This financial power allows your attorney-in-fact to make gifts of your property. You may already know that you want your attorney-in-fact to be able to give away your property under some circumstances. On the other hand, allowing your attorney-in-fact to make gifts might feel like giving up too much control.
Possible Gift Tax Consequences
Gifts to the Alternate Attorney-in-Fact
There are many reasons why you might want to permit your attorney-in-fact to make gifts of your property. Here are a few of the most common.
Estate tax savings. If you have substantial assets (many millions of dollars) and are concerned about your eventual estate tax liability, you may be planning to reduce estate taxes by giving away some of your property while you are still alive. If you have set up this sort of gift-giving plan, you'll probably want to authorize your attorney-in-fact to continue it.
Other gift-giving plans. There are lots of reasons to give gifts during your lifetime. You may, for example, want to donate regularly to your church or a favorite charity. Or perhaps you've made a commitment to help a family member with college or starting up a business.
Family emergencies. All of us are occasionally caught off guard by unexpected financial troubles. You may want your attorney-in-fact to be able to help out if a loved one faces such an emergency.
Except for gifts to your attorney-in-fact, you cannot use your power of attorney to limit the size of the gifts that your attorney-in-fact makes. If your attorney-in-fact gives away more than a certain amount—currently $16,000—to any one person or organization in one calendar year, a federal gift tax return will probably have to be filed.
Several kinds of gifts, however, are not taxable regardless of amount: gifts to your spouse, gifts that directly pay for medical expenses or tuition and gifts to tax-exempt charities. Even when gift tax must be paid, unless you make hundreds of thousands of dollars' worth of taxable gifts during your life, no tax will actually be due until after your death. Because your attorney-in-fact is required to act in your best interest, making large gifts could create a conflict. On one hand, your attorney-in-fact may feel that you would want to make a sizable gift—even if it's a taxable one—to a particular person or organization. On the other hand, if you have a very large estate that is likely to owe estate tax at your death, your attorney-in-fact won't want to increase your eventual tax liability.
For these reasons, if you do permit your attorney-in-fact to make gifts, it's particularly important that you explain, ahead of time, what you intend and whether you have any limits.
First, you must decide whether you want to allow your attorney-in-fact to make gifts to himself or herself. Because this raises some unique issues, you must consider it separately from the question of gifts to other people.
If you want to allow gifts to your attorney-in-fact, you must place an annual limit on them. This is because of a tricky legal rule called a general power of appointment. If your attorney-in-fact has an unlimited power to give your property to himself or herself and happens to die before you do, the attorney-in-fact could become the legal owner of all your property. In this case, your attorney-in-fact would be subject to taxes based not only on his or her own assets, but on yours as well.
To avoid this problem, you must limit the amount of money your attorney-in-fact may accept in any given year. To avoid trouble with gift taxes, you may want to let the current gift tax threshold be your guide and set the limit at $15,000 or less. Whatever amount you choose, be sure it's far less than what you're worth. If you set the limit too high, you may inadvertently create a general power of appointment.
You may want to allow your primary attorney-in-fact to receive gifts of your property, but not your alternate attorney-in-fact. WillMaker allows you to include this restriction in your power of attorney document. If you allow gifts to your first-choice attorney-in-fact, and you've also named an alternate attorney-in-fact, you will be asked whether or not your alternate is allowed to receive gifts of your property.
If you wish to allow your alternate to accept gifts of your property, that's fine, too. If you do allow gifts to your alternate, the annual gift limit will be the same as the amount you set for your first-choice attorney-in-fact.
After you've decided whether you want to allow gifts to your attorney-in-fact, we ask you about gifts to other people and organizations. If you're comfortable giving your attorney-in-fact broad authority, you can allow gifts to anyone your attorney-in-fact chooses. Or, you can specify the people and organizations to whom your attorney-in-fact may give your property.
You can't use your power of attorney to limit the size of gifts to others, so if you give your attorney-in-fact broad authority to make gifts, be sure to discuss your intentions. Your attorney-in-fact should have a sound understanding of your plans for giving gifts—including the recipients you have in mind, under what circumstances gifts should be made and in what amounts.
Remember that any gifts your attorney-in-fact makes must be in your best interest or according to your explicit instructions. For example, your attorney-in-fact may make annual gifts to each of your three children to reduce your estate tax liability—or periodic gifts to your niece because you promised to help her with college costs. Your attorney-in-fact should follow the guidelines you have set out in the power of attorney document.
When you give your attorney-in-fact the power to make gifts, you also give the power to forgive or cancel debts others owe you. If anyone owes you money and you've authorized your attorney-in-fact to make gifts to them, be sure you let your attorney-in-fact know which debts you want to be paid and which may be forgiven.
If you've authorized gifts to your attorney-in-fact and he or she owes you money, your attorney-in-fact can forgive those debts, too. But for these debts, your attorney-in-fact can't cancel amounts worth more than his or her maximum gift amount in any calendar year. For example, your son, whom you've named as attorney-in-fact, owes you $20,000. You've placed the annual gift limit at $7,000. He can forgive his debt to you at the rate of $7,000 per year.