or disability. A Durable Power of Attorney would
not necessarily allow the attorney-in-fact to change or remove the successor
trustees of a Revocable Living Trust.
For those of you that have given successor
trustees in your Revocable Living Trusts the ability to make gifts, please
check with your attorney as to whether or not any gift or transfer without
consideration either by you or your successor trustee will be brought back into
your estate if you die within 3 years of the date of the transfer or gift.
Most tax practitioners believe that if the
original trustee (the grantor of the trust) makes gifts from the Revocable
Trust property, that these gifts will be excluded from the estate even if they
die within 3 years of the gift. However, many also believe that a successor
trustee may not have the same power to make gifts from the Revocable Living
Trust. Very careful wording is required.
How do you avoid this potential pitfall? The
answer is quite simple. The successor trustee of your Revocable Living Trust
should either be the same person that you have given a Durable Power of
Attorney to and be able to work very closely with the person that holds the
Durable Power of Attorney.
Assume that the successor trustee also holds
the Durable Power of Attorney. Also assume that virtually all assets of the
person that has become incapacitated are held in a Revocable Living Trust. The
successor trustee of this trust withdraws funds from the Revocable Living Trust
and transfers those funds to a checking account in the name of the
incapacitated person. This account should not be a trust account but rather an
individual account that was originally opened by the person who is now
incapacitated. Since he also has the Durable of Power of Attorney from this
person, he will be able to execute transactions on this account at the bank.
Once the funds are transferred outside the
Revocable Living Trust to the incapacitated person's individual checking
account, the attorney-in-fact then makes gifts from the checking account. This
should avoid a potential tax pitfall in the event of incapacitation for a
person with a Revocable Living Trust that has been making annual exclusion
gifts from the trust.
As a reminder, the earlier in the year that
an individual can make annual exclusion gifts ($10,000 per donee per year), the
better off an individual will be for estate tax purposes. Once annual exclusion
gifts are completed, they will not be included in the estate for estate tax purposes.
For clients in the 55% estate tax bracket, this is equal to a $5,500 net
improvement to your heirs.
On the legislative front, it appears as
though Congress will pass some form of tax reform this year which should
include an increase in the Unified Credit from the current $600,000 equivalent
amount to $700,000 effective January 1, 1996.
If this proposed legislation becomes law, we
will be sending out a special newsletter to advise our readers of the details
of the legislation and how to take advantage of it. One obvious way to take
advantage of this legislation, should it become law, is to immediately gift the
additional $100,000 increase out of your estate either to your children,
grandchildren, or a trust for their benefit. Again, this legislation is
proposed to take effect on January 1, 1996.
The
Wealth Transfer Group, Inc. is not engaged in the practice of law or accounting
nor are any of its employees, representatives, or agents. Tax and legal advice
should be obtained from qualified personnel.
(c) 1995 The Wealth Transfer Group, Inc.
283 Cranes Roost Boulevard, Suite 145, Altamonte Springs, Florida, 32701 (407)
339-5787
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