Written by Benjamin Kingsley

Do you have questions about or need assistance with a power of attorney? Please click here to email us at contact@legalandme.com.

Do you need a power of attorney form? We make a do-it-yourself power of attorney: finance power of attorney or healthcare power of attorney.

When exercising financial power of attorney, there are several potential tax implications that both the principal (the person granting the power) and the agent (the person exercising the power) should be aware of. It’s important to note that simply being named as an agent under a financial power of attorney does not create any tax liability. However, how the power is exercised can have significant tax consequences.

One key consideration is that an agent acting under a financial power of attorney has a fiduciary duty to manage the principal’s finances in their best interest. This includes properly handling tax matters. The agent may be responsible for filing the principal’s tax returns, making tax payments, and keeping accurate records of financial transactions. Failure to properly manage these tax obligations could potentially result in penalties or legal issues for both the agent and principal.

In terms of income taxes, any income generated from assets managed under the power of attorney is still considered the principal’s income for tax purposes. The agent does not take on personal tax liability for this income simply by virtue of managing the assets. However, if the agent makes gifts or transfers of the principal’s assets, this could have gift tax implications. Large gifts may need to be reported on a gift tax return.

Estate tax considerations are also important when exercising financial power of attorney. Agents need to be careful not to take actions that could inadvertently increase the principal’s taxable estate. For example, if the power of attorney grants the ability to change beneficiary designations on life insurance policies or retirement accounts, doing so could impact the principal’s estate plan and potentially increase estate taxes.

In some cases, compensating an agent for their services in managing finances under a power of attorney may have income tax implications for the agent. Any compensation received would generally need to be reported as taxable income. The principal may be able to deduct reasonable compensation paid to an agent as a miscellaneous itemized deduction, subject to certain limitations.

It’s also worth noting that if the power of attorney grants the ability to make gifts or transfer assets, the IRS scrutinizes these transactions closely to prevent abuse. Agents need to be very careful to stay within the authority granted by the power of attorney document and to keep detailed records of all transactions to avoid any appearance of impropriety.

Given the complex tax implications that can arise when exercising financial power of attorney, it’s highly advisable for both principals and agents to consult with qualified tax and legal professionals. They can provide guidance on how to properly manage financial matters under a power of attorney while minimizing negative tax consequences and ensuring compliance with all applicable laws and regulations.

Do you have questions about or need assistance with a power of attorney? Please click here to email us at contact@legalandme.com.

Do you need a power of attorney form? We make a do-it-yourself power of attorney: finance power of attorney or healthcare power of attorney.