Possible Tax Consequences Under Florida Durable Powers of Attorney

The power of attorney (DPOA) allows someone to handle another person’s finances and personal affairs. In Florida, some powers in the DPOA can have unexpected tax consequences, especially the power to give the person’s property as gifts. Different states have different rules about this, but in some states, the DPOA might allow the agent to give gifts to themselves or others if the DPOA has broad language giving the agent control over the person’s affairs. In Florida, for an agent to legally make gifts on behalf of someone else, they need explicit permission in the power of attorney document. There’s also a rule that says if the agent is making gifts to themselves, the person they’re acting for needs to agree to it at the time or later. It’s based on the agent’s duty to not benefit themselves without the person they’re acting for being okay with it. In simple terms, even if a legal document (like a DPOA) gives someone permission to make decisions for someone else, it’s not a free pass to do whatever they want. They still have to act in the best interest of the person they’re making decisions for, and get their permission for any self-dealing transfers. This means the person has to know all the important information and agree to the transfer before it can be legally valid. In simple terms, the sources agree that an agent needs to tell the person they are acting for about any self-dealing transfers before getting their permission. This is important because if the agent has the power to give themselves gifts from the other person’s property, the IRS might consider it a taxable general power. But if the person gives their permission for the transfers, then it might not be considered a taxable power. So, in some cases, the agent might want the court to say that the person’s permission is needed for these types of transfers. If the power of attorney doesn’t give specific permission to make gifts, any transfers made by the agent could be considered void. This means that the money could be brought back into the person’s estate for tax purposes. If the power of attorney does allow for gifts, the tax consequences depend on whether the agent has a duty to get the person’s consent. Since there are no Florida court decisions on this, a federal court would have to guess how they think a Florida court would decide. In Florida, a court might decide that a power of attorney needs clear permission from the person who gave it in order to make any legal transfers. The Florida Legislature may pass a law that backs this up. If this happens, it could have tax consequences for the person with the power of attorney if they use it to benefit themselves. The agent must get permission from the person they are helping before doing anything with their money. If they don’t, they could get in trouble with the law. If a person gives someone else power of attorney to handle their money and property, any transfers made by that person to the agent are usually allowed. However, if the person didn’t know what they were doing, like if they were really sick or unable to understand, those transfers could be cancelled later. This is especially true if the transfers were made right before the person died or after they were unable to make decisions. Those transfers could be cancelled by the person’s guardian or the person in charge of their belongings after they die. When someone gives another person the power to make gifts or change beneficiaries on their behalf, the IRS might claim that certain tax rules apply. To avoid this, you can appoint a special person in the legal document who is responsible for making gifts to the main person with power. This way, the main person can’t give gifts to themselves, their kids, or anyone they take care of. The special person can do that instead. This also helps to keep the main person’s power in check. Another problem power is the ability to change who gets money from the main person’s bank accounts, retirement plans, and other accounts. The main person or their legal representative can always change it back, though. If the agent with the power to change beneficiary designations dies, the principal or their guardian could potentially change the beneficiaries. This could affect tax consequences. The law is concerned with the amount of control the agent has over the donor’s assets. If the principal can undo the agent’s beneficiary designations, the agent may not have enough control to be considered to possess a taxable power. Until this issue is resolved, it’s best to limit the agent’s ability to change beneficiaries for their own benefit. This power should not be confused with the power to change the ownership of the principal’s accounts, which could have tax consequences. Durable powers of attorney are important for handling someone’s affairs, but there are still some tax questions that need to be answered. Some powers, like changing beneficiaries or creating trusts, could have tax consequences, so it’s important to be careful when using them. It’s also a good idea to limit an agent’s authority when it comes to withdrawing funds and creating accounts, to avoid potential abuse and tax issues. Until these questions are answered, it’s important to be careful to avoid tax problems for both the agent and the person they’re helping. This is a list of legal cases and laws related to durable powers of attorney and estate planning. It includes references to court cases and statutes in different states. These cases and laws cover the authority and responsibilities of agents appointed in durable powers of attorney, as well as the limits of their powers. It also mentions the significance of the principal’s intent in these legal matters. Peter B. Tiernan is a tax attorney in Margate. He helps people with estate planning, probate, and taxes.

Source: https://www.floridabar.org/the-florida-bar-journal/possible-tax-consequences-under-florida-durable-powers-of-attorney/