Powers of Attorney – Planning Tips After 2010 Tax Act

Revisions to Powers of Attorney Gift provisions under all durable powers should be reviewed and revised. The purpose of gift clauses needs to be re-evaluated in light of the changes and how these changes will affect different clients. Here are a few thoughts for openers:

• For many taxpayers, the prospect of a large $5 million exclusion may obviate the need for any gift provision in a durable power of attorney. This might especially be true for elderly or infirm clients who opt to make a large gift, using up some of the new-found $5 million gift exclusion before it possibly disappears in 2013. These taxpayers may want to protect their remaining estate by expressly providing that no gifts shall be made.
• Some taxpayers may wish to permit gifts only to the extent reasonable to reduce state estate tax because the federal estate tax will no longer apply.
• For wealthy taxpayers who may believe that they will not be subject to an estate tax with the $5 million exclusion, there may be an inclination to eliminate any gift powers and simply state that “No gifts shall be permitted under this durable power of attorney.”
• For taxpayers who live in New York, the prospect of signing a newly revised or tailored New York statutory gifts rider may be sufficient to convince them to take no action.
• Perhaps wealthy taxpayers would wish to permit a broad gift provision that would authorize an agent to fund GRATs for designated beneficiaries, form and fund charitable lead trusts, and take a wide range of additional planning steps to take advantage of the $5 million exclusion in the event that future health issues interfere with or disrupt their planning. The TRA has provided an unprecedented opportunity to shift wealth to future generations. If these advantages are missed, and 2013 brings bad tax tidings (well, bad for taxpayers, but perhaps life support for the legions of estate planners!), a unique historical tax planning opportunity will have been wasted. Crafting such a detailed power will not be simple and some advisers might prefer to include such provisions in a revocable living trust and fund that trust with assets now.
• Some old powers of attorney included gift provisions that permitted the gifts of up to the applicable exclusion amount. Hmmm! What might this innocuous sounding term now mean? The applicable exclusion amount had been $1 million in 2001. In 2011 and 2012, the analogous concept is $5 million based on the TRA relief. But this is now referred to as the “basic exclusion amount.” The exclusion had previously been called the "applicable exclusion amount". The “applicable exclusion” amount under pre-TRA law has been redefined by the TRA to encompass the new estate tax concept of portability (the surviving spouse’s being permitted under certain conditions) to use the remaining basic exclusion amount from his or her previously deceased spouse (Your Basic Exclusion Amount + Portable Amount from Your Last Deceased Spouse = New Applicable Exclusion Amount).

Planning Note: Every gift provision must be reviewed. If a gift provision under an old power of attorney document referred to “applicable exclusion”, how will this now be interpreted? Potentially, it could mean $10 million, not the $1 million that it might have implied when executed. Any power containing that type of clause should be revised.