Introduction to Powers of Appointment, Part 1

One of the unfortunate aspects of estate planning is the terminology.  There are lots of words and phrases that sound the same, which can be confusing to laypeople.  For instance, there are living wills and Wills -- these are two entirely different things.  And there are powers of attorney (by which you appoint an agent to do something for you) and powers of appointment -- again, these are two entirely different things. 

What is a power of appointment?  It's a power granted to the beneficiary of a trust to pass on his or her trust interest upon death.  For instance, let's say that I'm the beneficiary of a trust containing $5 million (hurray!).  I have the right to all income from the trust, and I get the entire principal when I turn age 40.  But what if I die when I'm 38, before the trust has been distributed to me?  In that case, the question is: what happens to the trust?  The trust document should explain where the money goes -- to charity, to my descendants, to other trust beneficiaries, etc.  But in some trusts, the beneficiary is given "first crack" at disposing of the property.  For instance, the trust might say something like:

Upon the death of the beneficiary, any property remaining in the trust shall be distributed to such persons and organizations as the beneficiary may by his Will appoint by specific reference to this power.

The above is a power of appointment.

There are two major issues involving powers of appointment.

1. Did the beneficiary exercise it?  You'll see the phrase "specific reference" in the above language.  This is intended to address a situation where the beneficiary dies with a Will that (for example) gives all of his property to his wife.  Does that include the trust property of which he is beneficiary?  No.  Instead, the beneficiary should have language added to his Will specifically mentioning the power of appointment, invoking the trust's name, the date it was created, the paragraph number that grants the power, etc.

2. How can the beneficiary exercise the power?  Can the beneficiary exercise his power of appointment by creating a new trust, of which his wife or children are beneficiaries?  Can the terms of this new trust be different from the terms of the trust that created the power in the first place?  These questions can be answered via careful drafting of the power of appointment language.

In my next post I'll talk a bit about the tax ramifications of powers of appointment.

Comments

[J]

Don't forget about Durable Powers of Attorney as opposed to ordinary Powers of Attorney and Special Powers of Appointment as opposed to General Powers of Appointment.

Then, of course, there's the death tax, which is also the estate tax. And as you know, fewer oppose the estate tax than the death tax. Ugh.

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[pbr]

Bogert, the encyclopedia of trust law along with Stevenson who developed trust law in America (despite its conflict with English law because of feudal notions rather than Constitutional law about property) claims that Powers of Appointment are property as much as a house, or money.

If so, the attempt to remove powers of appointment from the person appointed is as much theft or embezzlement as the actual removal of personal or real property. Since once created, property must be transferred, sold, or gifted, transfer to Executor or Trustee is theft or embezzlement unless the transfer is the sole act of the donor, and the donor has no preconditioned obligation under a previous will or trust - as Co Executor or first life beneficiary - to distribute all property within that obligation. To do otherwise, and distribute "held property subject to life beneficiary interest only" to attempt to make it into fee simple is theft of valuable property whose value is measurable by the extent to which the estate is included in that power - often the entire estate - if the power has been usurped inappropriately.

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