The Pros and Cons of Powers of Appointment
An often misunderstood but common estate planning tool that can appear in estate planning
documents is the power of appointment. Not to be confused with a power of attorney (the document
that allows you to delegate certain powers to an agent to act on your behalf while you are still
living), a power of appointment can be an incredibly useful tool if used properly and
knowledgeably.
A well-considered power of appointment allows you to maintain significant
flexibility in your estate plan now and in the future, even when that estate plan is otherwise
considered irrevocable under the law. Though hundreds of pages of books, scholarly articles, court
decisions, and tax regulations have been written on the topic of powers of appointment, this blog
can help you identify opportunities in which powers of appointment may be useful and recognize
cases in which they can create negative consequences.
What Is a Power of
Appointment?
Broadly speaking, a power of appointment is a right granted in a legal
document, including in a will or a trust, by an individual (the donor) to another person (the
donee or the power holder). This granted power allows the donee to name someone else as a
recipient (the appointee) of all or a portion of the donor’s money and property in the
future. This can let a surviving spouse take into account changes in family circumstances
that didn’t exist when their deceased spouse past away.
The power holder is not required to exercise the power. Rather, the power holder simply has the
option to exercise it. If the power is left unexercised, then the money and property will pass to
those individuals or entities who were originally named in the will or trust as the beneficiaries
and in the amounts originally specified.
This tool essentially allows for the person making a will or trust to postpone the decision of
who should receive the donor’s money and property, and grants such decision-making power to
someone else who may be in a better position in the future to determine who will receive
it.
General Versus Limited Powers of Appointment
In trust law and tax
law, there are two types of powers of appointment: (1) a general power of appointment and (2) a
limited power of appointment (also known as special or nongeneral powers of appointment). A
general power of appointment is, with only a few exceptions, a power that is exercisable in favor
of the decedent, their estate, their creditors, or the creditors of their estate.[1]If a power of appointment does not
fit within the definition of a general power, then it is, by default, a limited power of
appointment. A common example of a limited power of appointment is a power that is limited to
distributions for health, education, maintenance, or support of a beneficiary (called the HEMS
standard). Another example is a power granted to a power holder to distribute the property among a
limited group of individuals, for example, among only “your descendants.”
Lifetime
Versus Testamentary Powers of Appointment
An additional characteristic that can be
applied to a power of appointment is whether the power is to be a lifetime power of appointment or
a testamentary power of appointment. The difference has to do with the particular moment that the
power can be exercised by the power holder. For example, if a power of appointment gives the power
holder a power to distribute property among grandchildren only while the power holder is alive,
this would be a lifetime power of appointment. However, because this is also a limit