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Powers of Appointment: Flexibility in Estate Planning Documents

An individual who prepares a Trust (a “Trustmaker”) as part of his or her estate plan faces many choices in deciding how to divide his or her estate. One of the choices the Trustmaker may face is whether the assets to be distributed at his death should be distributed outright to the beneficiary; or, whether they should be held in trust for the benefit of the beneficiary.There are numerous reasons a grantor may desire that assets be retained in trust for a beneficiary, such as creditor protection, management of assets, or tax planning. For example, in order to minimize estate taxes, many estate plans include a “family” or “credit shelter” trust for the benefit of the surviving spouse. For tax reasons, the spouse cannot own the assets in the family trust; but, the trustee can use the trust assets for the surviving spouse’s “health, education, maintenance, and support”. The trust will typically provide that upon the death of the surviving spouse, the assets will be distributed to the Trustmaker’s descendants. However, the Trustmaker may have also included a provision in the Trust that allows the surviving spouse to decide how the assets remaining in the Trust at the death of the surviving spouse should be distributed upon the beneficiary’s death. This power is referred to as a “Power of Appointment.” The requirements for “exercising” a power of appointment are usually set forth in the Will or Trust.A Power of Appointment is a tremendously flexible estate planning tool. Powers of appointment may be very broad or limited in scope. For instance, in the example above, the Trustmaker may establishes a trust for the primary benefit of the surviving spouse. But, the Trustmaker wishes to ensure that upon the spouse’s death, the assets will only be used for members of the Trustmaker’s family. In such a case, the Trustmaker would only provide for a “limited power of appointment” which would allow the surviving spouse to redirect the estate among the Trustmaker’s descendants, but to no one else. Frequently, however, the trustee will desire to provide more flexibility to the beneficiaries of the trust, and grant them a “general power of appointment” which allows the beneficiary to appoint the trust assets to any beneficiary. Frequently, powers of appointment will have significant tax and creditor protection implications.If you are the beneficiary of a trust and are interested in exercising a power of appointment, or if you want to revisit your estate plan to determine whether it is appropriate to grant your beneficiaries a power of appointment, please call us to schedule a review of your documents.