Powers of Attorney can be wonderfully flexible documents. They allow the principal to appoint an agent to do all the things that the principal could do. That seems pretty straightforward. However, it is significantly more complicated than it appears.
State laws vary regarding how to interpret silence in a POA on various issues. For example, if the POA simply states that the agent has general authority to do anything that the principal could do, many states find that does not authorize gifting. So, you may think you have an all purpose POA, but, if it does not set out the power of the agent in sufficient detail, you may find the POA is not as flexible as you may have thought. Of course, gifting can be very powerful in estate and gift tax planning and Medicaid planning. Thus, a sufficiently detailed POA can provide additional planning opportunities for the principal’s benefit.
If a POA is not well drafted, other problems may arise. For example, a generic power to gift to anyone would cause tax problems for the agent, as holder of the power. If the agent has a power to gift for his/her own benefit, they have a taxable general power of appointment, even if they never exercise that power. As a result, all of the principal’s assets subject to the power could be included in the agent’s estate for estate tax purposes. This result can be avoided by either i) limiting the agent’s power to gift to himself or herself to the amount which may lapse back under IRC section 2514(e) (the greater of $5,000 or 5% of the assets), or ii) having the power to gift to the agent be exercisable only by a disinterested third party.
Read more about powers of attorney and their pitfalls here. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1545332
The POA used by members of the American Academy addresses these and many other potential problems. Have you come across powers of attorney with these or other hidden traps?
Steve Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
(800) 846-1555
www.aaepa.com
Steve Hartnett
Latest posts by Steve Hartnett (see all)
- Beneficiary Designations, etc., Aren’t a True Substitute for a Trust - February 19, 2019
- New Tax Proposals - February 12, 2019
- State Income Taxation of Nongrantor Trusts - February 5, 2019
