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Giving gifts can minimize estate taxes

By ALAN S. NOVICK
SCRIPPS HOWARD NEWS SERVICE

The holiday season is a time of giving for love and friendship but also because end-of-year tax planners encourage their clients to make deductible gifts to charities and personal gifts to family members to reduce estate taxes on potentially large estates.

For 2004 and 2005, the federal estate tax begins when estates exceed $1.5 million.

When a gift is to be made for an incapacitated person, the use of a durable power of attorney is the usual device that is relied upon.

One of the most troublesome areas in tax law involves the question of whether a gift that is made by use of a power of attorney will be valid either as a gift to a family member, using the annual exclusion of $11,000 per individual gift recipient or as a deduction for a gift made to a recognized charity.

The Internal Revenue Service said that if the durable power of attorney didn't expressly authorize the attorney-in-fact to make gifts, then such gifts can't be recognized as being removed from the taxable estate.

The result of that ruling was to increase the estate taxes by the value of all of the gifts that the taxpayer's attorney-in-fact had thought he had made.

When the IRS issues a technical advice memorandum such as the one described, it is answering a specific question involving a specific set of facts, and it always includes the warning that the memorandum may not be used or cited as precedent.

There are some cases in which a gift made under a durable power of attorney with only general powers has been held to be valid.

State law is determinative of the interpretation of the powers granted by the durable power of attorney. Durable powers of attorney are key documents in modern estate and tax planning.

The above example indicates that if gifts are to be made using a durable power of attorney, it is prudent to have specific language authorizing gifts included in the drafting of the durable power of attorney rather than to rely upon an interpretation of state law.

 

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