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Estate Planning Newsletter

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    A constructive trust is a remedy imposed by a court when a person has wrongfully attained property in an inappropriate way. The court will undo the transaction and order that title to the property go to the rightful... Read more.
  • Estate Tax Changes Bring Calm After the Storm
    Much to the relief of many, the American Taxpayer Relief Act of 2012 (“2012 Tax Act”) was enacted in the beginning of 2013, making permanent many of the tax benefits that were scheduled to expire at the end of 2012. The... Read more.
  • Special Needs Trusts and the Disabled
    Some government statistics estimate that between 15% and 20% of all Americans have some form of disability. It is also estimated that the majority of disabled persons will need to avail themselves of public assistance to help pay the... Read more.
  • IRS Issues Proposed Regulations on Delaware Series LLC
    Limited Liability Companies (“LLCs”) are a form of business ownership which is a separate legal entity much like a corporation. An LLC is treated like a partnership for tax purposes and like a corporation for liability... Read more.
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Adding Flexibility to Your Estate Plan

What is a Power of Appointment?

A power of appointment is the power given by one person to another (referred to as the “holder” of the power of appointment) to designate who is to receive an asset. For example, if Husband creates a trust giving Daughter the power to determine who is to receive the trust principal, Daughter is the holder of the power of appointment. There are essentially two types of powers of appointment:

  • A general power of appointment allows the holder to appoint the assets to anyone, including himself, to his estate, or to the creditors of his estate. Property subject to a general power of appointment at the time of death will be included in the holder’s estate.
  • A special power of appointment is exercisable only to a group of persons defined in the trust instrument (for example, to the group comprised of the Trustor’s issue) or in favor of someone other than the holder, the holder’s estate, the holder’s creditors, or the creditors of the holder’s estate. Property subject to a special power of appointment is not included in the holder’s estate.

Special Power of Appointment May Add Flexibility to Estate Plan

A special power of appointment may be used to add flexibility to the dispositive provisions of an estate plan without subjecting the property subject to the special power to inclusion in the holder’s estate. For example, Husband and Wife may designate that the surviving spouse will have a special power of appointment over the principal of the exemption trust (also commonly referred to as the credit-shelter or bypass trust), a trust which becomes irrevocable upon the death of the first spouse. The special power of appointment in this scenario would allow the surviving spouse to make a later determination as to who should receive the principal of the exemption trust and make adjustments accordingly.

Special Power of Appointment May Not Be Appropriate in All Circumstances

The decision as to whether a special power of appointment should be used and the drafting of such a provision must be considered carefully, particularly where there are children from a previous marriage. The use of a special power of appointment in such a situation could result in the surviving spouse appointing all of the trust assets to his or her children, excluding the children of the first spouse to die.

The use of a special power of appointment may add flexibility to the dispositive provisions of an estate plan, allowing someone to make adjustments among beneficiaries, to take into consideration the increased need of a particular beneficiary, or other changes in circumstances. However, as illustrated above, the use of a special power of appointment may not be appropriate in all circumstances.

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