Possible tax consequences under Florida durable powers of attorney.

• Author: Tiernan, Peter B.

Durable powers of attorney (DPOAs) have become an essential tool for dealing with the financial and personal affairs of many individuals, particularly in their later years. However, certain powers commonly used in Florida DPOAs can result in unexpected tax consequences. This article will examine some of those powers with particular attention to the agent's power to make gifts of the principal's property.

Two Lines of Thought Regarding Power to Make Gifts

The legal effect of gifts made pursuant to a power of attorney is controlled by state law. (1) States generally follow one of two lines of thought. The first line of thought is that an agent's power to make gifts to himself or herself and to others is to be implied from language set forth in the DPOA, which grant the agent broad authority over the principal's affairs. The broad, general language in the DPOA by itself is sufficient to permit the making of legally effective gifts to oneself and to others provided there is a pattern of making gifts on the part of the principal, and the agent is merely following that prior pattern. Georgia, (2) Oregon, (3) Alabama, (4) and Virginia (5) appear to follow this approach.

Florida does not follow the above line of thought. Rather, Florida follows what appears to be the majority approach regarding an agent's authority to make gifts. In order for an agent to make legally effective gifts, express authorization to that effect is required in the DPOA. The case setting down this rule is the Fourth DCA case of Johnson v. Fraccacreta, 348 So. 2d 570 (4th DCA 1977), where the court stated, "An agent has no power to make a gift of his principal's property unless the power is expressly conferred upon the agent by the instrument or unless such power arises as a necessary implication from the powers which are expressly conferred." (6)

Other Florida cases (7) have reaffirmed the above rule to the extent that the only remaining question involves the circumstances under which the power to make gifts arises as a necessary implication from other powers expressly conferred in the DPOA. Further, proposed F.S. [section] 709.08(7)(c) would even resolve this last remaining issue by (requiring) providing that any power to make legally effective gifts of any of the principal's property, either to the agent or to third parties, be "expressly authorized" in the DPOA. (8)

Possible Third Line of Thought

There is another possible line of thought regarding an agent's authority to make certain types of gifts. The type of gift transfers to which this line of thought relates are those which are exercisable by the agent in his or her favor. This third line of thought suggests that even if the transfers are expressly authorized in the DPOA, because of the self-dealing aspect of such transfers, the transfers must also be freely consented to by the principal at the time of the transfer or ratified thereafter.

The basis for this line of thought can be traced to an agent's common law duty regarding any self-dealing transfers. Under the common law of agency, an agent owes his or her principal a duty not to benefit from any action taken pursuant to the agency (i.e., the durable power of attorney) without the consent of the principal, freely given with full knowledge of every detail known to the agent which might affect the transaction (i.e., informed consent). (9) Considering this duty, it can be argued that any transfer to an agent, unless it is freely consented to by the principal at the time of the transfer (or ratified thereafter), is always subject to question at a future date.

But what about the express authorization in the DPOA? In this regard, the case of Krevatas v. Wright, 518 So.2d 435 (Fla. 1st DCA 1988), made the following comment: "Further, in exercising granted powers, the attorney is bound to act for the benefit of his principal, avoiding, where possible, that which is detrimental unless expressly authorized" (emphasis supplied). (10)

Krevatas seems to indicate that express authorization in the DPOA is the only requirement necessary for legally effective self-dealing transfers. The recent case of James v. James, 843 So. 2d 304 (Fla. 5th DCA, 2003), seems to reinforce this view. Does Krevatas either eliminate or override the agent's fiduciary duty to obtain the principal's informed consent to any self-dealing transfer?

Regardless of the above statement in Krevatas, it is suggested that express authorization is only one of the requirements necessary for legally effective self-dealing transfers. It is not a blank check! It is not the equivalent of informed consent. It is also not a manifestation by the principal that he or she either knows or does not care to know all the facts that might affect the principal's decision on whether to consent to a self-dealing transfer.

To further put the above statement from Krevatas into a proper context, consider the approach taken by Supreme Court of Nebraska, possibly the only state to address (in dicta) the question of what other legal requirements may be necessary in connection with transfers by an agent to himself under a DPOA containing express authorization to make such gifts. The court stated that not only must there be specific authorization in the DPOA; there must also be a showing of the clear intent on the part of the principal to make such a gift. (11) Absent the fulfillment of both of these conditions, the transfers were deemed not to be legally effective. (12) Corpus juris secundum adds that the principal's consent must be "after a full disclosure of facts which might affect the principal's decision" (emphasis supplied). (13) Also, consider [section] 390 of the Restatement (Second) of Agency. That section states that...