If you have not yet read my previous articles on family trust planning, you may want to check these out first:
Reasons to Establish a Family Trust
As stated in prior articles, family trusts can prevent inclusion in the surviving spouse’s estate and maintain the creditor protection afforded by family trust planning. The surviving spouse serves as trustee, and it is critical that any power to consume, invade, or appropriate property for the benefit of the surviving spouse be limited by an ascertainable standard relating to health, support, education, or maintenance (that is, the “HEMS” standards).
The above said, today, we would like to describe powers of appointment, and how they can be implemented as part of a family trust.
You can grant a power of appointment to someone (the “Powerholder”) within the family or outside of the family, as you see fit, and for exercise during life, specific dates, conditions or events, or upon death. This power authorizes the person to convey ownership of property not owned by him or her, as specified by the trust.
Reasons for Establishing a Power of Appointment
Why would you want to give someone the power to designate a recipient of the appointed property? Depending upon who dies first, it can provide important flexibility and allow for adjustment to changed circumstances following the first spouse’s death. For example, if there is a disability event among the kids, a divorce or creditor problems, or one child simply has a greater need than others. As such, you might wish to give the surviving spouse the power to adjust the gifts made under the trust to account for changed circumstances since the decedent’s death.
Because we do not know what the future might bring, in most family trust cases, we recommend giving the surviving spouse limited power to appoint the remaining assets as of his or her death.
Tax Implications
As indicated above, by law, powers of appointment can be exercisable during life, specific dates, conditions or events, or upon death (“testamentary power”). For tax purposes, all powers of appointment can be divided in to either a “general” power of appointment or a “limited” power of appointment.
General Power of Appointment
This is the power to direct assets to any one or more of the following four taboos.
- The Powerholder
- The Powerholder’s Estate
- The Powerholder’s Creditors
- The Creditors of the Powerholder’s Estate
As such, assets subject to this type of power can be disposed of to personally benefit the Powerholder.
Limited Power of Appointment
Also known as a “special” power of appointment, this is any power of appointment which is not a general power of appointment. It gives the Powerholder the power to direct assets to any person or party other than the four taboos listed above.
Granting powers of appointment as part of family trust planning is an important tool to maintain flexibility given unknown future circumstances, but it also raises complex issues. I am just scratching the surface with the information above. Therefore, you will want to work with an attorney who understands family trust law and who will take the time to understand your family’s situation to create the appropriate trust plan.
If you are looking for help with your family trust or other estate planning needs, contact me today.
