Don't Get Burned Estate Tax Considerations for Certain "hot Powers" Under Colorado's Uniform Power of Attorney Act
| Publication year | 2023 |
| Pages | 42 |
TRUST AND ESTATE LAW
BY KELIANNE CHAMBERLAIN
This article discusses estate tax inclusion for agents under financial powers of attorney with authority to make certain gifts of the principal's assets or create or change the principal's beneficiary designations.
A well-rounded estate plan includes a financial power of attorney naming an agent to make decisions and take actions for the principal if the principal is unable to act alone. However, the authority granted by the principal to an agent to make gifts or create or change beneficiary designations may inadvertently cause the principal's assets to be included in the taxable estate of the agent. This article describes some of the interplay between Colorado's Uniform Power of Attorney Act and the Internal Revenue Code regarding estate tax inclusion.
Introduction to Powers Under the Uniform Power of Attorney Act
A power of attorney is a document in which one person (the "principal") names and authorizes another (the "agent") to act on the principal's behalf.[1] Colorado has adopted a version of the Uniform Power of Attorney Act (Act).[2] The Act has also been adopted by several other states, including our neighbors, Wyoming and Utah.[3]The Act includes a statutory form financial power of attorney at CRS § 15-14-741 (the statutory form). Under the Act, unless otherwise specified in the document, the statutory form and any other Colorado power of attorney created on or after January 1, 2010, is "durable," meaning it remains effective during the principal's incapacity.[4] All authority of an agent under a power of attorney ends at the principal's death.[5]The authority may begin immediately upon signing the power of attorney (a "standing" power of attorney) or may begin at some later determination of the principal's incapacity (a "springing" power of attorney).[6]
A defining feature of the Act and the statutory form is the definition of authority granted by the principal to the agent, and the distinction between "general powers" and "specific powers." The general powers are incorporated into the
“A defining feature of the Act and the statutory form is the definition of authority granted by the principal to the agent, and the distinction between 'general powers' and 'specific powers.' ”
statutory form by the following key words and phrases:[7]
■ real property
■ tangible personal property
■ banks and other financial institutions
■ operation of entity or business
■ personal and family maintenance
■ estates, trusts, and other beneficial interests
■ benefits from governmental programs or civil or military service
■ stocks and bonds
■ commodities and options
■ insurance and annuities
■ claims and litigation
■ retirement plans
■ taxes.
In turn, each of these key words and phrases is defined by statute.[8] Even if a power of attorney does not follow the statutory form, however, a statement like "I grant my agent the authority to do anything I could do" should provide the agent all of the general powers under the Act.[9]
Conversely, specific powers are not granted to an agent unless they are expressly stated in the power of attorney.[10] So, even making the broad statement above ("I grant my agent the authority to do anything I could do") will not grant the agent these specific powers.[11] These specific powers are sometimes also referred to as "hot powers" because they are so powerful. For example, one hot power is to "create, amend, revoke, or terminate an inter vivos trust" on behalf of the principal, giving the agent broad authority over the principal's estate plan.[12]
Although it may sometimes be appropriate for a power of attorney to omit all of the hot powers, certain hot powers can be key to an efficiently administered plan for some clients. For example, in an estate plan that includes a revocable trust and in which the named successor trustee and the named agent under power of attorney are the same individual, it may be a good idea to grant the hot power to "[e]xercise [a] power held by the principal in a fiduciary capacity. . . ."[13] This allows the agent to act for the principal in the trustee role even before an effective resignation or removal provisions in the trust have been implemented.
In addition, a principal who owns a membership interest in a limited liability company with other members may consider granting the agent the hot power to exercise powers, rights, or authority as a member of a limited liability company.[14]
This article focuses on two of the hot powers under CRS § 15-14-724(1): making a gift and creating or changing a beneficiary designation. Both of these hot powers relate to an agent exercising control over gratuitous transfers of the principal's assets. However, this analysis may apply to other hot powers. An overview of the laws regarding gifts and powers of appointment gives context to the estate tax implications of an agent's authority.
Gift and Estate Tax Exemptions
Colorado does not currently have an estate tax. In 2023, a decedent may transfer up to a combined $12.92 million during life or at death without incurring federal estate tax.[15] The Tax Cuts and Jobs Act of 2017 (TCJA) provided this historically high exemption by doubling the federal estate tax exemption in effect prior to the enactment of the TCJA.[16] However, the TCJA also includes an automatic expiration or "sunset" of the high exemption amount on December 31, 2025.[17]After the sunset, the exemption will revert back to prior levels. Specifically, the exemption amount on January 1, 2026, will be $5 million plus inflation from 2010.[18] The precise exemption amount cannot be determined at this time but is projected to be somewhere between $6 million and $7 million.[19] The highest effective tax rate for a decedent's assets that exceed the exemption is 40% of the fair market value of those excess assets.[20]
Generally, gifts made during a taxpayer's life reduce the taxpayer's remaining available federal exemption.[21] However, taxpayers may make certain gifts that are not counted against the exemption, including annual exclusion gifts.[22] In 2023, the federal gift tax exclusion amount is $17,000 per donor per donee.[23]Spouses may consent to combine their annual gift tax exclusion amounts (called "gift splitting"), resulting in a possible $34,000 excluded annual gift per donee in 2023.[24] As with the exemption, the annual exclusion amount is tied to inflation.[25]Other exclusions are available for certain medical
and educational expenses in excess of the annual exclusion amounts.[26]
Although the current estate tax exemption is very high, many financially successful individuals, including farm and ranch owners and small-business owners, face the very real possibility of estate tax liability on their estates. Additionally, the reduced exemption after sunset will increase the number of taxpayers who need to do estate planning to mitigate estate taxes. The Internal Revenue Service has confirmed that the value of gifts made before December 31, 2025, will not be "clawed back" after the exemption sunsets to a lower value, even if those gifts exceed the exemption in place on January 1, 2026.[27] Based on this guidance, some estate planning clients have made or are planning to make significant lifetime gifts prior to December 31, 2025, to "lock in" the exemption for those gifts after January 1, 2026.[28]
Introduction to Powers of Appointment Under the Internal Revenue Code
The Internal Revenue Code (IRC) describes the interests that are included in a decedent's taxable estate.[29] One of these interests is a certain type of "power of appointment" held by a person on death.[30] The IRC distinguishes the estate tax treatment of "general" powers of appointment and all others (called "non-general," "special," or "limited"). Unlike the terms "general" and "specific" under the Act, under the IRC, the "general" power of appointment is more powerful and consequential (for estate tax purposes) than the "special" power of appointment. The taxable estate of a person who dies holding an inter vivos or testamentary general power of appointment includes the assets over which the general power of appointment could have been exercised, even if it was not actually exercised.[31]
A general power of appointment is a power exercisable in favor of the power holder (the "donee"), the donee's estate, the donee's creditors, or the creditors of the donee's estate, with limited exceptions.[32] Any one of these powers alone is enough to characterize the power of appointment as general.
Certain restrictions prevent the power of appointment from being general. If the donee may appoint assets for their own benefit, but limited to an "ascertainable standard related to the health, education, support, or maintenance of the donee," the power of appointment is not general.[33] In addition, if a donee may appoint to the donee only in conjunction with (a) the creator of...
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