The biggest challenge in creating an estate plan is predicting what your family's financial situation will be when you actually pass away. After all, you could create a will or trust today and live for another twenty years or so. Circumstances may change drastically in that period of time. Placing a power of appointment in your will or trust allows you to name an individual with the authority to redirect your inheritance and decide where your assets should go when you die. This individual can choose to give some or all of your assets to other beneficiaries or to charities, or to their own children. Building flexibility into your estate plan allows an individual to decide at the time of your death where the assets should actually go. This could be useful if a beneficiary you chose had a lot of debt and the assets would be seized by their creditors. It could also be useful if the beneficiaries were quite wealthy at the time of your passing, making it a better idea to divert the inheritance to a more worthy beneficiary, such as a charity. Note that a power of appointment is different from a power of attorney, which gives someone the authority to make financial decisions for you while you are alive.
The power of appointment can be as broad or limited as you desire depending on whether you choose to give general power of appointment or special powers of appointment. It can also be exercised or postponed until a specified event occurs or a condition is met. A general power of appointment gives the holder the right to redirect an inheritance anywhere they want, such as to other beneficiaries, their own children, charities, or businesses. There are no limits on where the beneficiary can direct the assets. A limited, or special, power of appointment allows the holder to redirect the trust or estate assets only among a certain group (such as just grandchildren) under certain circumstances. Another way a limited power of appointment can be used is to allow the holder to give assets to themselves only if it is for use for the holder's health, education, support, and maintenance.
It is important to note that powers of appointment have tax consequences. If you give your holder a general power of appointment, the assets are included in that individual’s taxable estate at their death and they are responsible for gift or estate taxes on those assets, even if they never exercise the power of appointment. The reasoning behind this is that the holder has control of the assets and, as such, has a form of ownership. However, a general power of appointment does allow you to avoid the generation-skipping tax (tax imposed on inheritances that skip a generation, i.e., when you leave something to your grandchildren instead of your children). A limited power of appointment, on the other hand, avoids all gift and estate tax responsibility for the holder. Powers of appointment are a way to ensure that your estate plan can be adjusted to the beneficiaries' circumstances at the time of your death.
Contact First Class Counsel to learn more about powers of appointment and if they could be useful in your estate plan.
