Estate planning involves planning for time that you may be incapacitated and the time following your death. Many things can change that affect your plan — your family, the economy, the law, society. Change can happen rapidly and unexpectedly, affecting your careful estate planning in unpredictable ways. To achieve your estate planning goals, you need a plan that can keep up with the changes. Few estate planning tools provide more flexibility than a general power of appointment.

You cannot see into the future. But appointing a trusted person to decide who will receive your money and property when you are not around to make that decision could be the next best thing.

The Power of a Power of Appointment
While you are alive and mentally able, you can adjust your estate plan as circumstances change.

Perhaps a loved one comes into some money and no longer needs as much of an inheritance as they once did, so you decide to change your will or trust and divert money to other beneficiaries. Or maybe a loved one suddenly takes on a large amount of debt, prompting you to put money for them in a trust rather than giving it to them in one lump sum, in order to protect it from their creditors. If that loved one loved one later pays off their debt, you might wish to change their gift back to the lump sum inheritance. Or, there might be a major tax law change that forces you to reconsider your gifting strategy completely.

Such changes in circumstances might cause you to make adjustments to an estate plan. A divorce or birth in the family, the success or failure of a family business, or an economic boom or bust might also prompt you to revisit your plan.

Ideally, you review your estate plan every few years and update as appropriate to ensure that your plan still reflects your wishes. But you may be concerned about changes that occur after your death, both in the near and far term.

Including a power of appointment in your will or trust can be a great way to address these concerns.

How a Power of Appointment Works
In your estate plan, you can leave assets to a beneficiary either outright or in trust, with specific instructions as to when and how the beneficiary can access their inheritance. A power of appointment allows for additional flexibility. For example, depending on the scope of the power of appointment granted to a beneficiary powerholder, the powerholder could redirect to whom all or a portion of their trust share will go while they are still alive or choose new beneficiaries to receive the remaining balance of their inheritance, if any, when they die.

A power of appointment is a right given to a person under a legal instrument that enables the person to further designate the recipients of property or interests in the property.

In essence, a general power of appointment is like giving somebody authority to decide who will receive your property and in what way.

Here are some key features and terms to understand about powers of appointment:

• The original property holder (the person who grants the power) is known as the donor.
• The person who receives the power of appointment is called the donee or powerholder.
• When a powerholder exercises their power of appointment and names a new recipient or beneficiary of the property, those recipients are appointees.
• The property that changes hands is referred to as the appointive property.
• Depending on the scope of the power of appointment, the powerholder can determine not only who receives the appointed property but also how and when they receive it. A general power of appointment would even allow them to exercise the power in favor of themselves, their estate, their creditors, and creditors of their estate. (A limited power of appointment limits the permissible class of appointees.)
• The powerholder does not have to exercise the power of appointment. Exercise of the power is at their discretion.
• If a powerholder does not exercise the power of appointment, the individuals who take the property by default (according to the donor’s original will or trust instructions) are the default takers.

Reasons to Use a General Power of Appointment: Long-Term Flexibility and Taxes
A general power of appointment gives the powerholder enormous control. By sharing this control, you may increase the flexibility in your estate plan to account for events that occur after your death. In addition, this control can offer potential tax planning strategies.

For example, your loved ones may experience changes that impact their financial status. Some may come into money and no longer need an inheritance, while others may suffer a disability, develop a substance abuse issue, enter into a bad marriage, incur a great deal of debt, or display a proclivity to waste money or use it in a way you would not have approved of. 

New issues like these can arise after your death when you can no longer update your estate plan. But instead of relying on distribution provisions in your will or trust that may no longer make sense or align with your goals given the new circumstances, unexpected occurrences can be indirectly planned for by granting a power of appointment to a trusted person who decides, in the future, who will receive your money and property.

A general power of appointment can also be part of a tax planning strategy. Use of a power of appointment may enable eligibility for a basis adjustment for assets that have significantly grown in value over time, resulting in minimization of the income and capital gains tax liability on those assets. However, holding a general power of appointment over assets may cause those assets to be included in the powerholder’s estate, possibly exposing the assets to estate taxation. These considerations must be balanced carefully.

Do I Need a General Power of Appointment in My Estate Plan?
Anticipating the changes that could affect your careful estate planning is difficult, whether those changes happen next week, next year, or long after your death.

A general power of appointment gives an estate plan unmatched flexibility, allowing someone you choose to decide how to best dispose of property based on information unavailable to you when you make your estate plan. At the same time, a general power of appointment is a big responsibility with a complicated set of advantages and disadvantages that needs to be evaluated on a case-by-case basis.

Let Us Help
If you are interested in learning more about powers of appointment, schedule time with us and let us explain how this flexible but complex tool can be customized to fit your goals. We can also provide guidance if you have been granted a power of appointment.