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By Peter C. Barton, MBA, CPA, JD, University of Wisconsin-Whitewater

In Estate of Goldman, the Tax Court ruled that a power of attorney to conduct banking transactions does not authorize the holder of the power to make gifts. Therefore, transfers to relatives by the holder shortly before the grantor of the power died were invalid, and the amounts involved were included in the grantor's gross estate. In reaching its decision, the Tax Court applied New York State law on the validity of gifts.

IRC Sec. 2033 requires that all property that the decedent had an interest in at death be included in the gross estate. Sec. 2503(b) allows an annual exclusion from the gift tax of $10,000 per donee. Therefore, utilizing this exclusion enables taxpayers to reduce their gross estate and estate tax. Whether a gift is valid is determined under state law.

In Estate of Goldman, Sylvia Goldman, a New York resident, developed breast cancer. She executed a Citibank standard-form power of attorney, giving her daughters, Marsha and Linda, authority to conduct banking transactions. They had the explicit authority to make deposits and withdrawals, write and sign checks, and "to do anything he or she considers proper to conduct this business with the bank, even if it is for the attorney's own benefit...." The power of attorney did not mention gifts.

Marsha testified that on December 15, 1990, and again on January 10, 1991, she wrote eight $10,000 checks, drawn on Sylvia's account, to the eight members of Marsha's and Linda's families. (Marsha and Linda were married and each had two children.) None of these checks were cashed until Sylvia's death was imminent in mid-January 1991.

From November 26, 1990, to January 3, 1991, Sylvia wrote several checks to pay bills and to make gifts to charities and family members. Of the family gifts, two checks that Sylvia wrote were for $1,000, and the rest were for $250 or less. She died on January 19, 1991, leaving an estate of over $3,100,000, most of which was willed to Marsha and Linda.

The estate tax return did not include the $160,000 in checks written by Marsha. Also omitted was over $470,000 in bank account deposits. The IRS issued a deficiency of $271,031.

The Tax Court pointed out that the estate must prove the 16 $10,000 gifts were valid in order to exclude them from the gross estate. Proving either that Sylvia intended to make these gifts or the power of attorney authorized Marsha to make them would satisfy this requirement. Under New York law, the donor must intend to make a gift for it to be valid. This intention must be proven by "clear and convincing evidence," which is a higher burden of proof than "more likely than not." The Tax Court found it implausible that Sylvia would write numerous small checks, yet allow Marsha to make large family gifts. Also, Sylvia had not made such large gifts in the past. Finally, the court did not believe certain details of Marsha's testimony. The court ruled that the estate did not prove that Sylvia intended to make these gifts.

Next, the Tax Court considered whether the power of attorney could implicitly authorize gifts under New York law. New York's highest court, the Court of Appeals, has ruled that a power of attorney could not be expanded by implication. Also, lower New York appellate courts have consistently invalidated gifts where the power of attorney did not explicitly authorize gifts. The Tax Court therefore ruled that the power of attorney did not authorize Marsha to make gifts and the $160,000 was includable in Sylvia's gross estate. Clearly, CPAs should advise clients to consider making lifetime gifts utilizing the $10,000 annual exclusion if the clients have sufficient assets to incur an estate tax liability. The lesson from Estate of Goldman is that such clients should include explicit authority to make gifts in a power of attorney. Also, if Sylvia had made $10,000 gifts to her daughters and their families in previous years, the estate might have been able to prove intent even without explicit authority. Educating clients about these rules can save them thousands of dollars in estate taxes. *

Source: Estate of Goldman, T.C. Memo 1996-29. (January 25, 1996)

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