What is a Power of Appointment and How an
Experienced Estate Planning Attorney Can Help You
Incorporate It Into Your Estate Plan?
If you are the current beneficiary of a trust, whether created under a parent’s Will, set up by your deceased spouse, or by a relative, then you may have a powerful tool in your estate planning tool-box waiting to be used!
If you are the current beneficiary of a trust, whether created under a parent’s Will, set up by your deceased spouse, or by a relative, then you may have a powerful tool in your estate planning tool-box waiting to be used!
This tool is known as a Power of Appointment, which gives you the ability to appoint your share from the trust to certain individuals upon death; however, failure to understand this important power and effectively implement it can create problems and unintended negative consequences.
What is a Power of Appointment?
A Power of Appointment (“PoA”) is a versatile and effective estate planning tool for building flexibility into long-term or multi-generational trusts. It is particularly useful in allowing the holder of a PoA to take into consideration events and circumstances that occur long after the power was created.
The PoA is defined as a right created in a trust or will by a Donor and then given to another individual—the Donee—who is empowered to dispose of the interest in the property.
The Donor, as the creator of a PoA, can make this power as limited or as broad as he or she desires, depending on the Donor’s desires to provide the Trust Beneficiary without broad or limited list of potential appointees. A Donor can:
- Limit the scope of the permissible class of individuals who can receive the “appointed” property. For example, a Donee’s power of appointment can be limited to a class of individuals composed of the Donor’s descendants;
- Give a Donee the ability to grant the Donee’s spouse a lifetime income interest in the property;
- Specify whether the PoA is conditioned upon the occurrence or non-occurrence of a particular event (e.g., the Donee must survive the Donor to be able to exercise the power to appoint trust property); and
- Grant an unlimited power of appointment, allowing for the appointment of trust assets to any person or entity.
How to Exercise a Power of Appointment?
It is important that the holder of the power follows the precise requirements set out in the will or trust for properly exercising said power. A PoA can only be validly exercised by:
- Specifically identifying the document granting the power, including the article or paragraph in the will or trust;
- Naming the qualified beneficiaries who are permitted to be the recipient of the appointed property; and
- Identifying how the appointed property should be allocated among the recipients and whether it should pass outright or continue in trust.
If a PoA is not exercised, then the will or trust should specify what the default rules are. The default rules dictate how and to whom the property should be disposed of if a power of appointment is not exercised.
Why An Attorney Should Review Your Power of Appointment
An experienced estate planning attorney should review and analyze the Will or Trust document granting you or your loved ones a PoA. It is important that you receive sound legal advice that guides you on the full implications of being granted this important power because there are many pitfalls that can be avoided only through proper counsel.
There are also tax ramifications to be aware of depending on how the assets are to be distributed, the value of the Trust assets at issue and the currently existing estate tax and income tax laws.
The attorneys at UTBF stand ready to assist you in reviewing any powers of appointment that you have been granted and to provide you with guidance on how to incorporate it into your estate plan based on your unique circumstances.
Contact David Frees and Douglas Kaune today at (610) 933–8069 for information regarding any powers of appointment you have been granted and how you can incorporate it into your estate planning.
David Frees and Douglas Kaune represent thousands of clients in Chester County, Montgomery County, Delaware County, Philadelphia County and Lancaster County and many clients from communities such as, Wayne, Berwyn, Devon, Paoli, Exton, Phoenixville, West Chester, Malvern, Chester Springs, Ardmore, Villanova, Rosemont, Newtown Square, Gladwyne, and surrounding areas.
