In a durable power of attorney, the principal appoints someone to oversee his financial affairs, including in the event he becomes incompetent as a result of injury or illness. A broad durable power of attorney may authorize the agent to take any action as fully and effectually in all respects as the principal could do if personally present. However, even the most broadly stated power of attorney does not authorize the agent to make gifts on behalf of the principal unless the power of attorney expressly grants the agent such power. The law requires that gifting powers be expressly stated in the durable power of attorney in order to reduce the risk that the agent will engage in financial abuse of the principal.
Gifts are an important estate planning tool, as making gifts during life often results in significant tax savings at the principal’s death. Therefore, it is advantageous for an agent under a durable power of attorney to be authorized to make gifts for estate planning purposes. Generally, it is best if the scope of an agent’s power to make gifts on behalf of the principal is limited, so as to reduce the potential for abuse.
If the durable power of attorney states in general language that the agent is authorized to make gifts, without express limitations, by law the agent is authorized to make a gift up to the amount of the annual federal gift tax exclusion, or twice that amount if the principal’s spouse consents to a split gift, as defined by the tax code. Further, such general language authorizes the agent to make a gift of the principal’s property if the agent determines doing so is consistent with the principal’s objectives, if known, or if unknown, with the principal’s best interest, based on all applicable factors, including: (i) the value and nature of the principal’s property; (ii) the foreseeable obligations and need for maintenance of the principal; (iii) the minimization of all taxes; (iv) the principal’s eligibility for any benefit, program or assistance; and (v) the principal’s personal history of making such gifts.
A durable power of attorney may expressly provide that the agent is only authorized to make gifts to specified classes of persons, such as the principal’s descendants. Such a provision may be advisable if the agent is someone other than the principal’s spouse or family member, in order to reduce the risk that the agent will make gifts to himself or third parties he wishes to benefit, contrary to the principal’s desires or best interest.
A durable power of attorney may also expressly require that the agent make gifts only in a manner which continues the principal’s previously established pattern of gift-making for estate planning purposes. Such a provision helps ensure that the agent will make gifts which align with the principal’s desires and objectives.
Further, a durable power of attorney may expressly provide that the aggregate of all gifts to any one recipient in any one year shall not exceed the amount of the annual federal gift tax exclusion. Such a provision provides the agent with the flexibility to maximize tax-free annual gifts for estate planning purposes, and reduces the risk that the agent will deplete the principal’s estate.
It is also possible for the principal to expressly authorize the agent to make any gifts that the agent believes will benefit the principal or the principal’s estate, including gifts to the agent himself. Such a provision grants the agent the broadest authority to make gifts on behalf of the principal, but it also provides the greatest potential for abuse. Therefore, it is crucial that a principal granting such broad authority trust the agent unconditionally.
In drafting a durable power of attorney as part of a comprehensive estate plan, it is important to consider what gifting powers should be granted in light of the principal’s personal and financial situation. While gifting powers are useful for estate planning purposes, it is also important to limit gifts to those the principal might have made, and minimize the risk for financial abuse.
If you have any questions regarding this article, please contact Attorney Megan Harried at O’Neil, Cannon, Hollman, DeJong & Laing S.C. at 414-276-5000.
