The power of appointment is a legal right to leave assets in a trust to someone else. These assets may include stocks, property, or money that is held in the trust. These assets can be given by way of a last will and testament, gift, distribution, or transfer.
The power of appointment can exist in a trust held by a single entity or in a co-owned trust. In the event of a co-owned trust, the power of appointment allows the trust co-owner to leave their portion of the trust to a beneficiary, possibly after they pass away. The power of appointment is not transferable, if the trustor or trustees with this power choose not to exercise their power of appointment before they die, then the power of appointment will expire.
Power of appointment is a method of increasing the discretion and freedom of the trustor or trustees with this powers to act as they see fit with the assets of a trust. In a traditional trust arrangement, the income from the trust must be managed according to the original terms of the trust. With the power of appointment, trustors or trustees with this power retain more control over how the trust is administered, including the ability to choose additional beneficiaries to distribute the income to. This can range from complete freedom to choose who receives benefits to choosing the beneficiary from a list of beneficiaries provided by the grantor of the trust.
The power of appointment can give trustor or trustees with this power increased freedom in the ways that they choose to distribute the assets and profits of their trusts. Power of appointment can come in to forms, each with their own risks and benefits: general power of appointment and limited power of appointment.
General power of appointment grants the trustor or trustees exercising it the ability to give portions of the trust to any entity. This broad discretion allows the trustor or trustees with this power to give portions of the trust to themselves, their estate, or any creditors they may have. General power of appointment can be thought of as power of appointment without restrictions.
General power of appointment can be good for trustors or trustees looking to give the trust assets to a beneficiary in their will, but there is a drawback. Since the general power of appointment grants such broad discretion over the trust assets, those assets are considered part of the trustor or trustee’s estate for estate tax purposes.Â
The general power of appointment can also be used to try to mitigate taxation of the trust’s assets. Through some carefully crafted language, a trustee could assign their beneficiary general power of appointment. This makes the trust a part of the the beneficiary’s assets for their own estate, potentially delaying the tax consequences. In general, having general power of appointment causes the trust assets to be included in the agent’s estate for tax purposes even if they don’t use their general power of appointment.
An agent who holds limited power of appointment has different conditions imposed on them. At a minimum, the agent who exercises limited power of appointment cannot give any of the trust assets to themselves. This includes leaving any assets to their estate or using assets to pay their creditors. There may be additional limitations applied to an agent exercising limited power of appointment according to the wishes of the grantor. A benefit of a limited power of appointment is that it is not included in the agent’s taxable estate and while assets cannot be given to the agent or their estate, this limiting factor still allows for broad discretion in giving to other entities.
Power of appointment is a flexible and useful tool in the realm of estate planning. If you are thinking of establishing a trust with either limited or general power of appointment, you will need the help of an experienced trusts & estates attorney.
An experienced trusts & estates attorney can carefully craft a power of appointment clause into your trust that fits your needs as closely as possible. Not only can a trusts & estates attorney ensure that the power of appointment clause allows you to distribute your assets according to your wants and needs, they can also utilize their experience and expertise in local, state, and federal tax law to reduce your tax burden from such an arrangement.
