Gifts by power of attorney
Tax Facts | National Underwriter Company
A recent case serves as a reminder that in many states, a power of attorney does not include the power to make gifts unless specified in the power. Therefore, the attorney in fact will generally be unable to implement a gift-giving program on behalf of the principal unless the power to make gifts is specified in the power. Gifts invalidly made under a power of attorney will generally be includable in the principal's estate.
However, it should be remembered that the reason for the requirement that the power to make gifts be specified is because the power to make gifts could possibly be used to give away everything the principal owned and the principal might have no recourse against the attorney in fact. Indeed, some commentators believe the power to make gifts is inconsistent with the fiduciary duty which the attorney in fact owes the principal. If the power to make gifts is included in a power of attorney, it might be wise to place restrictions on the power, such as the permissible beneficiaries, the amount of gifts, and the circumstances under which gifts can be made.
Willis Barnett executed a durable power of attorney, giving Elton Barnett the legal authority to manage and dispose of Willis' property and conduct business on his behalf. Shortly before Willis' death in 2003, Elton issued a series of 17 checks to 17 individuals in the amount of $11,000 (the amount of the gift tax annual exclusion in 2003).
A durable power of attorney can be a useful tool to provide for a disabled or incapacitated person. A power of attorney is a written document which allows the person given the power (the attorney in fact) to act on behalf of the person creating the power (the principal). A durable power of attorney provides that the power of attorney is not affected by subsequent disability or incapacity of the principal.
The power of attorney can specify the powers given or the extent of the powers. In many states, a power of attorney does not include the power to make gifts unless specified in the power.
The court agreed with the IRS that under Pennsylvania state law, a power of attorney does not include the power to make gifts unless specified in the power and the power to make gifts was not specified in the power. Therefore, Elton lacked the power to make the gifts and the checks were not valid gifts for estate tax purposes. As such, the gift checks were includable in Willis' estate.
Although the court stated that it was not necessary to determination of the case, the court also addressed the argument of the estate that Willis could have somehow ratified the gifts under the theory that Elton was acting as an agent of Willis. The court noted that agency theories cannot be used to ratify the gifts because the power of attorney statute specifically states the requirements for a valid power and the requirements for a power to make gifts were not met here.
Additionally, the court noted that because the checks were not considered valid gifts, it did not have to address the issue of whether 12 of the checks were completed gifts, the checks having been cashed after the decedent's death. Whether for purposes of removing property from the gross estate or for obtaining the gift tax annual exclusion, it is a good practice to write and deliver checks sufficiently in advance that the checks can be cashed before the end of the year for which the annual exclusion is sought and before the donor's death.
Barnett v. U.S., 2009-2 USTC ¶60,576 (WD Pa. 2009).
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