Keep Future Options Open with Powers of Appointment

The amount of flexibility you build into your estate plan will go a long way toward how successful, ultimately, it is at carrying out your wishes after you’re gone. Using powers of appointment is one way to achieve that flexibility.

Powers of appointment — defined

A power of appointment is simply a provision in your estate plan that permits another person — a beneficiary, family member or trusted advisor, for example — to determine how, when and to whom certain assets in your estate or trust will be distributed. The person who receives a power of appointment is called the “holder.”

These powers come in several forms. A testamentary power of appointment allows the holder to direct the distribution of assets at death through his or her will or trust. An inter vivos power of appointment allows the holder to determine the disposition of assets during his or her lifetime.

2 types of power

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 has one or more restrictions. In most cases, limited powers don’t allow holders to distribute assets for their 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 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.

Availability of options

Powers of appointment provide flexibility, and enhance the chances that you’ll achieve your estate planning goals, by allowing you to postpone the determination of how your wealth will be distributed until the holder has all the relevant facts.

For example, suppose your plan establishes a dynasty trust designed to benefit multiple generations, decades or even centuries into the future. Currently, the most you can contribute to such a trust without triggering the generation-skipping transfer (GST) tax is $11.58 million. But if Congress repeals the GST tax in the future, the holder of a power of appointment could funnel far more wealth into your dynasty trust.

Get creative

With a little creativity, you can design powers of appointment to address a variety of estate planning issues. The powers can allow your family to make critical adjustments to your plan to reflect changing circumstances. Talk to your estate planning advisor for additional details or contact us.

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