The reference in last month’s article regarding the power of appointment seemed to inspire a couple of questions, the first being, “What on earth were you talking about”? Let’s see if we can get our hands around this concept. First, the general power of appointment can be a great tool to adjust for the future.
A general power of appointment is most widely used in a section of a Last Will and Testament. This power language allows the holder of the power to appoint (give) to himself, his estate, his creditors, or the creditors of his or her estate the right to have the beneficial use and enjoyment of the specific property covered by the power of appointment.
Basically, it works like this. A trust was created for the benefit of son, the trust contained language that the son could “appoint” the trust (so he can give the funds of the trust to anyone in the world he desires, even to himself). You have to reference the trust document you are modifying for this to work. So the funds in the trust could be retained in the trust and the trustee would follow the language established by the Grantor (Mom and Dad), or, if the son did not want to keep those assets in the trust, he could
(1) exercise his power of appointment and remove the funds during his lifetime; or
(2) use his last will and testament and direct his executor to withdraw the assets from the parents trust.
Either approach will allow son to control the benefit of the trust and break the control that the parents had in their document.
At first glance, breaking the goals of the creator of the trust seems inappropriate, but as a planning tool, it can be very valuable.
Imagine that you are the grandparent and you’ve watched your son grow up, do what he’s supposed to do, and all of the hopes and expectations of life are being met. Great! Giving your son control will be just fine. But—you would also like your grandchildren to benefit from your trust after your son is gone, so you leave the assets in trust for them as well.
The problem is that you don’t always get to watch grandchildren grow into adulthood. But while your son is living, he has the power!
The general power of appointment allows son to reach into the trust, take out the funds, or let his Last Will and Testament control what happens to those funds. He can modify the trust to move the funds to his wife, he can leave the funds in trust for his kids, he can do whatever in the world he wants to with that trust!!!!!
All of this power does come at a price. A general power of appointment has tax issues, identified for federal estate tax purposes in the Internal Revenue Code §2041. The holder of a general power of appointment is treated for estate tax purposes as if he or she is the owner of the property subject to the power, whether or not the power is exercised. Any property which is subject to the power is includable in the power holder’s estate for estate tax purposes.
If the power of appointment is not exercised, the original provision of the document that created the power takes over.
The general power of appointment can be a confusing item, but used properly, it can be very helpful in addressing the future.