Powers of appointment allow a trusted individual (the “holder”) to adjust how assets are distributed after your death, based on changing circumstances. These might include marriages, births, financial needs, tax laws, or evolving family dynamics. By incorporating powers of appointment into your trusts and other planning strategies, you can create an estate plan that balances long-term control with the ability to adapt over time.
Forms of Powers of Appointment
Powers of appointment come in a few forms. A testamentary power of appointment allows the holder to direct the distribution of your assets at his or her death through his or her own will or trust. (See “Postponing distribution decisions” below for an example.) An inter vivos power of appointment allows the holder to determine the disposition of your assets during his or her lifetime.
In addition, powers may be general or limited. A general power of appointment allows the holder to distribute assets to anyone, including him or herself.
A limited power of appointment has one or more restrictions. In most cases, it doesn’t allow a holder to distribute assets for his or her own benefit (unless distributions are strictly based on “ascertainable standards” related to the holder’s health, education, or support).
Typically, limited powers authorize the holder to distribute assets among a specific class of people. For example, you might give your daughter a limited power of appointment to distribute your assets among her children.
The distinction between general and limited powers has significant tax implications. Assets subject to a general power are included in the holder’s taxable estate — even if the holder doesn’t execute the power. Limited powers generally don’t expose the holder to gift or estate tax liability.
Postponing Distribution Decisions
Powers of appointment provide flexibility by allowing you to postpone the determination of how your wealth will be distributed until the holder has all the relevant facts. For example, let’s say that you and your spouse have three young children. Your plan calls for your wealth to be placed in a trust that benefits your spouse for life and then divides your assets equally among your children.
But it’s impossible to predict your children’s financial future, so you give your spouse a limited, testamentary power of appointment that allows him or her to distribute the trust assets according to the children’s needs. This way, if one child is financially independent, your spouse can reduce that child’s inheritance. Or if one child has developed a substance abuse or gambling problem, your spouse might direct that child’s inheritance into a trust that restricts his or her access to the funds.
Need More Information?
If you’re interested in incorporating powers of appointment into your estate plan, contact us. We can review your plan and help determine which type is best for your situation.
