One of the most important documents you will use during your lifetime is a general durable power of attorney. As I have discussed in previous articles, a general durable power of attorney allows you (as the principal) to designate a person(your agent) to conduct your business and financial matters after you become mentally incapacitated. Generally, a durable power of attorney will avoid the need for a court to appoint a conservator for you if you are incapable of handling your own financial affairs.
It is equally important to have a well drafted durable power of attorney. The preprinted durable power of attorney forms that you find in book stores or on the internet are written to general, and do not include language that is necessary to give the agent authority to complete specific transactions. For example, if the durable power of attorney document does not contain specific language giving the agent the authority to make gifts of the principal's property, the agents may run into trouble with the IRS.
the case of Estate of Floy M. Christensen
The consequence of neglecting this important detail was illustrated in the case of Estate of Floy M. Christensen. In the Christensen case, the United States Tax Court ruled that transfers made by agents under of a durable power of attorney with no specific language granting the agents the authority to gift the principal=s property were not completed gifts and should be included in the decedents gross estate. Estate of Floy M. Christensen v. Commissioner, T.C. Memo 2000-368.
The facts of the Christensen case
The facts of Christensen are as follows: On January 10, 1996, Floy M. Christensen, a resident of Kirkland Washington, died testate at the age of 102. In 1984, Mrs. Christensen executed a durable power of attorney and appointed her son and daughter as her agent. Mrs. Christensen's power of attorney provided in pertinent part:
- Powers. The Attorney in Fact, as fiduciaries, shall have all the powers of absolute ownership and control of all assets and liabilities of the Principal, whether located within or without the State of Washington, the same as are possessed by the Principal, including but not limited to, the power
- to convey, transfer, encumber or otherwise deal in any way in connection with real property, securities and bank accounts owned by the Principal, and
- to do all acts granted trustees by the Washington Trust Act of 1959 and any amendments thereto (which powers are incorporated herein by this reference).
- Effectiveness and Duration. This Power of Attorney shall become effective immediately and shall not be affected by the disability of the Principal.
Mrs. Christensen's power of attorney did not specifically grant her agents the power to transfer her property by gift.
In September of 1994, Ms. Christensen moved into a nursing home where she remained until her death From September 1994 to the date of her death, Mrs. Christensen exhibited severely impaired cognitive skills including poor short and long term memory.
In 1995 and 1996 the agents under Mrs. Christensen's power of attorney gifted more than $205,000 of cash to various family members from a bank account that was titled in the name of Mrs. Christensen and her son and daughter as joint tenants. It was stipulated that all the money deposited into the joint account was Mrs. Christensen and not from her son and daughter. On audit, the IRS determined that the transfers made in 1995 and 1996 of $205,000 were not completed gifts and should be added to decedent's gross estate.
The Tax Court agreed with the IRS because Washington law does not grant the authority to a person named on a joint account who does not own the funds in such account to make a gift of all or a portion of those funds on behalf of the actual owner of those funds. Any transfer of funds made by a non contributing joint owner will be subject to the contributing owner's continuing power to revoke the transfer. For a gift to be complete by a non contributing owner of the owner's funds for gift tax purposes, the contributor of the funds must provide prior authorization for the gifts or specifically authorize a duly appointed representative to make the gifts on the contributing owner' s behalf.
Lessons of The Christensen case
The Christensen case should alert everyone to the importance of having a well drafted durable power of attorney. The heirs of Mrs. Christensen's estate learned this mistake the hard way by paying an additional $108,633 of federal estate tax plus the time and expense of litigating the case with the IRS. Learn from Mrs. Christensen's mistake, and have your durable power of attorney reviewed by your attorney. A little prevention now may save your family many problems when they can least afford it.
Call (720) 200-4025 now or email us to find out how our attorneys can advise you on your durable power of attorney.
