A power of appointment is an estate planning tool used to provide significant flexibility in design and strategy. The power of appointment is a power reserved by a person or given to another person, to dispose of an interest in real or personal property. The power of appointment, itself, is not an interest in the property, but rather it supersedes the estate or property interest. The power of appointment should not be confused with a Power of Attorney, which gives power to an agent to act on your behalf and is an important and necessary part of your Life and Legacy Plan. Read more about Powers of Appointment below.
Black's Law Dictionary defines a power of appointment as, “a power that enables the donee of the power to designate recipients of beneficial ownership interests in or powers of appointments over the appointive property.”
To provide context to a power of appointment, let's look at options you may already be familiar with to leave property through a will or a trust.
A person can leave property as an outright gift in a last will and testament. When the testator, the person making the will, dies, this property passes outright, directly to the beneficiary.
A person can leave property for a beneficiary in a trust. Here, the grantor, or trust maker, leaves the property to a person called the trustee, who holds and controls the property for the benefit of the beneficiary pursuant to the trust's directives. This may result in an outright distribution, or some other conditional distribution as defined by the trust's terms.
POWER OF APPOINTMENT
A testator or grantor can also leave property to a person and give that person the authority to select a new owner of the property. This power is called a “power of appointment.”
PARTIES TO THE POWER OF APPOINTMENT
The person who created the power, the testator or grantor.
The person on whom the power is given and who may exercise the power, power holder.
The person(s) for whom the power may be exercised to benefit.
A person or entity or trust to whom the appointment has been made.
Taker in default
The person(s) who would receive the property if the power is not exercised.
TYPES OF POWERS OF APPOINTMENT
General Power of Appointment
A power exercisable in favor of the power-holder, the power-holder's estate, or the power-holder's creditor (IRC 2041/2514)
Limited Power of Appointment
Also called a special power of appointment – it is a power that is a not a general power (ie., it is not exercisable in favor of the powerholder, or the powerholders estate or creditors), and limited as defined by the donor.
Lifetime Power of Appointment
A presently exercisable general power of appointment that permits the power holder to exercise with effect during their lifetime, as opposed to a testamentary power which would only be exercisable at death.
Testamentary Power of Appointment
Either general or limited power of appointment exercisable only at death, by will, trust or other writing.
Collateral power of appointment
A power held by someone who is not a beneficiary of a trust, ie., a distribution trustee appointed to avoid certain tax or creditor implications that would apply if exercised by a beneficiary.
Appendant power of appointment
A power held by someone who IS a beneficiary of a trust and whose interest in the trust can be affected by the exercise of the power.
A power of appointment may be a tool that is useful for your estate planning design. It could also be something to avoid, depending on your objectives. Contact Hartmann Law to determine what estate planning tools are available to prepare your customized Life and Legacy Plan.
Contact Hartmann Law
Take steps to start your Life and Legacy planning today! Take action to ensure you voice is heard when you are unable to speak for yourself. Make the decision to protect yourself, your loved ones, your business, your property by design and not by default!
Schedule a call today with Hartmann Law, providing Life and Legacy plans ready for today with an eye on the future.