Using Powers of Appointment to create Flexibility in your Estate Plan

If you are a regular reader of our blog postings, you know that we feel strongly that significant inheritances should be passed on to spouses or other heirs in lifetime trusts.  Creating lifetime trusts for these beneficiaries helps protect them for losing their inheritances due to lawsuits, divorces, and bankruptcies.  Those who are mature and responsible enough can serve as their own trustees, so they get this protection even though they can invest and spend their inheritances as they see fit.  One of the few times in life you can “have your cake and eat it, too.”

The challenge in designing these lifetime trusts is building in enough certainty that you know your plan works as you want, but also builds in some flexibility to handle unexpected developments that couldn’t be foreseen at the time the trust was created.  Powers of appointment can help provide some of that flexibility.

What is a power of appointment?  A power of appointment is the ability of the power holder to direct where the trust property goes, typically upon the death of the power holder (a testamentary power of appointment).  Powers of appointment can be general or limited.  A general power of appointment means the power holder may appoint the remaining trust property to anyone.  A limited power of appointment permits the power holder to appoint where remaining trust property goes among a limited group, defined by the grantor of the power.  As an example, if I create a trust for my wife upon my death, but want the money to stay in our family, I can give her a limited power of appointment to say how the remaining property is divided among my descendants upon her death.

How is the power used?  A power of appointment, under the example above, would give my wife the ability to decide how the money is distributed upon her death, among our descendants.  Suppose that like most people, my wife and I want our children to all receive an equal share of what we leave behind, and believe they all manage money well, so we create a trust that says that upon both of our deaths, our remaining trust property will be divided equally into trusts for each.  But after my death, one child wins a lottery and becomes wealthy, and no longer needs anything from us.  Perhaps another is seriously injured and can no longer work.  My grant of the power of appointment to my wife allows her to exercise the power and change both the percentages each will receive, as well as the way they will inherit the money.  That means that my wife would be able to design a new trust for my disabled child that takes care of him or her in a way that meets the child’s needs, to address new developments that I couldn’t see during my lifetime.

Powers of appointment are also often given to children in the trusts created for them.  If I want them to leave their remaining trust property to the grandchildren I adore and not the son-in-law or daughter-in- law I may not care for, a limited power to appoint among descendants only can make sure that only the descendants and not the in-laws will receive the inheritance.  So powers of appointment are great tools to use to accomplish clients’ estate planning goals.

Michael G. Carroll