Today many estate plans contain trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations. Since these trusts are designed to span multiple decades, it is important for the trust creator to consider including powers of appointment in the trust agreement to allow trust beneficiaries to be added or excluded at each generation.
What is a Power of Appointment?
In broad terms a power of appointment is the right granted to an individual under the terms of a trust to change the provisions of that trust.
Powers of appointment can be given to the current beneficiaries or trustees of a trust or to an outside third party such as a trust protector. They also come in many different forms and include powers that can be exercised while the individual is living (a “lifetime” power of appointment), or after the individual dies (such as a power of appointment exercised in the individual’s own will or trust, which is a “testamentary” power of appointment).
Powers of appointment can be as broad or limited as the trust creator desires. In other words, the trust creator can give the power holder the ability to make broad changes to the trust or to make very limited changes under limited circumstances.
Examples of Powers of Appointment in Action
Below are some examples of how a power of appointment can be used to change the beneficiaries of a trust:
- The trust creator’s spouse can be given the power to include or exclude children, grandchildren, and other heirs as trust beneficiaries after the spouse dies.
- The trust creator’s child can be given the power to include or exclude the child’s own heirs or the child’s spouse, siblings (brothers and sisters), or heirs of the child’s siblings (nieces and nephews) as trust beneficiaries after the child dies.
- If the trust creator is married but doesn’t have any children, the trust creator’s spouse can be given the power to include or exclude the trust creator’s extended family members and one or more charities as trust beneficiaries after the spouse dies.
These are of course only a few examples; the possibilities are truly endless for how powers of appointment can be used to change the terms of a trust.
Do Not Attempt to Draft Your Own Powers of Appointment
If you are concerned about how your children, grandchildren, or even great grandchildren will eventually grow up, you can build flexibility into your trust by giving your spouse or other beneficiaries the ability to include or exclude heirs through the use of powers of appointment.
But beware: Poorly drafted powers of appointment can create all sorts of gift tax and/or estate tax problems for your trust beneficiaries and trustees.
Therefore, powers of appointment should only be drafted or included in a trust with the assistance of an experienced estate planning attorney.
If you would like to discuss how to incorporate powers of appointment into your trust, please call our office.
