The power to make gifts can be a powerful and flexible tool in a well designed estate plan. However, if not carefully applied, the power to gift can either be ineffective or have unintended negative tax consequences for the power holder.
The power to gift is one of several powers often given to an attorney-in-fact (through a durable power of attorney) or to a trustee, which allows the power-holder to continue a disabled individual’s pattern of gifting to family members or charities, or to disburse estate assets as needed to various individuals appointed by the disabled individual.
If this power is not specifically outlined in the power of attorney or trust documents some Courts have held that no power to gift can be inferred despite broad language allowing the attorney-in-fact to “grant, convey, assign or mortgage…” the principal’s property. In Massachusetts, it is well settled that powers not explicitly given to an agent will not be inferred. For this reason, a well crafted durable power of attorney needs to specify to whom and for what purpose gifts can be made or else risk not having the gift power honored.
Even when the gifting power has been clearly defined there can be unintended tax consequences if the power has not been well designed. Property subject to a “general power of appointment” is treated at the power-holder’s death as if he actually owned the property, and is therefore taxable in his estate. A general power of appointment exists if a power can be exercised for the benefit of the power-holder, his estate or his creditors. For example, if an attorney-in-fact has the power to make gifts of a disabled person’s property to cousin Mary, uncle Roger, and himself, he has a general power of appointment and the entire value of any property subject to the gifting power will be attributed (and taxed) to his estate at death.
To avoid this outcome, a power of attorney may only allow the attorney-in-fact to make gifts for the benefit of others. This can be troubling however, especially when the attorney-in-fact is a child or close family member of the disabled individual. Limiting the power-holder’s ability to use the gifting power for his own benefit to an ascertainable standard relating to his “health, education, support or maintenance” will also help ensure that no general power of appointment is created.
Another option to limit the tax consequences to the attorney-in-fact is to limit the amount of the gift he can make to the prevailing annual gift tax exclusion. Currently, the exclusion limit is $12,000. If the power-holder can only make gifts of $12,000 per year to several people including himself, and he dies in a given year without making the gifts, only the $12,000 he was able to gift to himself will be taxable against his estate.
Obviously there are many considerations involved in drafting a durable power of attorney. Contact a Massachusetts estate planning attorney to discuss your options.