What is a Power of Appointment provision?

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Power of Appointment Provision within a Trust

A power of appointment provision is a legally binding provision within a trust that empowers the surviving spouse or another designated beneficiary to change the ultimate beneficiaries of the trust. To provide an example, suppose a married couple’s trust includes a power of appointment clause. In such a case, once one spouse passes away, the surviving spouse possesses the authority to modify the trust’s beneficiaries and heirs as specified in the power of appointment.

The power holder is under no obligation to exercise the power but retains the choice to do so. In the event that the power remains unutilized, the money and property will be passed down. The individuals or entities initially designated as beneficiaries in the will or trust will receive the original distribution.

Essentially, this mechanism enables the creator of a will or trust to defer the decision of distributing their assets and grants this decision-making authority to another person who may be better suited in the future to determine the recipients.

Not all Power of Appointments are equal

Within the realms of trust law, there exist two distinct categories of powers of appointment: 

General Power of Appointment: 

A general power of appointment, with only a few exceptions, grants the authority to the individual exercising it to benefit the decedent, their estate, their creditors, or the creditors of their estate. If a power of appointment does not meet the criteria of a general power, it automatically falls under the category of a limited power of appointment.

Limited Power of Appointment:

This is also referred to as special or non-general powers of appointment. An instance of a limited power of appointment commonly encountered is one that is restricted to making distributions for the health, education, maintenance, or support of a beneficiary, often referred to as the HEMS standard. Another example is a power bestowed upon a designated power holder to allocate the property among a specific group of individuals, such as “your descendants” exclusively.

Why you might want to consider a Power of Appointment for your trust

The world is always changing. The world keeps evolving even after one’s passing. A power of appointment trust can help you find a means to adapt your estate’s strategy to account for this, even if you are no longer present. The underlying message is crystal clear: if you desire to have control over the destiny of your wealth beyond your own ability to manage it, utilizing a Trust or a power of appointment, or both, becomes imperative.

What to consider with Power of Appointments

There are certain tax considerations with these estate planning tools.. If you grant a general power of appointment to your designated holder, the assets in question become part of their taxable estate upon their passing. The holder becomes liable for gift or estate taxes on those assets, regardless of whether they exercise the power of appointment or not. This stems from the notion that the holder possesses control over the assets, thereby having a certain form of ownership. 

However, it’s important to note that a general power of appointment allows you to circumvent the generation-skipping tax (GST), which is imposed on inheritances that skip a generation. In other words, if you choose to leave something to your grandchildren instead of your children, a general power of appointment can help you avoid the GST. Conversely, a limited power of appointment absolves the holder of any gift and estate tax responsibilities.

An Estate Planning Attorney can help you chart your future

An Estate Planning Attorney can be an invaluable guide in mapping out your future and ensuring that your wishes are effectively carried out. Our attorneys have specialized knowledge and expertise in creating a comprehensive estate plan tailored to your specific needs and goals. We can provide valuable insights and advice on various legal instruments such as wills, trusts, powers of attorney, and healthcare directives, helping you navigate the complexities of estate laws. Give our team a call today if you have any questions regarding your estate planning and future.

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