NOVEMBER 13, 2000 VOLUME 8, NUMBER 20
Suzanne C. Pruitt died in 1994 from complications related to her Alzheimer’s disease. At the time of her death her estate was worth over $1.4 million. The IRS argued that it should have been $120,000 more than that, and that the estate should pay just under $50,000 more in taxes.
For years before her death Ms. Pruitt had made regular gifts to her children and grandchildren. In 1992, for example, she had given $185,000 to her three children and another $70,000 to grandchildren. The reasons for her generosity were clear: she wanted her offspring to enjoy the money immediately, and she wanted to reduce the size of her estate to limit the amount of tax due at the time of her death.
In 1987, and again in 1992, Ms. Pruitt had given her daughter Sandra Thompson a durable power of attorney to handle her financial matters. As it turned out it was good she had done so, since Ms. Pruitt lost the ability to manage her own affairs by 1993. In that year, Ms. Thompson had to decide whether to continue her mother’s pattern of making gifts of her property.
Using the power of attorney Ms. Thompson did give away some of her mother’s property in 1993, but she only transferred $10,000 each to Ms. Pruitt’s three daughters and their husbands. The next year she did the same thing, and Ms. Pruitt died a month after the last transfers of property.
When the estate tax return was filed, the IRS had no problems with gifts made by Ms. Pruitt herself before 1993. The tax authority did object to gifts made using he power of attorney, however. The agency argued that the powers of attorney did not include express language authorizing Ms. Thompson to give away her mother’s property, and so the gifts were incomplete. Since Ms. Pruitt could theoretically have filed a lawsuit to set aside the gifts and secure a return of the property, they should be included in her estate for tax purposes, insisted the IRS.
Ms. Pruitt’s children disagreed, and appealed to the United States Tax Court. They argued that Oregon law does not require any special language in a power of attorney to authorize gift giving, and that the transfers were effective to reduce Ms. Pruitt’s estate.
The Tax Court was particularly impressed by the history of gifts made by Ms. Pruitt while she was still competent, and the testimony of her attorney that he had advised her to continue to make gifts. The Court ruled that Ms. Pruitt’s estate did not owe the additional tax. Estate of Pruitt v. Commissioner, September 12, 2000.
The Pruitt decision would provide no comfort to an Arizona taxpayer in a similar situation, however. Arizona law is clear: a power of attorney does not authorize gifts unless the power is clearly spelled out and separately initialed by the principal and witnesses.